npce-20220930
false000152828712-312022Q30.384600015282872022-01-012022-09-3000015282872022-11-04xbrli:shares00015282872022-09-30iso4217:USD00015282872021-12-31iso4217:USDxbrli:shares00015282872022-07-012022-09-3000015282872021-07-012021-09-3000015282872021-01-012021-09-300001528287us-gaap:CommonStockMember2021-12-310001528287us-gaap:AdditionalPaidInCapitalMember2021-12-310001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310001528287us-gaap:RetainedEarningsMember2021-12-310001528287us-gaap:RetainedEarningsMember2022-01-012022-03-3100015282872022-01-012022-03-310001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-03-310001528287us-gaap:CommonStockMember2022-01-012022-03-310001528287us-gaap:AdditionalPaidInCapitalMember2022-01-012022-03-310001528287us-gaap:CommonStockMember2022-03-310001528287us-gaap:AdditionalPaidInCapitalMember2022-03-310001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-310001528287us-gaap:RetainedEarningsMember2022-03-3100015282872022-03-310001528287us-gaap:RetainedEarningsMember2022-04-012022-06-3000015282872022-04-012022-06-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-012022-06-300001528287us-gaap:CommonStockMember2022-04-012022-06-300001528287us-gaap:AdditionalPaidInCapitalMember2022-04-012022-06-300001528287us-gaap:CommonStockMember2022-06-300001528287us-gaap:AdditionalPaidInCapitalMember2022-06-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-300001528287us-gaap:RetainedEarningsMember2022-06-3000015282872022-06-300001528287us-gaap:RetainedEarningsMember2022-07-012022-09-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-07-012022-09-300001528287us-gaap:CommonStockMember2022-07-012022-09-300001528287us-gaap:AdditionalPaidInCapitalMember2022-07-012022-09-300001528287us-gaap:CommonStockMember2022-09-300001528287us-gaap:AdditionalPaidInCapitalMember2022-09-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-09-300001528287us-gaap:RetainedEarningsMember2022-09-300001528287us-gaap:PreferredStockMember2020-12-310001528287us-gaap:CommonStockMember2020-12-310001528287us-gaap:AdditionalPaidInCapitalMember2020-12-310001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001528287us-gaap:RetainedEarningsMember2020-12-3100015282872020-12-310001528287us-gaap:RetainedEarningsMember2021-01-012021-03-3100015282872021-01-012021-03-310001528287us-gaap:CommonStockMember2021-01-012021-03-310001528287us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001528287us-gaap:PreferredStockMember2021-03-310001528287us-gaap:CommonStockMember2021-03-310001528287us-gaap:AdditionalPaidInCapitalMember2021-03-310001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001528287us-gaap:RetainedEarningsMember2021-03-3100015282872021-03-310001528287us-gaap:RetainedEarningsMember2021-04-012021-06-3000015282872021-04-012021-06-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-012021-06-300001528287us-gaap:PreferredStockMember2021-04-012021-06-300001528287us-gaap:CommonStockMember2021-04-012021-06-300001528287us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300001528287us-gaap:PreferredStockMember2021-06-300001528287us-gaap:CommonStockMember2021-06-300001528287us-gaap:AdditionalPaidInCapitalMember2021-06-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-300001528287us-gaap:RetainedEarningsMember2021-06-3000015282872021-06-300001528287us-gaap:RetainedEarningsMember2021-07-012021-09-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-07-012021-09-300001528287us-gaap:CommonStockMember2021-07-012021-09-300001528287us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001528287us-gaap:PreferredStockMember2021-09-300001528287us-gaap:CommonStockMember2021-09-300001528287us-gaap:AdditionalPaidInCapitalMember2021-09-300001528287us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-09-300001528287us-gaap:RetainedEarningsMember2021-09-3000015282872021-09-300001528287us-gaap:IPOMember2021-04