SEC Filing - Neuropace

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npce-20210930

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 September 30, 2021


☐			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 November 9, 2021, there were approximately 24,314,002 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	2
	Condensed Statements of Operations and Comprehensive Loss	3
	Condensed Statements of Redeemable Convertible P referred Stock and Stockholders' Deficit	4
	Condensed Statements of Cash Flows	6
	Notes to Unaudited Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43
Part II. Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	101
Item 3.	Defaults Upon Senior Securities	102
Item 4.	Mine Safety Disclosures	103
Item 5.	Other Information	103
Item 6.	Exhibits	104
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 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;

•our expectations regarding the impact of the COVID-19 pandemic on our sales, business, financial condition and results of operations;

•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;

•our ability to retain or scale our organizational culture;

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

•our ability to retain and hire 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 remediate our existing material weakness and to design and maintain an effective system of internal controls;

•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.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

NeuroPace, Inc.

Condensed Balance Sheets

(unaudited)

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

NeuroPace, Inc.

Condensed Balance Sheets

(unaudited)


	September 30,		December 31,
(in thousands, except share and per share amounts)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	26,633	$	26,390
Short-term investments	96,701		11,689
Accounts receivable	6,611		8,395
Inventory	7,162		6,909
Prepaid expenses and other current assets	3,383		1,179
Total current assets	140,490		54,562
Property and equipment, net	624		515
Restricted cash	122		366
Deferred offering costs	—		484
Other assets	21		23
Total assets	$	141,257	$	55,950
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	1,254	$	949
Accrued liabilities	7,420		6,603
Short-term debt	—		2,043
Total current liabilities	8,674		9,595
Deferred rent, noncurrent	1,041		1,301
Long-term debt	49,582		50,821
Redeemable convertible preferred stock warrant liability	—		369
Other liabilities	248		274
Total liabilities	59,545		62,360
Commitments and contingencies (Note 5)
Redeemable convertible preferred stock, $0.001 par value - no shares authorized as of September 30, 2021 and 60,757,386 shares authorized as of December 31, 2020, respectively; no shares issued and outstanding as of September 30, 2021 and 16,614,178 shares issued and outstanding as of December 31, 2020, respectively (Liquidation value $0 and $227,755 as of September 30, 2021 and December 31, 2020, respectively)	—		141,422
Stockholders’ equity (deficit)
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2021 and December 31, 2020	—		—
Common stock, $0.001 par value - 200,000,000 shares and 74,636,348 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 24,307,898 and 314,096 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	24		—
Additional paid-in capital	494,733		239,826
Accumulated other comprehensive income	33		33
Accumulated deficit	(413,078)		(387,691)
Total stockholders’ equity (deficit)	81,712		(147,832)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	141,257	$	55,950

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 September 30,				Nine Months Ended September 30,
(in thousands, except share and per share amounts)	2021		2020		2021		2020
Revenue	$	10,339	$	12,771	$	34,186	$	30,386
Cost of goods sold	2,832		3,196		8,827		8,333
Gross profit	7,507		9,575		25,359		22,053
Operating expenses
Research and development	4,329		3,691		12,866		11,776
Selling, general and administrative	9,421		7,050		27,215		20,347
Total operating expenses	13,750		10,741		40,081		32,123
Loss from operations	(6,243)		(1,166)		(14,722)		(10,070)
Interest expense (includes $0 and $203 to related parties in the three months ended September 30, 2021 and 2020, respectively, and $0 and $1,258 to related parties in the nine months ended September 30, 2021 and 2020, respectively)	(1,826)		(2,792)		(5,548)		(9,603)
Other income (expense), net	(14)		(168)		(5,117)		13
Net loss	$	(8,083)	$	(4,126)	$	(25,387)	$	(19,660)
Unrealized gain on available-for-sale debt securities	22		4		—		—
Comprehensive loss	$	(8,061)	$	(4,122)	$	(25,387)	$	(19,660)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.34)	$	(19.26)	$	(1.81)	$	(96.02)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	24,101,399		202,408		14,061,958		202,382

