npce-20240331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-40337

NEUROPACE, INC.

(Exact name of registrant as specified in its charter)


Delaware						22-3550230
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

455 N. Bernardo Avenue

Mountain View, CA 94043

(650) 237-2700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

NPCE

Nasdaq Global Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of May 3, 2024, there were approximately 28,768,128 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS


		Page
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Balance Sheets	1
	Condensed Statements of Operations and Comprehensive Loss	2
	Condensed Statements of Stockholders' Equity	3
	Condensed Statements of Cash Flows	4
	Notes to Unaudited Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
Part II. Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 3.	Defaults Upon Senior Securities	85
Item 4.	Mine Safety Disclosures	86
Item 5.	Other Information	86
Item 6.	Exhibits	87
Signatures

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements regarding results or events that may occur in the future contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial condition, as well as expectations of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors and assumptions more thoroughly described in “Risk Factors.” These risks are not exhaustive. Other sections of this Quarterly Report on Form 10-Q, as well as our other disclosures and filings, include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely on these forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or to changes in our expectations, whether as a result of any new information, future events, changed circumstances or otherwise. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•our expected future growth;

•the size and growth potential of the markets for our products, and our ability to serve those markets;

•our ability to accurately forecast demand for our products;

•the rate and degree of market acceptance of our products;

•coverage and reimbursement for procedures performed using our products, including pre-implant evaluations, implant procedures, and follow-up care;

•the performance of third parties in connection with the manufacturing and development of our products, including single-source suppliers;

•regulatory developments in the United States and in any foreign countries in which we may seek to do business;

•our ability to retain regulatory approval for our products or obtain regulatory approval for updates to our products, or new products or indications in the United States and in any foreign countries in which we may seek to do business;

•our research and development for existing products and new products;

•our reliance on third-party suppliers for product components, some of which are single source suppliers;

•our ability to manufacture our products in conformity with FDA requirements and with regulatory requirements of any foreign countries in which we may seek to do business;

•our ability to predict product performance, including battery life of our RNS device;

•our expectations regarding the impact that our sales and marketing initiatives will have on our sales;

•our ability to retain or scale our organizational culture;

•the development, regulatory approval, efficacy and commercialization of competing products;

•our ability to attract and retain members of our board of directors, senior management, or operational personnel;

•our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act and as a smaller reporting company under the federal securities laws;

•our ability to develop and maintain our corporate infrastructure, including our ability to maintain an effective system of internal control;

•our expectations regarding the impact of public health crises and geopolitical tensions, such as the Russia-Ukraine war and ongoing conflicts in the Middle East, on our business, our industry and the economy;

•the impact of adverse economic conditions, including as a result of unfavorable global economic and political conditions, increased interest rates and inflation;

•our financial performance and capital requirements; and

•our expectations regarding our ability to obtain, maintain and enforce intellectual property protection for our products and technology, as well as our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others.

You should read this Quarterly Report on Form 10-Q as well as the documents that we reference in, and have filed as exhibits to, this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on them.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

NeuroPace, Inc.

Condensed Balance Sheets

(unaudited)


	March 31,		December 31,
(in thousands, except share and per share amounts)	2024		2023
Assets
Current assets
Cash and cash equivalents	$	12,998	$	18,058
Short-term investments	45,947		48,396
Accounts receivable	11,631		12,314
Inventory	11,416		11,214
Prepaid expenses and other current assets	2,262		2,737
Total current assets	84,254		92,719
Property and equipment, net	1,048		1,003
Operating lease right-of-use asset	13,027		13,405
Restricted cash	122		122
Deferred offering costs	387		387
Other assets	15		15
Total assets	$	98,853	$	107,651
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	3,268	$	2,332
Accrued liabilities	7,290		11,180
Operating lease liability	1,683		1,627
Deferred revenue	869		1,090
Total current liabilities	13,110		16,229
Long-term debt	58,039		56,954
Operating lease liability, net of current portion	13,363		13,814
Total liabilities	84,512		86,997
Commitments and contingencies (Note 5)
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued and outstanding as of March 31, 2024 and December 31, 2023	—		—
Common stock, $0.001 par value, 200,000,000 shares authorized as of March 31, 2024 and December 31, 2023; 28,717,452 and 27,823,465 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively	29		28
Additional paid-in capital	527,046		524,435
Accumulated deficit	(512,734)		(503,809)
Total stockholders’ equity	14,341		20,654
Total liabilities and stockholders’ equity	$	98,853	$	107,651

The accompanying notes are an integral part of these unaudited interim condensed financial statements.