-262021-04-260001528287us-gaap:IPOMember2021-04-260001528287us-gaap:OverAllotmentOptionMember2021-04-262021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoCommonStockMember2021-04-262021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoWarrantsToPurchaseSeriesBConvertiblePreferredStockMember2021-04-262021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoWarrantsExercisedToSeriesBConvertiblePreferredStockMember2021-04-262021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoWarrantsExercisedToSeriesBConvertiblePreferredStockMember2021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoWarrantsToPurchaseCommonStockMember2021-04-262021-04-260001528287npce:RedeemableConvertiblePreferredStockConvertedIntoWarrantsExercisedToCommonStockMember2021-04-262021-04-2600015282872021-04-260001528287srt:ScenarioForecastMember2022-01-012022-12-310001528287srt:ScenarioForecastMember2022-12-3100015282872021-05-012021-05-3100015282872022-07-302022-07-300001528287us-gaap:AdditionalFundingAgreementTermsMember2022-01-012022-09-300001528287us-gaap:AdditionalFundingAgreementTermsMember2022-09-3000015282872022-01-0100015282872021-04-092021-04-09xbrli:pure0001528287us-gaap:FairValueInputsLevel1Member2022-09-300001528287us-gaap:FairValueInputsLevel2Member2022-09-300001528287us-gaap:FairValueInputsLevel3Member2022-09-300001528287us-gaap:FairValueInputsLevel1Member2021-12-310001528287us-gaap:FairValueInputsLevel2Member2021-12-310001528287us-gaap:FairValueInputsLevel3Member2021-12-310001528287npce:RedeemableConvertiblePreferredStockWarrantsMember2022-09-300001528287npce:RedeemableConvertiblePreferredStockWarrantLiabilityMemberus-gaap:FairValueInputsLevel3Member2020-12-310001528287npce:RedeemableConvertiblePreferredStockWarrantLiabilityMemberus-gaap:FairValueInputsLevel3Member2021-01-012021-09-300001528287npce:RedeemableConvertiblePreferredStockWarrantLiabilityMemberus-gaap:FairValueInputsLevel3Member2021-09-300001528287npce:MachineryEquipmentFurnitureAndFixturesMember2022-09-300001528287npce:MachineryEquipmentFurnitureAndFixturesMember2021-12-310001528287npce:ComputerEquipmentAndSoftwareMember2022-09-300001528287npce:ComputerEquipmentAndSoftwareMember2021-12-310001528287us-gaap:LeaseholdImprovementsMember2022-09-300001528287us-gaap:LeaseholdImprovementsMember2021-12-3100015282872018-05-012018-05-310001528287npce:LeaseFacilityMember2011-08-310001528287npce:LeaseFacilityMember2019-05-310001528287npce:LeaseFacilityMember2021-06-300001528287srt:MinimumMember2018-05-012018-05-310001528287srt:MaximumMember2018-05-012018-05-3100015282872020-05-012020-06-3000015282872020-06-3000015282872020-10-0100015282872021-04-01npce:installment00015282872022-08-310001528287npce:JamesJacobyEtAlVNeuroPaceIncEtAlMember2021-10-182021-10-18npce:plaintiff0001528287srt:MaximumMembernpce:A2020TermLoansMember2020-09-300001528287npce:A2020TermLoansMember2020-09-300001528287npce:A2020TermLoansMembernpce:PaymentInCashMember2020-09-300001528287npce:A2020TermLoansMemberus-gaap:PaymentInKindPIKNoteMember2020-09-300001528287npce:A2020TermLoansMemberus-gaap:PaymentInKindPIKNoteMember2022-09-3000015282872020-09-012020-09-300001528287npce:A2020TermLoansMember2022-09-300001528287npce:A2020TermLoansMember2022-03-012022-03-310001528287npce:SeriesBRedeemableConvertiblePreferredStockMembernpce:A2020TermLoansMember2020-09-300001528287npce:SeriesBRedeemableConvertiblePreferredStockMembernpce:A2020TermLoansMember2020-09-240001528287npce:A2020TermLoansMember2022-07-012022-09-300001528287npce:A2020TermLoansMember2021-07-012021-09-300001528287npce:TermLoanMember2022-09-300001528287npce:PaycheckProtectionProgramCARESActMember2020-04-300001528287npce:PaycheckProtectionProgramCARESActMember2021-04-012021-04-300001528287npce:PaycheckProtectionProgramCARESActMember2021-04-300001528287us-gaap:PreferredStockMember2022-09-300001528287us-gaap:PreferredStockMember2021-12-310001528287npce