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

NeuroPace, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(unaudited)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
(in thousands, except share amounts)	Shares	Amount		Shares	Amount
Balances as of January 1, 2021	16,614,178	$	141,422	314,096	$	—	$	239,826	$	33	$	(387,691)	$	(147,832)
Net loss	—	—		—	—		—		—		(8,810)		(8,810)
Issuance of common stock pursuant to stock option exercises	—	—		156,538	—		4		—		—		4
Stock-based compensation	—	—		—	—		202		—		—		202
Balances as of March 31, 2021	16,614,178	141,422		470,634	—		240,032		33		(396,501)		(156,436)
Net loss	—	—		—	—		—		—		(8,494)		(8,494)
Unrealized loss on available-for-sale debt securities	—	—		—	—		—		(22)		—		(22)
Net exercise of Series B’ redeemable convertible preferred stock warrants	213,941	5,606		—	—		—		—		—		—
Conversion of redeemable convertible preferred stock into common stock	(16,828,119)	(147,028)		16,828,119	17		147,011		—		—		147,028
Net exercise of common stock warrants	—	—		185	—		—		—		—		—
Issuance of common stock upon initial public offering, net of issuance costs and underwriting discount of $11,813	—	—		6,900,000	7		105,480		—		—		105,487
Issuance of common stock pursuant to stock option exercises	—	—		95,770	—		4		—		—		4
Change in early exercise liability	—	—		—	—		(4)		—		—		(4)
Stock-based compensation	—	—		—	—		1,103		—		—		1,103
Balances as of June 30, 2021	—	—		24,294,708	24		493,626		11		(404,995)		88,666
Net loss	—	—		—	—		—		—		(8,083)		(8,083)
Unrealized gain on available-for-sale debt securities	—	—		—	—		—		22		—		22
Issuance of common stock pursuant to stock option exercises	—	—		13,190	—		—		—		—		—
Stock-based compensation	—	—		—	—		1,107		—		—		1,107
Balances as of September 30, 2021	—	$	—	24,307,898	$	24	$	494,733	$	33	$	(413,078)	$	81,712

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

NeuroPace, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(unaudited)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Deficit
(in thousands, except share amounts)	Shares	Amount		Shares	Amount
Balances as of January 1, 2020	635,048	$	73,568	202,121	$	—	$	234,290	$	1	$	(363,641)	$	(129,350)
Net loss	—	—		—	—		—		—		(6,741)		(6,741)
Unrealized loss on available-for-sale debt securities	—	—		—	—		—		(41)		—		(41)
Issuance of common stock pursuant to stock option exercises	—	—		131	—		6		—		—		6
Stock-based compensation	—	—		—	—		301		—		—		301
Balances as of March 31, 2020	635,048	73,568		202,252	—		234,597		(40)		(370,382)		(135,825)
Net loss	—	—		—	—		—		—		(8,793)		(8,793)
Unrealized gain on available-for-sale debt securities	—	—		—	—		—		37		—		37
Series B’ redeemable convertible preferred stock issuance costs	—	(117)		—	—		—		—		—		—
Stock-based compensation	—	—		—	—		290		—		—		290
Balances as of June 30, 2020	635,048	73,451		202,252	—		234,887		(3)		(379,175)		(144,291)
Net loss	—	—		—	—		—		—		(4,126)		(4,126)
Unrealized gain on available-for-sale debt securities	—	—		—	—		—		4		—		4
Issuance of Series B’ redeemable convertible preferred stock, net of issuance costs of $1,187	7,599,720	31,813		—	—		—		—		—		—
Conversion of convertible notes into Series B' redeemable convertible preferred stock	8,379,410	36,386		—	—		4,148		—		—		4,148
Reduction of Series A' redeemable convertible preferred stock liquidation value	—	(228)		—	—		—		—		228		228
Stock-based compensation	—	—		—	—		301		—		—		301
Balances as of September 30, 2020	16,614,178	$	141,422	202,252	$	—	$	239,336	$	1	$	(383,073)	$	(143,736)

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

NeuroPace, Inc.

Condensed Statements of Cash Flows

(unaudited)


	Nine Months Ended September 30,
(in thousands)	2021		2020
Cash flows from operating activities
Net loss	$	(25,387)	$	(19,660)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense	2,412		892
Depreciation	217		241
Amortization of debt discount and issuance costs	200		5,337
Non-cash interest expense	608		1,350
PIK interest incurred but not paid on term loan	—		(4,081)
Inventory write-downs	185		546
Realized loss from sale of short-term investments	—		15
Change in fair value of redeemable convertible preferred stock warrant liability	5,236		—
Change in fair value of derivative instrument	—		(149)
Loss on extinguishment of convertible notes	—		182
Changes in operating assets and liabilities
Accounts receivable	1,784		(2,038)
Inventory	(438)		896
Prepaid expenses and other assets	(2,227)		212
Accounts payable	259		45
Accrued liabilities	1,296		933
Other liabilities	—		317
Deferred rent	(519)		(223)
Net cash (used in) operating activities	(16,374)		(15,185)
Cash flows from investing activities
Acquisition of property and equipment	(230)		(16)
Proceeds from sale of short-term investments	—		6,300
Purchase of short-term investments	(85,012)		(7,005)
Net cash (used in) investing activities	(85,242)		(721)
Cash flows from financing activities
Issuance of common stock pursuant to stock option exercises	8		6
Proceeds from issuance of common stock in initial public offering, net of underwriter discount and commissions	109,089		—
Payment of deferred offering costs	(3,392)		—
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs	—		31,696
Repayment of debt	(4,090)		(42,121)
Proceeds from debt	—		54,047
Payment of debt issuance costs	—		(854)
Issuance of convertible notes, net of issuance costs (includes $0 and $11,867 from related parties in the nine months ended September 30, 2021 and 2020, respectively)	—		12,514
Net cash provided by financing activities	101,615		55,288
Net increase in cash and cash equivalents	(1)		39,382
Cash, cash equivalents and restricted cash
Beginning of the period	26,756		4,123