NeuroPace, Inc.

Condensed Statements of Operations and Comprehensive Loss

(unaudited)


	Three Months Ended March 31,
(in thousands, except share and per share amounts)	2024		2023
Revenue	$	18,124	$	14,472
Cost of goods sold	4,781		4,100
Gross profit	13,343		10,372
Operating expenses
Research and development	5,784		5,263
Selling, general and administrative	15,104		13,428
Total operating expenses	20,888		18,691
Loss from operations	(7,545)		(8,319)
Interest income	827		726
Interest expense	(2,258)		(1,965)
Other income (expense), net	51		(817)
Net loss and comprehensive loss	$	(8,925)	$	(10,375)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.32)	$	(0.41)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	28,285,176		25,097,262

The accompanying notes are an integral part of these unaudited interim condensed financial statements.

NeuroPace, Inc.

Condensed Statements of Stockholders’ Equity

(unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
(in thousands, except share amounts)	Shares	Amount
Balances as of January 1, 2024	27,823,465	28		524,435		(503,809)		20,654
Net loss	—	—		—		(8,925)		(8,925)
Issuance of common stock pursuant to stock option exercises	409,045	—		721		—		721
Issuance of common stock upon vesting of restricted stock units	522,483	1		(1)		—		—
Shares withheld for taxes	(37,541)	—		(649)		—		(649)
Stock-based compensation	—	—		2,540		—		2,540
Balances as of March 31, 2024	28,717,452	$	29	$	527,046	$	(512,734)	$	14,341


	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
(in thousands, except share amounts)	Shares	Amount
Balances as of January 1, 2023	25,045,751	$	25	$	506,713	$	(1,108)	$	(470,853)	$	34,777
Net loss	—	—		—		—		(10,375)		(10,375)
Unrealized loss adjustment for short-term investment	—	—		—		1,108		—		1,108
Issuance of common stock pursuant to stock option exercises	17,608	—		1		—		—		1
Issuance of common stock upon vesting of restricted stock units	325,747	—		—		—		—		—
Shares withheld for taxes	(35,562)	—		(146)		—		—		(146)
Repurchase of common stock	(1,340)	—		—		—		—		—
Stock-based compensation	—	—		2,125		—		—		2,125
Balances as of March 31, 2023	25,352,204	$	25	$	508,693	$	—	$	(481,228)	$	27,490

The accompanying notes are an integral part of these unaudited interim condensed financial statements.

NeuroPace, Inc.

Condensed Statements of Cash Flows

(unaudited)


	Three Months Ended March 31,
(in thousands)	2024		2023
Cash flows from operating activities
Net loss	$	(8,925)	$	(10,375)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense	2,540		2,125
Depreciation	45		48
Amortization of debt discount and issuance costs	78		64
Non-cash interest expense	316		234
PIK interest incurred but not paid on term loan	690		649
Amortization of right-of-use asset	378		347
(Gain) loss on short-term investments	(51)		817
Inventory write-downs	47		34
Changes in operating assets and liabilities
Accounts receivable	682		(1,713)
Inventory	(249)		(1,072)
Prepaid expenses and other assets	475		514
Accounts payable	950		(193)
Accrued liabilities	(3,890)		(834)
Deferred revenue	(220)		—
Operating lease liabilities	(394)		(343)
Net cash (used in) operating activities	(7,528)		(9,698)
Cash flows from investing activities
Acquisition of property and equipment	(104)		(132)
Proceeds from sale of short-term investments	2,500		10,200
Net cash provided by investing activities	2,396		10,068
Cash flows from financing activities
Proceeds from issuance of common stock under employee plans	721		1
Taxes withheld and paid related to net share settlement of equity awards	(649)		(146)
Payment of deferred offering costs	—		(110)
Net cash provided by (used in) financing activities	72		(255)
Net (decrease) increase in cash and cash equivalents	(5,060)		115
Cash, cash equivalents and restricted cash
Beginning of the period	18,180		6,727
End of the period	$	13,120	$	6,842
Reconciliation of cash, cash equivalents and restricted cash to balance sheets:
Cash and cash equivalents	$	12,998	$	6,720
Restricted cash	122		122
Cash, cash equivalents and restricted cash in balance sheets	$	13,120	$	6,842