:SeriesBRedeemableConvertiblePreferredStockMembernpce:A2020TermLoansMember2021-04-260001528287npce:SeriesBRedeemableConvertiblePreferredStockMembernpce:A2020TermLoansMember2021-07-012021-09-300001528287npce:SeriesBRedeemableConvertiblePreferredStockMembernpce:A2020TermLoansMember2021-01-012021-09-300001528287npce:OptionsAvailableForGrant2021PlanMember2022-09-300001528287npce:OptionsAvailableForGrant2021PlanMember2021-12-310001528287npce:OutstandingOptions2021PlanMember2022-09-300001528287npce:OutstandingOptions2021PlanMember2021-12-310001528287npce:OptionsRestrictedStockUnit2021PlanMember2022-09-300001528287npce:OptionsRestrictedStockUnit2021PlanMember2021-12-310001528287npce:CommonStockAvailableForESPPMember2022-09-300001528287npce:CommonStockAvailableForESPPMember2021-12-310001528287npce:A2021EquityIncentivePlanMember2021-12-310001528287npce:A2021EquityIncentivePlanMember2022-01-012022-09-300001528287npce:A2021EquityIncentivePlanMember2022-09-3000015282872021-01-012021-12-3100015282872021-04-012021-04-3000015282872020-04-012021-04-300001528287npce:A2021EmployeeStockPurchasePlanMember2021-04-300001528287npce:A2021EmployeeStockPurchasePlanMember2021-04-012021-04-300001528287npce:A2021EmployeeStockPurchasePlanMember2021-05-202021-12-060001528287npce:A2021EmployeeStockPurchasePlanMember2021-01-012021-12-310001528287npce:A2021EmployeeStockPurchasePlanMember2021-12-072022-06-060001528287npce:A2021EmployeeStockPurchasePlanMember2022-04-012022-06-300001528287npce:A2021EmployeeStockPurchasePlanMember2022-09-300001528287srt:ScenarioForecastMembernpce:A2021EmployeeStockPurchasePlanMember2022-06-072022-12-060001528287us-gaap:RestrictedStockUnitsRSUMember2021-12-310001528287us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-09-300001528287us-gaap:RestrictedStockUnitsRSUMember2022-09-300001528287us-gaap:CostOfSalesMember2022-07-012022-09-300001528287us-gaap:CostOfSalesMember2021-07-012021-09-300001528287us-gaap:CostOfSalesMember2022-01-012022-09-300001528287us-gaap:CostOfSalesMember2021-01-012021-09-300001528287us-gaap:ResearchAndDevelopmentExpenseMember2022-07-012022-09-300001528287us-gaap:ResearchAndDevelopmentExpenseMember2021-07-012021-09-300001528287us-gaap:ResearchAndDevelopmentExpenseMember2022-01-012022-09-300001528287us-gaap:ResearchAndDevelopmentExpenseMember2021-01-012021-09-300001528287us-gaap:SellingGeneralAndAdministrativeExpensesMember2022-07-012022-09-300001528287us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-07-012021-09-300001528287us-gaap:SellingGeneralAndAdministrativeExpensesMember2022-01-012022-09-300001528287us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-01-012021-09-300001528287npce:StockOptionsAndRestrictedStockUnitsMember2022-07-012022-09-300001528287npce:StockOptionsAndRestrictedStockUnitsMember2021-07-012021-09-300001528287npce:StockOptionsAndRestrictedStockUnitsMember2022-01-012022-09-300001528287npce:StockOptionsAndRestrictedStockUnitsMember2021-01-012021-09-300001528287npce:EmployeeStockPurchasePlanMember2022-07-012022-09-300001528287npce:EmployeeStockPurchasePlanMember2021-07-012021-09-300001528287npce:EmployeeStockPurchasePlanMember2022-01-012022-09-300001528287npce:EmployeeStockPurchasePlanMember2021-01-012021-09-300001528287npce:A2021EmployeeStockPurchasePlanMember2022-01-012022-09-300001528287us-gaap:EmployeeStockOptionMember2022-01-012022-09-300001528287us-gaap:EmployeeStockOptionMember2021-01-012021-09-300001528287npce:ShareBasedPaymentArrangementUnvestedEarlyExercisedCommonStockOptionMember2022-01-012022-09-300001528287npce:ShareBasedPaymentArrangementUnvestedEarlyExercisedCommonStockOptionMember2021-01-012021-09-300001528287us-gaap:EmployeeStockMember2022-01-012022-09-300001528287us-gaap:EmployeeStockMember2021-01-012021-09-300001528287us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-09-300001528287us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-09-30