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

NeuroPace, Inc.

Condensed Statements of Cash Flows

(unaudited)


End of the period	$	26,755	$	43,505
Reconciliation of cash, cash equivalents and restricted cash to balance sheets:
Cash and cash equivalents	$	26,633	$	43,139
Restricted cash	122		366
Cash, cash equivalents and restricted cash in balance sheets	$	26,755	$	43,505

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,740	$	2,813
Supplemental disclosures of non-cash investing and financing information:
Net change in accrued liabilities from early exercise of options	$	4	$	—
Purchase of property and equipment included in accounts payable	$	97	$	—
Conversion of convertible notes and accrued interest into preferred stock	$	—	$	34,113
Extinguishment of derivative liability	$	—	$	6,239
Issuance of redeemable convertible preferred stock warrants in connection with the New Term Loan	$	—	$	550
Unpaid debt issuance costs included in accounts payable and accrued liabilities	$	—	$	94

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 commercial-stage 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.

Initial Public Offering

On April 21, 2021, the Company’s registration statement on Form S-1 (File No. 333-254663) relating to its initial public offering, or IPO, of common stock became effective. The IPO closed on April 26, 2021, at which time the Company issued 6,900,000 shares of its common stock at a price of $17.00 per share, which included the issuance of shares in connection with the exercise by the underwriters of their option to purchase up to 900,000 additional shares. The Company received an aggregate of $117.3 million in gross proceeds, before underwriting discounts and commissions and offering costs, and approximately $105.5 million in net proceeds after deducting $8.2 million in underwriting discounts and commissions and $3.6 million in offering costs.

Upon the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 16,614,178 shares of common stock, warrants to purchase 346,823 shares of Series B’ convertible preferred stock net exercised to 213,941 shares of Series B’ convertible preferred stock and subsequently converted into common stock on a one-to-one basis, and warrants to purchase 219 shares of common stock net exercised to 185 shares of common stock. In connection with the completion of its IPO, on April 26, 2021, the Company’s certificate of incorporation was amended and restated to provide for 200,000,000 authorized shares of common stock with a par value of $0.001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.001 per share.

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 $413.1 million as of September 30, 2021. For the nine months ended September 30, 2021 and 2020, the Company used $16.4 million and $15.2 million of cash in its operating activities, respectively. As of September 30, 2021, the Company had cash, cash equivalents and short-term investments of $123.3 million. Historically, the Company has funded its operations principally through the sales of its products, issuance of redeemable convertible preferred stock and debt financing. On April 26, 2021, the Company completed its IPO and received approximately $105.5 million in net proceeds after deducting underwriting discounts and commissions and offering costs.

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 New 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 beginning in the year ended December 31, 2021 of $43.0 million 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 funds.

The COVID-19 pandemic is affecting business conditions in the industry in which the Company operates. Beginning in March 2020, the Company’s net sales were negatively impacted by the COVID-19 pandemic as hospitals delayed or canceled elective procedures. In response to the pandemic, many state and local governments in the U.S. issued orders that temporarily precluded elective procedures in order to conserve scarce health system resources. The decrease in hospital admission rates and elective surgeries reduced both the number of patients being evaluated for treatment with and demand for elective procedures using the Company's RNS System. A similar

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

decrease occurred in the third quarter of 2021, as hospitals responded to new COVID-19 variants, including the Delta variant. The Company has taken necessary precautions to safeguard its employees, patients, customers, and other stakeholders from the COVID-19 pandemic, while maintaining business continuity to support its patients, customers and employees. The timing, extent and continuation of any increase in procedures, and any corresponding increase in sales of the Company’s products, and whether there could be a future decrease in the current level of procedures as a result of the COVID-19 pandemic or otherwise, remain uncertain and are subject to a variety of factors.

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.