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,174	$	1,018
Supplemental disclosures of non-cash investing and financing information:
Purchase of property and equipment included in accounts payable	$	55	$	—

The accompanying notes are an integral part of these unaudited interim condensed financial statements.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

1.The Company

NeuroPace, Inc., or the Company, was incorporated in the state of Delaware on November 19, 1997. The Company is a medical device company that has developed the RNS System, the only commercially available brain-responsive neuromodulation system designed for treating medically refractory focal epilepsy by delivering personalized, real-time treatment at the seizure source. The Company began commercializing its products in the United States in 2014.

At-the-Market Equity Offering

In November 2022, the Company filed a Registration Statement on Form S-3, or Shelf, with the Securities and Exchange Commission, or the SEC, in relation to the registration of common stock, preferred stock, debt securities, warrants or any combination thereof for up to an aggregate of $150.0 million, of which $50.0 million may be issued and sold pursuant to an at-the-market, or ATM, offering program for sales of the Company’s common stock under a sales agreement, or Sales Agreement, with Leerink Partners LLC, or Leerink, (formerly SVB Securities LLC). The Company agreed to pay Leerink up to 3.0% of the gross proceeds of sales of common stock made through the Sales Agreement. The Company’s common stock would be sold at prevailing market prices at the time of the sale and, as a result, prices may vary. In November 2023, the Company issued and sold 933,500 shares of common stock under the Sales Agreement for gross proceeds of $8.1 million. The shares were sold at a weighted average price of $8.71 per share for aggregate net proceeds of approximately $7.6 million, after deducting sales commission and offering expenses. No sales were made pursuant to the ATM program during the quarter ended March 31, 2024. As of March 31, 2024, the Company has $41.9 million remaining under its ATM program.

Liquidity and Capital Resources

The Company has incurred operating losses and negative cash flows from operations since its inception and has an accumulated deficit of $512.7 million as of March 31, 2024. For the three months ended March 31, 2024 and 2023, the Company used $7.5 million and $9.7 million of cash, respectively, in its operating activities. As of March 31, 2024, the Company had cash, cash equivalents and short-term investments of $58.9 million. Historically, the Company has funded its operations principally through the sales of its products, issuance of equity securities and debt financing.

The Company’s condensed financial statements have been prepared on the basis of the Company continuing as a going concern for the next 12 months. Management believes that the Company’s cash, cash equivalents and short-term investments will allow the Company to continue its planned operations for at least the next 12 months from the date of the issuance of these unaudited interim condensed financial statements.

In connection with the Term Loan described in Note 6, the Company will need to be in compliance with a minimum annual net revenue covenant determined in accordance with generally accepted accounting principles of $70.0 million in the year ending December 31, 2024, and maintain a minimum cash and cash equivalents balance of $5.0 million. If the Company cannot generate sufficient revenue in the future, the Company may not be in compliance with the annual net revenue covenant and the lender may call the debt resulting in the Company immediately needing additional capital, and resulting in a going concern. The Company’s ability to raise additional capital may be adversely impacted by global economic conditions and disruptions to, and volatility in, the financial markets in the United States and worldwide. If the Company is unable to raise capital when needed, it will need to delay, limit, reduce or terminate planned commercialization or product development activities in order to reduce costs. As of March 31, 2024, the Company was in compliance with all covenants of the Term Loan.

2.Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim condensed financial statements have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP, as defined by the Financial Accounting Standards Board, or the FASB.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

Unaudited Interim Financial Information

The condensed balance sheet as of December 31, 2023 was derived from the Company’s audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited condensed financial statements as of March 31, 2024 and for the three months ended March 31, 2024 and 2023, have been prepared by the Company, pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2023 and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on March 5, 2024. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s condensed financial position as of March 31, 2024 and condensed results of operations and condensed cash flows for the three months ended March 31, 2024 and 2023 have been made. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.