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, 2022
OR
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)
Delaware22-3550230
(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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareNPCENasdaq 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 filerAccelerated filer
Non-accelerated filerSmaller 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 4, 2022, there were approximately 24,903,146 shares of the registrant's common stock outstanding.



TABLE OF CONTENTS
Page



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;
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 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)
September 30,December 31,
(in thousands, except share and per share amounts)20222021
Assets
Current assets
Cash and cash equivalents$5,688 $19,187 
Short-term investments79,724 96,397 
Accounts receivable7,876 7,091 
Inventory8,581 7,822 
Prepaid expenses and other current assets2,501 2,319 
Total current assets104,370 132,816 
Property and equipment, net894 603 
Operating lease right-of-use asset15,067  
Restricted cash122 122 
Other assets21 21 
Total assets$120,474 $133,562 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$1,175 $1,378 
Accrued liabilities7,550 7,923 
Operating lease liability692  
Total current liabilities9,417 9,301 
Deferred rent, noncurrent 911 
Long-term debt51,954 49,847 
Operating lease liability, net of current portion15,694  
Total liabilities77,065 60,059 
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 September 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value, 200,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 24,864,119 and 24,452,999 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
25 24 
Additional paid-in capital504,425 497,522 
Accumulated other comprehensive loss(1,334)(272)
Accumulated deficit(459,707)(423,771)
Total stockholders’ equity43,409 73,503 
Total liabilities and stockholders’ equity$120,474 $133,562 
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
1

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)2022202120222021
Revenue$11,157 $10,339 $32,731 $34,186 
Cost of goods sold3,1922,8329,0418,827
Gross profit7,9657,50723,69025,359
Operating expenses
Research and development5,6114,32916,85712,866
Selling, general and administrative12,5539,42137,76827,215
Total operating expenses18,16413,75054,62540,081
Loss from operations(10,199)(6,243)(30,935)(14,722)
Interest income423136778262
Interest expense(1,906)(1,826)(5,588)(5,548)
Other income (expense), net(103)(150)(191)(5,379)
Net loss$(11,785)$(8,083)$(35,936)$(25,387)
Unrealized gain (loss) on available-for-sale debt securities11722(1,062)
Comprehensive loss$(11,668)$(8,061)$(36,998)$(25,387)
Net loss per share attributable to common stockholders, basic and diluted$(0.48)$(0.34)$(1.47)$(1.81)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted24,728,701 24,101,399 24,514,820 14,061,958 
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
2

NeuroPace, Inc.
Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(unaudited)
Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
(in thousands, except share amounts)SharesAmount
Balances as of January 1, 202224,452,999 $24 $497,522 $(272)$(423,771)$73,503 
Net loss— — — — (11,461)(11,461)
Unrealized loss on available-for-sale debt securities— — — (710)— (710)
Issuance of common stock pursuant to stock option exercises38,635 — 1 — — 1 
Repurchase of common stock(14,454)— — — — — 
Change in early exercise liability— — 2 — — 2 
Stock-based compensation— — 1,488 — — 1,488 
Balances as of March 31, 202224,477,180 24 499,013 (982)(435,232)62,823 
Net loss— — — — (12,690)(12,690)
Unrealized loss on available-for-sale debt securities— — — (469)— (469)
Issuance of common stock pursuant to stock option exercises74,435 — 2 — — 2 
Issuance of common stock pursuant to Employee Stock Purchase Plan147,217 1 678 — — 679 
Issuance of common stock upon vesting of restricted stock units121,656 — — — — — 
Shares withheld for taxes(5,633)— (47)— — (47)
Change in early exercise liability— — 1 — — 1 
Stock-based compensation— — 2,603 — — 2,603 
Balances as of June 30, 202224,814,855 25 502,250 (1,451)(447,922)52,902 
Net loss— — — — (11,785)(11,785)
Unrealized gain on available-for-sale debt securities— — — 117 — 117 
Issuance of common stock pursuant to stock option exercises16,130 —  — —  
Issuance of common stock upon vesting of restricted stock units34,540 — — — —  
Shares withheld for taxes(1,406)— (7)— — (7)
Stock-based compensation— — 2,182 — — 2,182 
Balances as of September 30, 2022
24,864,119 $25 $504,425 $(1,334)$(459,707)$43,409 
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
3

NeuroPace, Inc.
Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(unaudited)
Redeemable Convertible Preferred StockCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity (Deficit)
(in thousands, except share amounts)SharesAmountSharesAmount
Balances as of January 1, 202116,614,178$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, 202116,614,178 $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 warrants213,941 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.
4