Reverse Stock Split

On August 18, 2020, the Company effected a 1-for-100 reverse stock split of its common stock and redeemable convertible preferred stock. The par value of the authorized stock was not adjusted as a result of the reverse stock split.

On April 9, 2021, the Company effected a 1-for-2.6 reverse stock split of its common stock and redeemable convertible preferred stock. The par value of the authorized stock was not adjusted as a result of the reverse stock split.

All issued and outstanding shares of common stock and redeemable convertible preferred stock and related per share amounts contained in the accompanying financial statements have been retroactively revised to reflect the combined effect of these reverse stock splits for all periods presented.

Unaudited Interim Financial Information

The condensed balance sheet as of December 31, 2020 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 September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission, or 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, 2020 and notes thereto, included in the Company’s final prospectus for the IPO filed with the SEC pursuant to Rule 424(b)(4) on April 23, 2021, or the final prospectus. 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 September 30, 2021 and condensed results of operations for the three and nine months ended September 30, 2021 and 2020 and condensed cash flows for the nine months ended September 30, 2021 and 2020 have been made. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

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 valuation of its common stock and related stock-based compensation, the valuation of deferred tax assets and related valuation allowances, provision for excess and obsolete inventories, the valuation of derivative financial instruments and redeemable

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

convertible preferred stock warrant liability. 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. Short-term investments comprise available-for-sale debt securities, which are carried at fair value. 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. Derivative instruments and the redeemable convertible preferred stock warrant liability are carried at fair value based on unobservable market inputs. 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 sheet. The Company’s cash is invested in one major financial institution in the United States. Deposits in this financial institution may exceed federally insured limits. 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 and nine months ended September 30, 2021 and 2020, there were no customers that represented 10% or more of revenue. As of September 30, 2021 and December 31, 2020, 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 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 Level 4 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.

Deferred Offering Costs

The Company capitalizes, within other assets, certain legal, accounting and other third-party fees that are directly related to the Company’s in-process equity financings, including its IPO, until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses. As of December 31, 2020,

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

$0.5 million of deferred offering costs were recorded on the condensed balance sheet. Upon closing the IPO, all deferred offering costs were charged against the proceeds from the IPO and recorded in stockholders equity (deficit) as a reduction of additional paid-in capital. As of September 30, 2021, there were no deferred offering costs recorded on the condensed balance sheet.

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. Funding is 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. Approval of funds for years two through five is subject to the completion of certain milestones.

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 within prepaid expenses and other current assets on the balance sheets. As of September 30, 2021, $57,000 of qualifying expenses have been incurred, all of which have been funded by the NIH.

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, redeemable convertible preferred stock, stock options, common stock subject to repurchase related to early exercise of stock options, and convertible notes 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, as the redeemable convertible preferred stock is considered a participating security because it participates in dividends with common stock. The Company also 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 redeemable convertible preferred stock and 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 February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset, or ROU, and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This ASU provides a lessee with an option to not account for leases with a term of 12 month or less as leases in the scope of this ASU. This ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This ASU should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to elect an optional transition method where entities may continue to apply the existing lease guidance during the comparative periods and apply the new lease requirements

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

through a cumulative effect adjustment in the period of adoption rather than in the earliest period presented. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which delays the adoption dates for ASU 2016-02 for non-public entities to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is allowed. The Company will adopt Topic 842 effective January 1, 2022 using a modified retrospective method and will not restate comparative periods. Based on an analysis of its current portfolio of leases, the Company expects to recognize a ROU asset and lease liability for the Company’s facility lease. The Company is completing its evaluation of the key drivers, such as the discount rate, in the measurement of the ROU asset and lease liability and the quantitative impact that adoption will have on the financial statements in the future.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends existing guidance on the impairment of financial assets and adds an impairment model that is based on expected losses rather than incurred losses and requires an entity to recognize as an allowance its estimate of expected credit losses for its financial assets. An entity will apply this guidance through a cumulative-effect adjustment to retained earnings upon adoption (a modified-retrospective approach) while a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, adoption is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For SEC filers that are eligible to be smaller reporting companies and for all other entities, this ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption on its financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically the ASU removes: i) major separation models required under GAAP and ii) certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, this ASU is effective for interim and annual reporting periods beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s financial statements and related disclosures.

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

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier 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, marketable securities and liabilities) at fair value as of September 30, 2021 (in thousands):


	Fair Value as of September 30, 2021		Basis for Fair Value Measurements
			(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds, included in cash and cash equivalents	$	25,312	$	25,312	$	—	$	—
Fixed income mutual funds, included in short-term investments	96,701		96,701		—		—
Total	$	122,013	$	122,013	$	—	$	—

There were no liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021.