Use of Estimates

The preparation of unaudited interim condensed financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. The Company uses significant judgment when making estimates related to the provision for excess and obsolete inventories. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Fair Value of Financial Instruments

Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of the short-term nature of these instruments. The Company has a short-term investment in a fixed income mutual fund, which is classified as equity security and carried at fair value based on quoted market prices. Changes in the fair value of the short-term investment are recorded in income or loss. The Company believes that its borrowings bear interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument approximates its fair value. The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy which establishes three levels of inputs that may be used to measure fair value (see Note 3).

Concentration of Credit Risk, and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, short-term investments and accounts receivable to the extent of the amounts recorded on the balance sheets. The Company’s cash is invested in major financial institutions in the United States. Deposits in these financial institutions may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the event of default of the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance Corporation. The Company’s cash equivalents are invested in money market funds.

The Company’s accounts receivable are due from a variety of health care organizations in the United States. For the three months ended March 31, 2024 and 2023, there were no customers that represented 10% or more of revenue. As of March 31, 2024 and December 31, 2023, no customer represented 10% or more of the Company’s accounts receivable.

The Company is subject to certain risks, including that its devices may not be approved or cleared or continue to be approved or cleared for marketing by governmental authorities or be successfully marketed for expanded

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

indications. There can be no assurance that the Company’s products will achieve widespread adoption in the marketplace, nor can there be any assurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and speed and with appropriate performance characteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence on healthcare providers to prescribe initial implants and replacements, dependence upon third-party payors to provide adequate coverage and reimbursement, dependence on key personnel, single-source suppliers and vendors in connection with the manufacture of its products, concentration of comprehensive epilepsy centers, or CECs, and epileptologists, obtaining, maintaining, protecting, enforcing, and defending intellectual property rights and proprietary technology, product liability claims, legal proceedings, and compliance with government regulations.

The Company’s medical devices require approvals or clearances from the U.S. Food and Drug Administration, or the FDA, or international regulatory agencies. In addition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If approvals or clearances were withdrawn by the FDA for the Company’s current products or if such approvals or clearances were denied or delayed for future products, product updates, or expanded indications for use, it would have a material adverse impact on the Company.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company makes estimates on the collectability of customer accounts based primarily on analysis of historical trends and experience, the age of the receivable and changes in customers’ financial condition. The Company uses its judgment, based on the best available facts and circumstances, and records an allowance against amounts due to reduce the receivable to the amount that is expected to be collected. The Company determined that no allowance was required as of March 31, 2024 and December 31, 2023. To date, the Company has not experienced any material credit-related losses.

Remaining Performance Obligation and Contract Liabilities

The Company’s contract liabilities consist of deferred revenue of $0.9 million and $1.1 million as of March 31, 2024 and December 31, 2023, respectively. Revenue recognized during the three months ended March 31, 2024 that was included in the deferred revenue balance at the beginning of the year was immaterial.

As of March 31, 2024, the aggregate amount of the transaction price allocated to the remaining performance obligations that are unsatisfied or partially unsatisfied was $2.2 million, which the Company expects to recognize as revenue by December 2025 pursuant to customer contract terms.

Government Programs

In May 2021, the Company was awarded a grant by the National Institutes of Health, or NIH, to support research of thalamocortical responsive neurostimulation for the treatment of Lennox-Gastaut Syndrome, a type of epilepsy. The award was issued for a five-year period and has a total budget of over $9.3 million, which includes approximately $5.5 million in funding for subawards to third party academic epilepsy centers that are collaborating on the study and are subinvestigators on the study funded by NIH. The subawardees are determined by NIH. The Company’s responsibility for the subawards is to submit the funding requests on behalf of the subawardees. The funding of subawards does not have any impact on the Company’s condensed financial statements. Initially funding was approved for the first year beginning June 1, 2021 and provides for reimbursement of qualified direct and indirect expenses in the amount of $0.8 million, including $0.4 million for subawards. Approvals of funds for years two through five are subject to the completion of certain milestones. On July 30, 2022, the Company received funding approval for year two in the amount of $2.6 million, which includes $1.6 million for subawards. On May 25, 2023, the Company received funding approval for year three in the amount of $3.0 million, which includes $1.5 million for subawards.