NeuroPace, Inc.
Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
(in thousands)20222021
Cash flows from operating activities
Net loss$(35,936)$(25,387)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense6,273 2,412 
Depreciation213 217 
Amortization of debt discount and issuance costs192 200 
Non-cash interest expense636 608 
PIK interest incurred but not paid on term loan1,279  
Amortization of right-of-use asset2,022  
Realized loss from sale of short-term investments210  
Inventory write-downs204 185 
Change in fair value of redeemable convertible preferred stock warrant liability 5,236 
Changes in operating assets and liabilities
Accounts receivable(783)1,784 
Inventory(964)(438)
Prepaid expenses and other assets(181)(2,227)
Accounts payable(208)259 
Accrued liabilities121 1,296 
Operating lease liabilities(2,104) 
Deferred rent (519)
Net cash (used in) operating activities(29,026)(16,374)
Cash flows from investing activities
Acquisition of property and equipment(501)(230)
Proceeds from sale of short-term investments15,400  
Purchase of short-term investments (85,012)
Net cash provided by (used in) investing activities14,899 (85,242)
Cash flows from financing activities
Proceeds from issuance of common stock under employee plans683 8 
Taxes withheld and paid related to net share settlement of equity awards(55) 
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)
Repayment of debt (4,090)
Net cash provided by financing activities628 101,615 
Net (decrease) in cash and cash equivalents(13,499)(1)
Cash, cash equivalents and restricted cash
Beginning of the period19,309 26,756 
End of the period$5,810 $26,755 
Reconciliation of cash, cash equivalents and restricted cash to balance sheets:
Cash and cash equivalents$5,688 $26,633 
Restricted cash122 122 
Cash, cash equivalents and restricted cash in balance sheets$5,810 $26,755 
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
5

NeuroPace, Inc.
Condensed Statements of Cash Flows
(unaudited)
Supplemental disclosure of cash flow information:
Cash paid for interest$3,481 $4,740 
Supplemental disclosures of non-cash investing and financing information:
Operating lease right-of-use asset obtained in exchange for lease obligations$10,585 $ 
Net change in accrued liabilities from early exercise of options$(3)$4 
Purchase of property and equipment included in accounts payable$4 $97 
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
6


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 $459.7 million as of September 30, 2022. For the nine months ended September 30, 2022 and 2021, the Company used $29.0 million and $16.4 million of cash, respectively, in its operating activities. As of September 30, 2022, the Company had cash, cash equivalents and short-term investments of $85.4 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, 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 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 $43.0 million in the year ended December 31, 2022, 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, and resulting in a going concern. As of September 30, 2022, the Company was in compliance with all covenants of the Term Loan.
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
7


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
evaluated for treatment with and demand for elective procedures using the Company's RNS System. A similar decrease occurred in the third and fourth quarters of 2021, as well as in the first half of 2022, as hospitals responded to new COVID-19 variants, including the Delta and Omicron variants. 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 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 all reverse stock splits for all periods presented.
Unaudited Interim Financial Information
The condensed balance sheet as of December 31, 2021 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, 2022 and for the three and nine months ended September 30, 2022 and 2021, 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, 2021 and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 10, 2022. 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, 2022 and condensed results of operations for the three and nine months ended September 30, 2022 and 2021 and condensed cash flows for the nine months ended September 30, 2022 and 2021 have been made. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022.
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 prior to the IPO, and related stock-based compensation, the valuation of deferred tax assets and related valuation allowances, provision for excess and obsolete inventories, and the valuation of redeemable 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.
8


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
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. The redeemable convertible preferred stock warrant liability is 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, 2022 and 2021, there were no customers that represented 10% or more of revenue. As of September 30, 2022 and December 31, 2021, 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.
Leases
The Company leases its facilities and meets the requirements to account for these leases as operating leases. For the three and nine months ended September 30, 2021, for facility leases that contain rent escalations or rent concession provisions, the Company recorded its lease expense during the lease term on a straight-line basis over the term of the lease. As of December 31, 2021, the Company recorded differences between the rent paid and the straight-line rent as a deferred rent liability. Leasehold improvements funded by landlord incentives or allowances were recorded as leasehold improvement assets and a corresponding deferred rent liability. The leasehold improvement asset is amortized over the lesser of the term of the lease or life of the asset.
9


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
Upon adoption of ASC 842, Leases, on January 1, 2022, the Company determined if an arrangement is a lease, or contains a lease, at inception. Operating leases are included in operating lease right-of-use, or ROU, assets, operating lease liability, and operating lease liability, net of current portion on the Company’s condensed balance sheets.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment at commencement date in determining the present value of future payments. The ROU asset also includes any lease payments made to the lessor at or before the commencement date, minus lease incentives received, and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company elected certain practical expedients under ASC 842 which are: (i) to not record leases with an initial term of twelve months or less on the balance sheet; (ii) to combine the lease and non-lease components in determining the lease liabilities and right-of-use assets, and (iii) to carry forward prior conclusions about lease identification and classification.
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.
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. Through September 30, 2022, $0.5 million of qualifying expenses have been incurred and funded by the NIH related to the first and second year funding. As of September 30, 2022, the Company recorded prepaid expenses and other current assets of less than $0.1 million related to the second year 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
10