The following table summarizes the Company’s financial assets (cash equivalents, marketable securities and liabilities) at fair value as of December 31, 2020 (in thousands):


	Fair Value as of December 31, 2020		Basis for Fair Value Measurements
			(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds, included in cash and cash equivalents	$	5,062	$	5,062	$	—	$	—
Fixed income mutual funds, included in short-term investments	11,689		11,689		—		—
Total	$	16,751	$	16,751	$	—	$	—
Liabilities:
Redeemable convertible preferred stock warrant liability	369		—		—		369
Total	$	369	$	—	$	—	$	369

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 investments comprise short-

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

term investments in fixed income mutual funds, which primarily consist of debt securities issued by the U.S. government and U.S. government agencies and corporate bonds and notes.

The following is a summary of the Company’s available-for-sale debt securities (in thousands):


	September 30,		December 31,
	2021		2020
Cost basis	$	96,668	$	11,656
Unrealized gain	33		33
Fair value	$	96,701	$	11,689

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):


	Redeemable Convertible Preferred Stock Warrant Liability
Fair value as of January 1, 2021	$	369
Change in fair value included in other income (expense), net	5,236
Net exercise of redeemable convertible preferred stock warrants	$	(5,605)
Fair value as of September 30, 2021	$	—


	Derivative Instrument
Fair value as of January 1, 2020	$	4,719
Recognition of derivative instrument related to 2020 Convertible Notes	1,669
Change in fair value included in other income (expense), net	(149)
Extinguishment of derivative instrument	$	(6,239)
Fair value as of September 30, 2020	$	—

The fair value of the derivative instrument has been estimated at the date of inception and at the subsequent balance sheet date using a two-step approach to valuation, employing a probability-weighted scenario valuation method and then comparing the instrument’s value with-and-without the derivative features in order to estimate their combined fair value, using unobservable inputs, which are classified as Level 3 within the fair value hierarchy.

In August 2020, the derivative instrument was extinguished in connection with the issuance of Series B’ redeemable convertible preferred stock and conversion of all outstanding convertible notes and accrued unpaid interest into shares of Series B’ redeemable convertible preferred stock.

In determining the fair value of the redeemable convertible preferred stock warrant liability, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 8). There were no warrants outstanding for the purchase of redeemable convertible preferred stock as of September 30, 2021, as all such warrants were net exercised to shares of common stock upon the closing of the IPO.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

4.Balance Sheet Components

Inventory

Inventories consist of the following (in thousands):


	September 30,		December 31,
	2021		2020
Raw materials	$	1,596	$	1,721
Work-in-process	1,467		1,487
Finished goods	4,099		3,701
Total	$	7,162	$	6,909

Property and Equipment, net

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


	September 30,		December 31,
	2021		2020
Machinery, equipment, furniture and fixtures	$	3,688	$	3,544
Computer equipment and software	2,912		2,730
Leasehold improvements	2,402		2,402
	9,002		8,676
Less: Accumulated depreciation	(8,378)		(8,161)
Property and equipment, net	$	624	$	515

Depreciation expense for the three months ended September 30, 2021 and 2020 was $0.1 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2021 and 2020 was $0.2 million and $0.2 million, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	September 30,		December 31,
	2021		2020
Payroll and related expenses	$	5,618	$	4,565
Inventory-raw materials	340		636
Professional fees	164		279
Deferred rent, current	407		666
Clinical trials	—		107
Other	891		350
Total accrued liabilities	$	7,420	$	6,603

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. The terms of the facility lease provide for rental payments on

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

a graduated scale; however, rent expense is recognized on a straight-line basis over the lease term. The Company has an option to extend the lease for a period of five years, commencing on July 1, 2024 and expiring on June 30, 2029. 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.

Rental payments range from $2.9 million to $3.3 million per year over the extended term of the lease. In April 2020, the Company amended the lease agreement to defer 50.0% of the rental payment for May and June 2020 of $0.3 million. The deferred rental payments accrued interest at an annual rate of 8.0% starting from October 1, 2020 and were paid in three equal monthly installments commencing on April 1, 2021.

Rent expense for the three months ended September 30, 2021 and 2020 was $0.7 million and $0.7 million, respectively. Rent expense for the nine months ended September 30, 2021 and 2020 was $2.1 million and $2.0 million, respectively. As of September 30, 2021 and December 31, 2020, $1.4 million and $2.0 million was recorded as deferred rent expense, respectively.

The Company’s future payments under the non-cancellable operating lease (in thousands) are as follows:


	September 30, 2021
2021 (remaining three months)	$	777
2022	3,172
2023	3,267
2024	1,666
Total	$	8,882

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 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 September 30, 2021 and December 31, 2020.