For funds received under the NIH funding agreement, the Company recognizes a reduction in research and development expenses in an amount equal to the qualifying expenses incurred in each period up to the amount awarded by the NIH. Qualifying expenses incurred by the Company in advance of funding by the NIH are recorded

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

within prepaid expenses and other current assets on the balance sheets. Through March 31, 2024, $2.4 million of qualifying expenses have been incurred and funded by the NIH related to the first, second and third year of funding. As of March 31, 2024, the Company recorded prepaid expenses and other current assets of $0.1 million related to the third year of funding.

Net Loss per Share Attributable to Common Stockholders

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options, common stock subject to repurchase related to early exercise of stock options, and restricted stock units are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities. The Company considers the shares issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of the shares issued upon early exercise of stock options subject to repurchase do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker, or CODM, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in this ASU and existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact this standard will have on the disclosures within its financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The ASU requires greater disaggregation of information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. The ASU applies to all entities subject to income taxes and is intended to help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax information that affects cash flow forecasts and capital allocation decisions. The ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The ASU should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the impact this standard will have on the disclosures within its financial statements.

3.Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table summarizes the Company’s financial assets (cash equivalents and marketable securities) at fair value as of March 31, 2024 (in thousands):


	Fair Value as of March 31, 2024		Basis for Fair Value Measurements
			(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds, included in cash and cash equivalents	$	11,452	$	11,452	$	—	$	—
Fixed income mutual fund, included in short-term investments	45,947		45,947		—		—
Total	$	57,399	$	57,399	$	—	$	—

The following table summarizes the Company’s financial assets (cash equivalents and marketable securities) at fair value as of December 31, 2023 (in thousands):


	Fair Value as of December 31, 2023		Basis for Fair Value Measurements
			(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds, included in cash and cash equivalents	$	16,125	$	16,125	$	—	$	—
Fixed income mutual fund, included in short-term investments	48,396		48,396		—		—
Total	$	64,521	$	64,521	$	—	$	—

There were no liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2024 and December 31, 2023.

The money market funds are highly liquid and primarily invest in short-term fixed income securities issued by the U.S. government and U.S. government agencies.

The Company’s available-for-sale investment comprises a short-term investment in a fixed income mutual fund, which primarily invests in debt securities issued by the U.S. government and U.S. government agencies and corporate bonds and notes. Interest income from short-term investment is recorded in interest income. During the three months ended March 31, 2024 and 2023, the Company recognized $0.1 million and $0.4 million in unrealized gains from its short-term investment, respectively. As of March 31, 2023, the Company’s short-term investment had a cumulative unrealized net loss of $0.7 million, which included an adjustment of $1.1 million unrealized loss recorded in other income (expense), net in the three months ended March 31, 2023. The adjustment was not material to any previously issued financial statements. As of March 31, 2024 and December 31, 2023, the Company’s short-

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Notes to Unaudited Interim Condensed Financial Statements

term investment had a cumulative unrealized net loss of less than $0.1 million and unrealized net loss of $0.1 million, respectively.

4.Balance Sheet Components

Inventory

Inventories consist of the following (in thousands):


	March 31,		December 31,
	2024		2023
Raw materials	$	3,843	$	4,090
Work-in-process	1,363		627
Finished goods	6,210		6,497
Total	$	11,416	$	11,214

Property and Equipment, net

Property and equipment, net consists of the following (in thousands):


	March 31,		December 31,
	2024		2023
Machinery, equipment, furniture and fixtures	$	4,606	$	4,522
Computer equipment and software	1,828		1,822
Leasehold improvements	2,426		2,426
	8,860		8,770
Less: Accumulated depreciation	(7,812)		(7,767)
Property and equipment, net	$	1,048	$	1,003

Depreciation expense for the three months ended March 31, 2024 and 2023 was less than $0.1 million and less than $0.1 million, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	March 31,		December 31,
	2024		2023
Payroll and related expenses	$	5,942	$	9,655
Inventory purchases	567		588
Professional fees	73		30
Other	708		907
Total accrued liabilities	$	7,290	$	11,180