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
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
Recently Adopted Accounting Pronouncements
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 ROU asset 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 months or less as leases in the scope of this ASU. This ASU also requires 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 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 delayed 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 adopted Topic 842 effective January 1, 2022 using a modified retrospective method and did not restate comparative periods. The Company recognized ROU assets of $6.1 million and lease liabilities of $7.5 million for its operating leases as of January 1, 2022. In addition, the amount of the Company’s deferred rent as of December 31, 2021 of $1.4 million was removed upon adoption. The adoption of these ASUs did not have any impact on the condensed statements of operations and comprehensive loss and condensed statements of cash flows. See Note 5 for more information related to the Company’s lease obligations.
Recent Accounting Pronouncements Not Yet Adopted
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 currently evaluating the impact of this standard on its financial statements and related disclosures, and does not expect the standard will have a material impact 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 determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier
11


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, marketable securities and liabilities) at fair value as of September 30, 2022 (in thousands):
Fair Value as of September 30, 2022
Basis for Fair Value Measurements
(Level 1)(Level 2) (Level 3)
Assets:
Money market funds, included in cash and cash equivalents$5,676 $5,676 $ $ 
Fixed income mutual funds, included in short-term investments79,724 79,724   
Total$85,400 $85,400 $ $ 
The following table summarizes the Company’s financial assets (cash equivalents, marketable securities and liabilities) at fair value as of December 31, 2021 (in thousands):
Fair Value as of December 31, 2021
Basis for Fair Value Measurements
(Level 1)(Level 2) (Level 3)
Assets:
Money market funds, included in cash and cash equivalents$16,498 $16,498 $ $ 
Fixed income mutual funds, included in short-term investments96,397 96,397   
Total$112,895 $112,895 $ $ 
There were no liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2022 and December 31, 2021.
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-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.
12


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
The following is a summary of the Company’s available-for-sale debt securities (in thousands):
September 30,December 31,
20222021
Cost basis$81,058 $96,702 
Unrealized loss(1,334)(305)
Fair value$79,724 $96,397 
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, 2022, as all such warrants were net exercised to shares of common stock upon the closing of the IPO.
The change in fair value of the redeemable convertible preferred stock warrant liability is summarized below (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), net5,236 
Net exercise of redeemable convertible preferred stock warrants(5,605)
Fair value as of September 30, 2021
$ 

4.Balance Sheet Components
Inventory
Inventories consist of the following (in thousands):
September 30,December 31,
20222021
Raw materials$3,171 $2,232 
Work-in-process501 879 
Finished goods4,909 4,711 
Total$8,581 $7,822 
Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
September 30,December 31,
20222021
Machinery, equipment, furniture and fixtures$4,211 $3,742 
Computer equipment and software2,952 2,916 
Leasehold improvements2,402 2,402 
9,565 9,060 
Less: Accumulated depreciation(8,671)(8,457)
Property and equipment, net $894 $603 

13


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.1 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $0.2 million and $0.2 million, respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30,December 31,
20222021
Payroll and related expenses $5,991 $6,547 
Inventory-raw materials377 251 
Professional fees365 109 
Deferred rent, current 490 
Other817 526 
Total accrued liabilities$7,550 $7,923 

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 30, 2030. The second amendment contains a rent free period from September 1, 2022 through December 31, 2022. The Company has an option to extend the lease for a period of five years, commencing on July 1, 2030 and 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. 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 and nine months ended September 30, 2021 was $0.7 million and $2.1 million, respectively. As of December 31, 2021, $1.4 million was recorded as deferred rent liability.
The Company’s future minimum lease payments under the non-cancellable operating lease as of December 31, 2021 were as follows (in thousands):
December 31,
2021
2022$3,172 
20233,267 
20241,666 
Total$8,105 
14


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
The maturities of operating lease liabilities as of September 30, 2022 are as follows (in thousands):
September 30,
2022
2022 (remaining three months)$ 
20232,773 
20242,857 
20252,942 
20263,031 
Thereafter11,354 
Total undiscounted lease payments22,957 
Less: imputed interest6,571 
Total operating lease liability16,386 
Less: current portion692 
Operating lease liability, net of current portion$15,694 
Operating lease cost was $0.7 million and $2.0 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, the remaining term for the operating lease in Mountain View, California was 7.8 years, and the discount rate used to measure the lease liability for such operating lease upon recognition was 8.5%.
During the nine months ended September 30, 2022, cash paid for amounts included in operating lease liabilities of $2.1 million 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 becomes 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 first twelve months following October 1, 2022, and increase the purchase minimum by 10% for each of the two subsequent years.
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, 2022 and December 31, 2021.
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, 2022 and December 31, 2021.
15