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 September 30, 2021 and December 31, 2020.

Legal Proceedings

The Company is, and from time to time may become, involved in legal proceedings. The Company may also 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. Due to the uncertainty of litigation

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

and depending on the amount and the timing, an unfavorable resolution of some or all of such matters may materially affect our business, results of operations, financial position, or cash flows. The nature of the loss contingencies relating to claims that have been asserted against us are described below.

On October 18, 2021, three stockholders of the Company, James Jacoby, George Vachtsevanos, and Javier Echauz, filed a complaint in the United States District Court for the Northern District of California, entitled James Jacoby et al. v. NeuroPace, Inc., et al., Case No. 5:21-cv-8136, against the Company and its board of directors. The complaint alleges various claims related to the Company’s reverse stock splits and seeks, among other relief, damages and attorney’s fees. No estimates of possible losses or range of losses with respect to this action can be made at this time. The Company believes there is no merit to these allegations and intends to vigorously defend itself against this action.

6.Debt

2014 Term Loan

In November 2014, the Company entered into a Term Loan Agreement, as amended, with Capital Royalty Partners II L.P. and its affiliates for total borrowings of up to $40.0 million. As of December 31, 2019, $40.0 million had been funded under this Term Loan Agreement, or the Term Loan. The Term Loan bore interest at a rate of 12.5% per year. Payments under the Term Loan were to be made quarterly with payment dates fixed at the end of each calendar quarter.

The Term Loan was interest-only through September 30, 2019. Following the interest-only period, principal payments were to be made in equal installments at the end of the next four calendar quarters, with the final payment due on September 30, 2020. The Term Loan included a fee upon repayment of the loan equal to 5% of the aggregate principal amount being repaid. The Company ratably accreted the fee over the life of the loan.

In connection with the Term Loan, the Company paid total closing fees of $0.8 million and issued warrants to purchase 219 shares of its Series I redeemable convertible preferred stock at $1,866.80 per share. The initial fair value of the warrants was $0.3 million and resulted in a discount to the Term Loan, which was amortized to interest expense over the life of the loan using the effective interest method. Prior to 2020, these warrants were modified to be exercisable for 219 shares of common stock at $2.60 per share. Upon the closing of the IPO, warrants to purchase 219 shares of common stock net exercised to 185 shares of common stock.

In October 2019, the Term Loan Agreement was amended to extend the interest-only period through December 31, 2019. This amendment was accounted as a debt modification and the impact on the Term Loan’s effective interest rate was a decrease from 15.0% to 14.7%.

In February through June 2020, the Term Loan Agreement was amended to extend the interest-only period through June 30, 2020 and to allow the Company to pay interest entirely in kind by adding it to the aggregate principal of the loan. The Company paid $1.4 million in interest due on March 31, 2020 in kind and paid $1.4 million in interest due on June 30, 2020 in cash. The amendments were accounted as a debt modification and the Term Loan’s effective interest rate was changed within 14.7% to 14.2% with each amendment.

In September 2020, the Company repaid its entire obligation under the Term Loan amounting to $47.6 million, including principal of $44.1 million, interest of $1.3 million and fees of $2.2 million, using the proceeds from New Term Loan (as defined below). The repayment of the Term Loan was accounted for as a debt extinguishment, which resulted in an immaterial extinguishment loss.

2020 Term Loan

In September 2020, the Company entered into a new Term Loan Agreement with CRG Partners IV L.P. and its affiliates for total borrowings of up to $60.0 million, or the New Term Loan, and borrowed $50.0 million. The remaining $10.0 million of the New Term Loan will be available to the Company for borrowing until March 31, 2022 if the Company achieves a revenue-based milestone in 2021.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

The New Term Loan bears interest at a rate of 12.5% per year. Payments under the New Term Loan are made quarterly with payment dates fixed at the end of each calendar quarter. The New Term Loan was interest-only through September 30, 2023, which could be extended through September 30, 2025 at the Company’s option if the Company completed its IPO on or prior 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. The New 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 September 30, 2021, the New Term Loan had an annual effective interest rate of 15.66% per year.

The New Term Loan is collateralized by substantially all of the Company’s assets. The New 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).

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 (see Note 8).

During the three months ended September 30, 2021 and 2020, the Company recorded interest expense related to deferred financing and debt issuance costs of the New Term Loan of $0.1 million and less than $0.1 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded interest expense related to deferred financing and debt issuance costs of the New Term Loan of $0.2 million and less than $0.1 million, respectively.