5.Commitments and Contingencies

Facility Lease

In August 2011, the Company entered into a non-cancelable operating lease for combined office and manufacturing facilities in Mountain View, California. The lease was scheduled to expire in April 2019 and was amended in May 2018 to extend it through June 2024. In August 2022, the Company amended the lease to extend it through June 2030. The second amendment contained a rent-free period from September 2022 through December 2022. The Company has an option to extend the lease for a period of five years, commencing on July 1, 2030 and

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

expiring on June 30, 2035. In conjunction with the original lease agreement, the Company obtained a letter of credit for $0.9 million in lieu of a security deposit. In May 2019, the letter of credit was amended and reduced to $0.7 million. In June 2021, the letter of credit was amended and further reduced to $0.2 million.

The terms of the facility lease provide for rental payments on a graduated scale; however, rent expense is recognized on a straight-line basis over the lease term. Rental payments range from $2.8 million to $3.3 million per year over the extended term of the lease.

The maturities of operating lease liabilities as of March 31, 2024 are as follows (in thousands):


	March 31, 2024
2024 (remaining nine months)	$	2,143
2025	2,942
2026	3,031
2027	3,122
2028	3,215
Thereafter	5,017
Total undiscounted lease payments	19,470
Less: imputed interest	4,424
Total operating lease liability	15,046
Less: current portion	1,683
Operating lease liability, net of current portion	$	13,363

Operating lease cost was $0.7 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the remaining term for the operating lease in Mountain View, California was 6.3 years, and the discount rate used to measure the lease liability for such operating lease upon recognition was 8.5%.

During the three months ended March 31, 2024 and 2023, cash paid for amounts included in operating lease liabilities of $0.7 million and $0.7 million, respectively, was included in cash flows from operating activities on the condensed statements of cash flows.

Distribution Agreement

In August 2022, the Company entered into an exclusive distribution agreement, or the Distribution Agreement, with DIXI Medical USA Corp, or DIXI Medical, pursuant to which the Company became the exclusive U.S. distributor of DIXI Medical’s product line. To maintain the exclusive distributor rights, the Company is committed to purchase a minimum of $2.4 million of DIXI Medical’s products during the twelve months beginning October 2022, and to increase the purchase minimum by 10% for each of the two subsequent years. The Company met the purchase commitment for the first twelve months.

Indemnifications

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made. The Company may, from time to time, be subject to claims or be required to defend actions related to its indemnification obligations.

The Company indemnifies each of its directors and officers for certain events or occurrences, subject to certain limits, while the director or officer is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as the director or officer may be subject to any proceeding arising out of acts or omissions of

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

such individual in such capacity. The maximum amount of potential future indemnification is unlimited. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of March 31, 2024 and December 31, 2023.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. The Company determined that no accrual related to contingencies was required as of March 31, 2024 and December 31, 2023.

Legal Proceedings

The Company is not involved in any pending legal proceedings that it believes could have a material adverse effect on its business, results of operations, financial condition, or cash flows. From time to time, the Company may pursue litigation to assert its legal rights and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. Such accruals, if any, reflect the estimable and probable costs that the Company may incur from the outcomes of its legal proceedings. Legal costs are expensed as incurred. There were no contingent liabilities requiring accrual as of March 31, 2024 and December 31, 2023.

6.Debt

Term Loan

In September 2020, the Company entered into a Term Loan Agreement with CRG Partners IV L.P. and its affiliates for total borrowings of up to $60.0 million, or the Term Loan, and borrowed $50.0 million. The remaining $10.0 million of the Term Loan was available to the Company for borrowing until March 31, 2022 if the Company achieved a revenue-based milestone in 2021. The revenue-based milestone was not achieved, and the remaining $10.0 million of the Term Loan expired without being drawn.

The Term Loan bore interest at a rate of 12.5% per year. In February 2023, the Term Loan was amended which increased the annual interest rate from 12.5% to 13.5% effective March 1, 2023. The amendment was accounted as a debt modification and the Term Loan’s effective interest rate increased from 15.7% to 16.8%. Payments under the Term Loan are made quarterly with payment dates fixed at the end of each calendar quarter. Through December 2020, the Company had the option to pay the entire interest paid-in-kind, or PIK, by increasing the principal of the Term Loan. From January 2021 through December 2022, the Company had the option to pay interest as follows: 7.5% per annum paid in cash and 5.0% per annum PIK by increasing the principal of the Term Loan. From January 2023 through June 2025, the Company has the option to pay interest as follows: 8.5% per annum paid in cash and 5.0% per annum PIK by increasing the principal of the Term Loan. For each payment date from April 2022 through March 2024, the Company elected the PIK option, increasing the principal of the Term Loan by $5.3 million.