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
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 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 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. Actual claims could settle or be adjudicated against the Company in the future for materially different amounts than the Company has accrued due to the inherently unpredictable nature of litigation. Legal costs are expensed as incurred. The Company believes it has recorded adequate provisions for any such lawsuits and claims as of September 30, 2022. The provisions are immaterial and are recorded within selling, general and administrative expenses. The nature of the loss contingencies relating to claims that have been asserted against us are described below.
On April 20, 2021, the Company received correspondence from the United States Department of Treasury regarding an inquiry into a matter that may fall under the jurisdiction of the Committee on Foreign Investment in the United States, or CFIUS. While the Company believes that its RNS System is not a critical technology for which CFIUS would have jurisdiction and does not pose a national security risk, the Company is cooperating fully with CFIUS on the matter.
Additionally, on October 18, 2021, three stockholders of the Company, James Jacoby, George Vachtsevanos, and Javier Echauz, or together with Company, the Parties, filed a complaint in the United States District Court for the Northern District of California, or the Court, entitled James Jacoby et al. v. NeuroPace, Inc., et al., Case No. 3:21-cv-8136, against the Company and its board of directors. The complaint alleged various claims related to the Company’s reverse stock splits and seeks, among other relief, damages and attorney’s fees. The complaint was amended on December 28, 2021 to name additional defendants. On August 8, 2022, the Parties entered into a confidential settlement agreement, which contains, among other things, a mutual release of claims and no admission of liability by defendants. On August 9, 2022, the Parties filed a stipulation of dismissal with prejudice, which was entered by the Court on August 9, 2022. Although the Company has agreed to settle these claims, it continues to believe there was no merit to the stockholders’ allegations. The Company recorded an immaterial expense related to this complaint.
6.Debt
2020 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 bears interest at a rate of 12.5% per year. Payments under the Term Loan are made quarterly with payment dates fixed at the end of each calendar quarter. Through December 31, 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 1, 2021 through June 30, 2025, the Company has 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. For each payment date from April 1, 2022 through September 30, 2022, the Company elected the PIK option, increasing the principal of the Term Loan by $1.3 million.
The 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 Term Loan includes a fee upon
16


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
repayment of the loan equal to 10% of the aggregate principal amount being prepaid or repaid, or the backend fee. As of September 30, 2022, the Term Loan had an annual effective interest rate of 15.67% 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 March 2022, the Term Loan was amended to reduce the minimum annual net revenue covenant to $43.0 million for the year ended December 31, 2022.
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, 2022 and 2021, 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. During the nine months ended September 30, 2022 and 2021, the Company recorded interest expense related to debt discount and debt issuance costs of the Term Loan of $0.2 million and $0.2 million, respectively.
Interest expense on the Term Loan was $1.9 million and $1.9 million during the three months ended September 30, 2022 and 2021, respectively. Interest expense on the Term Loan was $5.6 million and $5.5 million during the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, future minimum payments for the Term Loan are as follows (in thousands):
Term Loan
2022 (remaining three months)$1,638 
20236,499 
20246,517 
202561,268 
Total75,922 
Less: Unamortized debt discount and issuance cost(970)
Less: Unaccreted backend fee(3,483)
Less: Interest(19,515)
Term Loan$51,954 
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 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.
7.    Redeemable Convertible Preferred Stock
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. There was no issued and outstanding redeemable convertible preferred stock as of September 30, 2022 and December 31, 2021.
17