Interest expense on the New Term Loan was $1.9 million and $0.1 million during the three months ended September 30, 2021 and 2020, respectively. Interest expense on the New Term Loan was $5.5 million and $0.1 million during the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, future minimum payments for the New Term Loan are as follows (in thousands):


	New Term Loan
2021 (remaining three months)	$	1,597
2022	6,337
2023	6,337
2024	6,354
2025	59,740
Total	80,365
Less: Unamortized debt discount and issuance cost	(1,229)
Less: Unaccreted backend fee	(4,190)
Less: Interest	(25,364)
New Term Loan	$	49,582

Paycheck Protection Program

In April 2020, the Company received $4.0 million from a federal Small Business Administration loan under the Paycheck Protection Program, or the PPP Loan. The note bore interest at 1.0% per year on the outstanding principal amount and had a maturity date 24 months from the date of the note. No payments were due for the six-month period beginning on the date of the note. Payments of principal and interest were due over the following 18 months. The Small Business Administration modified the PPP Loan such that monthly payments of principal and interest were due from September 2021 through April 2022. In April 2021, the Company repaid its entire obligation under

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

the PPP Loan amounting to $4.1 million, including principal of $4.0 million and interest of less than $0.1 million, using the proceeds from its IPO.

2019 and 2020 Convertible Notes

In March and September 2019, Company issued convertible notes to certain investors for aggregate proceeds of $21.3 million, or the 2019 Convertible Notes. In January and March 2020, the Company raised $7.1 million and $5.4 million, respectively, through the sale and issuance of additional convertible notes, or the 2020 Convertible Notes. The 2019 and 2020 Convertible Notes were subordinated to the Term Loan, bore interest on the outstanding principal amount at the rate of 8.0% per year, and had a maturity date of December 31, 2020.

Upon the consummation of an equity financing with aggregate proceeds to the Company of not less than $18 million, or the Qualified Financing, the outstanding principal balance of the 2019 and 2020 Convertible Notes and accrued but unpaid interest would convert into shares of capital stock issued in such Qualified Financing at a conversion price equal to 85% of the issuance price per share of such capital stock in such Qualified Financing. In the event the Company consummated, while the 2019 and 2020 Convertible Notes remained outstanding, an equity financing that did not constitute a Qualified Financing, then the majority holders had the option to treat such equity financing as a Qualified Financing. If the Company did not complete a Qualified Financing prior to the maturity date while the 2019 and 2020 Convertible Notes remained outstanding, the holders of the notes could elect to convert the outstanding principal and unpaid accrued interest into the Company’s Series A’ redeemable convertible preferred stock at a conversion price of $116.35 per share.

Upon the occurrence of a change of control, the 2019 and 2020 Convertible Notes would upon the election of the majority holders either (i) become due and payable upon the closing of such change of control in cash in an amount equal to (a) the outstanding principal amount plus any unpaid accrued interest, plus (b) a repayment premium equal to 100% of the outstanding principal amount, or (ii) be converted such that the outstanding principal balance of the notes and any unpaid accrued interest would convert into shares of the Company’s Series A’ redeemable convertible preferred stock at a conversion price equal to $116.35 per share.

The 2019 and 2020 Convertible Notes contained embedded derivative instruments, including automatic conversion into equity securities upon completion of a Qualified Financing, that were required to be bifurcated and accounted for separately as a single derivative instrument initially and subsequently measured at fair value with the change in fair value recorded in other income (expense), net in the statements of operations and comprehensive loss. The issuance date estimated fair values of the derivative instruments issued with the March and September 2019 notes were $4.1 million and $1.9 million, respectively, which were recorded as debt discounts. The issuance date estimated fair values of the derivative instruments issued with the January and March 2020 notes were $1.0 million and $0.7 million, respectively, which were recorded as debt discounts. In August 2020, the derivative instrument was extinguished in connection with the issuance of Series B’ redeemable convertible preferred stock.

The discount on the 2019 and 2020 Convertible Notes was amortized over the contractual term ending on December 31, 2020, using the effective interest method. The annual effective interest rate was estimated from 10.8% to 12.2% per year. The interest expense for the three months ended September 30, 2020 was $1.0 million, consisting of $0.2 million of contractual interest expense and $0.8 million amortization of debt discount arising from separation of the embedded derivative instrument. The interest expense for the nine months ended September 30, 2020 was $4.6 million, consisting of $1.4 million of contractual interest expense and $3.2 million amortization of debt discount arising from separation of the embedded derivative instrument.

For the nine months ended September 30, 2020, $10.3 million of convertible notes were issued to related parties. The interest expense on convertible notes issued to related parties for the three and nine months ended September 30, 2020 was $0.2 million and $1.3 million, respectively.