The Term Loan was interest-only through September 2023, which could be extended through September 2025 at the Company’s option if the Company completed its IPO on or prior to September 30, 2023. In connection with closing the IPO, the Company extended the interest-only period to September 30, 2025. Following the interest-only period, principal payment is due in one installment on September 30, 2025. In May 2024, the Term Loan was amended to extend the final maturity by one year to September 30, 2026 and eliminate the PIK interest option after June 30, 2024 (see Note 11). The Term Loan includes a fee upon repayment of the loan equal to 10% of the aggregate principal amount being prepaid or repaid, or the backend fee. As of March 31, 2024, the Term Loan had an annual effective interest rate of 16.9% per year.

The Term Loan is collateralized by substantially all of the Company’s assets. The Term Loan Agreement contains customary representations and warranties, covenants, events of default and termination provisions. The financial covenants require that the Company achieve minimum annual revenue thresholds commencing in 2021 and maintain a minimum balance of cash and cash equivalents (see Note 1). In February 2023, the Term Loan was

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

amended to reduce the minimum annual net revenue covenant to $45.0 million for the year ended December 31, 2023.

The Company paid $1.0 million in fees to the lender and third parties which is reflected as a discount on the loan and is being accreted over the life of the loan using the effective interest method. Also, the Company issued warrants to the lender for a total of 346,823 shares of Series B’ redeemable convertible preferred stock. The warrants had a fair value of $0.6 million as of the issuance date, which was accounted for as debt issuance costs.

During the three months ended March 31, 2024 and 2023, the Company recorded interest expense related to debt discount and debt issuance costs of the Term Loan of $0.1 million and $0.1 million, respectively.

Interest expense on the Term Loan was $2.3 million and $2.0 million during the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, future minimum payments for the Term Loan are as follows (in thousands):


	Term Loan
2024 (remaining nine months)	$	5,704
2025	66,501
Total	72,205
Less: Unamortized debt discount and issuance cost	(542)
Less: Unaccreted backend fee	(2,258)
Less: Interest	(11,366)
Term Loan	$	58,039

7. Common Stock

The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 200,000,000 shares of $0.001 par value common stock.

The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the Board of Directors. As of March 31, 2024 and December 31, 2023, no dividends had been declared.

As of March 31, 2024 and December 31, 2023, the Company had reserved common stock for future issuance pursuant to our equity plans as follows:


	March 31,	December 31,
	2024	2023
Shares available for future grant under the 2021 Equity Incentive Plan	2,161,317	1,314,502
Outstanding options under the 2021 Equity Incentive Plan	2,036,844	2,208,341
Outstanding options under the 2023 Inducement Plan	380,424	380,424
Outstanding restricted stock units under the 2021 Equity Incentive Plan	2,252,671	2,430,803
Common stock available for Employee Stock Purchase Plan	678,032	399,798
Total	7,509,288	6,733,868

8. Stock-Based Incentive Compensation Plans

A summary of shares available for grant under the Company’s 2021 Equity Incentive Plan, or the 2021 Plan, is as follows:

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements


			Shares Available for Grant
Shares available for grant as of January 1, 2024			1,314,502
Authorized			1,391,173
Granted/Awarded			(770,044)
Cancelled			188,145
Withheld for taxes			37,541
Shares available for grant as of March 31, 2024			2,161,317

A summary of stock option activity for the three months ended March 31, 2024 is set forth below:


	Options Outstanding
	Number of Shares	Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)
Balances as of January 1, 2024	2,588,765	$	4.51	7.17
Granted	288,170	$	16.02
Exercised	(409,045)	$	1.76
Cancelled	(50,622)	$	9.67
Balances at March 31, 2024	2,417,268	$	6.23	7.86
Vested and exercisable at March 31, 2024

SEC Form 10-Q filed by Neuropace Inc.