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
8.    Redeemable Convertible Preferred Stock Warrant Liability
On September 24, 2020, in connection with entering into the Term Loan Agreement, the Company issued CRG Partners IV L.P. and its affiliates warrants to purchase 346,823 shares of Series B’ redeemable convertible preferred stock at an exercise price of $6.51339 per share, or the Series B’ Warrants, which was accounted as debt issuance costs.
The Series B’ Warrants would terminate at the earlier of the ten-year anniversary from the issuance date, the closing of the Company’s IPO or liquidation of the Company. These warrants had a net exercise provision under which their holders could, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Series B’ Warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The fair value of the Series B’ Warrants on the date of issuance of $0.6 million was recorded as a debt discount. Upon the closing of the IPO, the Series B’ Warrants were net exercised to 213,941 shares of Series B’ redeemable convertible preferred stock and subsequently converted into common stock on a one-to-one basis. Upon the closing of the IPO, the Company remeasured the Series B’ Warrants to fair value of $5.6 million, which was the intrinsic value of net exercised common stock, as according to the Series B’ Warrant agreements the Series B’ Warrants were to be automatically exercised upon the IPO and the expected term of the Series B’ Warrants was zero immediately before the closing of the IPO. Upon the closing of the IPO, the redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital.
The change in fair value of $0 and $(5.2) million during the three and nine months ended September 30, 2021 was recorded as a component of other income (expense), net in the condensed statements of operations and comprehensive loss.
9.    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 September 30, 2022 and December 31, 2021, no dividends had been declared.
As of September 30, 2022 and December 31, 2021, the Company had reserved common stock for future issuance as follows:
September 30,December 31,
20222021
Shares available for future grant under the 2021 Plan1,383,132 2,132,750 
Outstanding options under the 2021 Plan3,506,756 3,038,970 
Outstanding restricted stock units under the 2021 Plan1,822,209 596,085 
Common stock available for ESPP567,481 470,169 
Total7,279,578 6,237,974 
10.    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:
18


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
Shares Available for Grant
Shares available for grant as of January 1, 20222,132,750 
Authorized1,222,649 
Granted/Awarded(2,219,220)
Cancelled239,914 
Withheld for taxes7,039 
Shares available for grant as of September 30, 2022
1,383,132 
A summary of stock option activity for the nine months ended September 30, 2022 is set forth below:
Options Outstanding
Number of SharesWeighted-Average Exercise PriceWeighted Average Remaining Contractual Term (in Years)
Balances as of January 1, 20223,038,970 $2.61 8.83
Granted690,218 $7.83 
Exercised(129,200)$0.03 
Cancelled(93,232)$7.69 
Balances at September 30, 2022
3,506,756 $3.59 8.36
Vested and exercisable at September 30, 2022
1,518,126 $1.94 8.03
Vested and expected to vest at September 30, 2022
3,506,756 $3.59 8.36
Early Exercise of Stock Options
The terms of the Company’s 2020 Stock Plan, or the 2020 Plan, and the 2021 Plan, permit the exercise of options granted under the plans prior to vesting, subject to required approvals. The shares of common stock issued from the early exercise of unvested stock options are restricted and continue to vest over the original implied service period. The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. The shares purchased by the employees and non-employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be outstanding until those shares vest. The cash received in exchange for exercised and unvested shares related to stock options granted is recorded as a liability for the early exercise of stock options in accrued liabilities on the accompanying balance sheet and will be transferred into common stock and additional paid-in capital as the shares vest. As of September 30, 2022 and December 31, 2021, there were 111,527 and 174,171 shares of common stock, respectively, issued pursuant to early exercised options and subject to repurchase.
Employee Stock Purchase Plan
In April 2021, the Company adopted the 2021 Employee Stock Purchase Plan, or ESPP. The Company allows eligible employees to purchase shares of the Company's common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each offering period, which is typically six months. There were 580,000 shares of common stock initially reserved for issuance under the ESPP. In January 2022, the number of shares of common stock available for issuance under the ESPP was increased by 244,529 shares as a result of the automatic evergreen increase provision in the ESPP. The ESPP offering periods and purchase periods are determined by the Company’s board of directors, or the Board.
The first offering period was for 0.6 years beginning May 20, 2021 through December 6, 2021. The Company issued 109,831 shares under the ESPP for the year ended December 31, 2021. The second offering period was for six months beginning December 7, 2021 through June 6, 2022. The Company issued 147,217 shares under the ESPP for the three months ended June 30, 2022. As of September 30, 2022, 567,481 shares under the ESPP remain
19


NeuroPace, Inc.
Notes to Unaudited Interim Condensed Financial Statements
available for purchase. The Board authorized a new offering period of six months, which began on June 7, 2022 and runs through December 6, 2022.
Restricted Stock Units
Activity with respect to restricted stock units was as follows:
Number of Shares Underlying Outstanding Restricted Stock UnitsWeighted Average Grant Date Fair Value
Unvested, January 1, 2022596,085 $22.06 
Granted1,529,002 $7.89 
Vested(156,196)$23.52 
Cancelled(146,682)$14.68 
Unvested, September 30, 2022
1,822,209 $10.64 
The Company recognized stock-based compensation as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Cost of goods sold$129 $93 $402 $134 
Research and development563 348 1,751 694 
Selling, general and administrative1,490 666 4,120 1,584 
Total stock-based compensation$2,182 $1,107 $