In connection with the sale and issuance of Series B’ redeemable convertible preferred stock all outstanding convertible notes were modified to remove the 15% discount on conversion. All outstanding convertible notes of $33.9 million and accrued unpaid interest of $2.5 million were converted into 8,379,410 shares of Series B’ redeemable convertible preferred stock at 100% of the preferred stock issuance price of $4.3423 per share.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

The conversion of the 2019 Convertible Notes and 2020 Convertible Notes into shares of Series B' redeemable convertible preferred stock was accounted for as a debt extinguishment with $4.1 million extinguishment gain recognized as a deemed capital contribution to additional paid-in capital in the quarter ended September 30, 2020, as the holders of the notes were existing stockholders of the Company.

7. Redeemable Convertible Preferred Stock

In August 2020, the Company amended its Certificate of Incorporation, pursuant to which the Company had two series of redeemable convertible preferred stock, designated as Series A’ and Series B’. In August 2020, the Company issued 7,599,720 shares of Series B’ redeemable convertible preferred stock at $4.3423 per share for gross proceeds of $33.0 million. In connection with the issuance of Series B’ redeemable convertible preferred stock, all outstanding convertible notes of $33.9 million and accrued unpaid interest of $2.5 million were converted into 8,379,410 shares of Series B’ redeemable convertible preferred stock at such price.

As of December 31, 2020, the redeemable convertible preferred stock comprised (in thousands, except per share and share amounts):


	Number of Shares Authorized	Number of Shares Issued and Outstanding	Carrying Amount		Liquidation Value		Original Issue Price
Series A’	1,651,154	635,048	$	73,340	$	36,945	$	58.1750
Series B’	59,106,232	15,979,130	$	68,082	$	190,810	$	4.3423
	60,757,386	16,614,178	$	141,422	$	227,755

On April 26, 2021, upon the closing of the Company’s IPO, all outstanding redeemable convertible preferred stock automatically converted into 16,614,178 shares of common stock. Prior to the closing of the Company’s IPO, the holders of redeemable convertible preferred stock had the following various rights and preferences:

Dividends

The holders of redeemable convertible preferred stock were entitled to receive dividends, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend to the common stockholders, at the rate of $4.6540 per share per annum on each outstanding share of Series A’ redeemable convertible preferred stock and $0.3474 per share per annum on each outstanding share of Series B’ redeemable convertible preferred stock, payable when, as and if declared by the Board of Directors. Such dividends would not have been cumulative and if less than the full amount of dividends payable on the redeemable convertible preferred stock had been declared and paid, any such payments would have been made ratably among the holders of the redeemable convertible preferred stock in proportion to the total amount each holder would be entitled to receive if the full amount of dividends payable on the redeemable convertible preferred stock had been declared. No dividends have been declared to date.

Liquidation

In the event of any liquidation, dissolution or winding up of the Company, the holders of the Company’s Series B’ redeemable convertible preferred stock would have been entitled to receive, prior to any distribution of the Company’s assets to the holders of Series A’ redeemable convertible preferred stock and common stock, an amount per share equal to (i) as of and following August 19, 2020 (the “Initial Closing” of Series B’ redeemable convertible preferred stock), and prior to, at the Company’s election, the earlier of (a) the date the Company’s cash balance fell below $4.0 million and (b) March 31, 2022 (the “Deferred Closing”), 2.75 times $4.3423 per share for each share of Series B’ redeemable convertible preferred stock, and (ii) as of and following the date of the Deferred Closing, either (x) 2.75 times $4.3423 per share if the Company’s actual cash-burn between the Initial Closing and December 31, 2021 had been 110% or less of the Company’s business plan cash-burn for such time period as approved by the Board of Directors, or (y) otherwise 3 times $4.3423, for each share of Series B’ redeemable convertible preferred stock, plus declared but unpaid dividends.

NeuroPace, Inc.

Notes to Unaudited Interim Condensed Financial Statements

If, upon the occurrence of such event, the assets and funds thus distributed among the holders of redeemable convertible preferred stock would have been insufficient to permit the payment to such holders of the full amounts, then the entire assets and funds of the Company legally available for distribution would have been distributed ratably among the holders of redeemable convertible preferred stock in proportion to the preferential amount each such holder was otherwise entitled to receive.

After full payment to the holders of Series B’ redeemable convertible preferred stock, the holders of Series A’ redeemable convertible preferred stock would have been entitled to receive, prior to any distribution of the Company’s assets to the holders of common stock, an amount per share equal to $58.1750 per share for each share of redeemable convertible preferred stock plus declared but unpaid dividends. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of redeemable convertible preferred stock would have been insufficient to permit the payment to such holders of the full amounts, then the entire assets and funds of the Company legally available for distribution would have been distributed ratably among the holders of redeemable co