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Item 8. Financial Statements and Supplementary Data

2023-03-02 compared with 2022-03-10 · 271 added, 360 removed, 632 unchanged (50% of the section changed)

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INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( PricewaterhouseCoopers LLP, San Jose, CA,

PricewaterhouseCoopers LLP, San Jose, CA, PCAOB ID 238 )

Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

Financial Statements:

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for leases in 2022.

Basis for Opinion

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Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

The Company’s Term Loan includes a minimum annual net revenue covenant.

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.

Refer to Note 1 to the financial statements.

/s/ PricewaterhouseCoopers LLP

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Property and equipment, net 1,064 603

Operating lease right-of-use asset 14,838 —

Restricted cash 122 122

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Total assets $ 114,106 $ 133,562

Liabilities and Stockholders’ Equity (Deficit)

Liabilities and Stockholders’ Equity

Current liabilities

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Accrued liabilities 7,414 7,923

Short-term debt — 2,043

Operating lease liability 1,415 —

Total current liabilities 10,976 9,301

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Long-term debt 52,913 49,847

Redeemable convertible preferred stock warrant liability — 369

Other liabilities — 274

Operating lease liability, net of current portion 15,440 —

Total liabilities 79,329 60,059

Commitments and contingencies (Note 5)

Redeemable convertible preferred stock, $ 0.001 par value - no shares and 60,757,386 shares authorized as of December 31, 2021 and December 31, 2020, respectively;

no shares and 16,614,178 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively (Liquidation value $ 0 and $ 227,755 as of December 31, 2021 and December 31, 2020, respectively)

Stockholders’ equity (deficit)

Stockholders’ equity

Preferred stock, $ 0.001 par value, 10,000,000 shares authorized;

no shares issued and outstanding as of December 31, 2022 and December 31, 2021

Common stock, $ 0.001 par value - 200,000,000 and 74,636,348 shares authorized as of December 31, 2021 and December 31, 2020, respectively;

Common stock, $ 0.001 par value, 200,000,000 shares authorized as of December 31, 2022 and December 31, 2021;

25,045,751 and 24,452,999 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively

Additional paid-in-capital 506,713 497,522

Accumulated other comprehensive income (loss) ( 272 ) 33

Accumulated other comprehensive loss ( 1,108 ) ( 272 )

Accumulated deficit ( 470,853 ) ( 423,771 )

Total stockholders’ equity (deficit) 73,503 ( 147,832 )

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 133,562 $ 55,950

Total stockholders’ equity 34,777 73,503

Total liabilities and stockholders’ equity $ 114,106 $ 133,562

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

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Interest income 1,578 448

Interest expense (includes $ 0 and $ 1,258 to related parties in 2021 and 2020, respectively)

( 7,410 ) ( 11,486 )

Interest expense ( 7,529 ) ( 7,410 )

Other income (expense), net ( 337 ) ( 5,381 )

Net loss $ ( 47,082 ) $ ( 36,080 )

Unrealized (loss) gain on available-for-sale debt securities ( 305 ) 32

Unrealized loss on available-for-sale debt securities ( 836 ) ( 305 )

Comprehensive loss $ ( 47,918 ) $ ( 36,385 )

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(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 )

Balances at January 1, 2021 16,614,178 $ 141,422 314,096 $ — $ 239,826 $ 33 $ ( 387,691 ) $ ( 147,832 )

Net loss — — — — — — ( 36,080 ) ( 36,080 )

Unrealized gain on available-for-sale debt securities — — — — — 32 — 32

Issuance of Series B’ redeemable convertible preferred stock, net of issuance costs of $ 1,304

Unrealized loss on available-for-sale debt securities — — — — — ( 305 ) — ( 305 )

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 — — 300,768 — 8 — — 8

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

Repurchase of common stock — — ( 74 ) — — — — —

Issuance of common stock pursuant to Employee Stock Purchase Plan — — 109,831 — 911 — — 911

Change in early exercise liability — — — — ( 2 ) — — ( 2 )

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Unrealized loss on available-for-sale debt securities — — — — — ( 836 ) — ( 836 )

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 — — 157,447 — 4 — — 4

Issuance of common stock pursuant to Employee Stock Purchase Plan — — 284,758 1 893 — — 894

Issuance of common stock upon vesting of restricted stock units — — 194,705 — — — — —

Shares withheld for taxes — — ( 8,436 ) — ( 59 ) — — ( 59 )

Repurchase of common stock — — ( 35,722 ) — — — — —

Change in early exercise liability — — — — 4 — — 4

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Non-cash interest expense 874 806

PIK interest paid on repayment of term loan — ( 4,081 )

PIK interest incurred but not paid on term loan 1,934 —

Amortization of right-of-use asset 2,720 —

Inventory write-downs 243 242

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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

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Accrued liabilities ( 15 ) 1,719

Operating lease liabilities ( 2,104 ) —

Other liabilities — ( 248 )

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Purchase of short-term investments — ( 85,012 )

Net cash used in investing activities ( 85,396 ) ( 10,767 )

Net cash provided by (used in) investing activities 23,797 ( 85,396 )

Cash flows from financing activities

Proceeds from issuance of common stock under employee plans 896 919

Taxes withheld and paid related to net share settlement of equity awards ( 59 ) —

Proceeds from issuance of common stock in initial public offering, net of underwriter discount and commissions — 109,089

Payment of deferred offering costs ( 347 ) ( 3,392 )

Proceeds from debt — 54,047

Payment of debt issuance costs — ( 950 )

Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — 31,696

Repayment of debt — ( 4,090 )

Issuance of convertible notes, net of issuance costs (includes $ 0 and $ 11,867 from related parties in the years 2021 and 2020, respectively)

Net cash provided by financing activities 490 102,526

Net (decrease) increase in cash and cash equivalents ( 7,447 ) 22,633

Net decrease in cash and cash equivalents ( 12,582 ) ( 7,447 )

Cash, cash equivalents and restricted cash

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End of year $ 6,727 $ 19,309

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

NeuroPace, Inc.

Statements of Cash Flows

Reconciliation of cash, cash equivalents and restricted cash to balance sheets:

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Total cash, cash equivalents and restricted cash $ 6,727 $ 19,309

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

NeuroPace, Inc.

Statements of Cash Flows

Supplemental disclosure of cash flow information:

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Supplemental disclosures of non-cash investing and financing information:

Operating lease right-of-use asset obtained in exchange for lease obligations $ 10,700 $ —

Net change in accrued liabilities from early exercise of options $ ( 4 ) $ 2

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 deferred offering costs included in accounts payable and accrued liabilities $ — $ 274

Purchase of property and equipment included in accounts payable $ 124 $ —

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

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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.

At-the-Market Equity Offering

In November 2022, the Company filed a Registration Statement on Form S-3, or Shelf, with the Securities and Exchange Commission in relation to the registration of common stock, preferred stock, debt securities, warrants or any combination thereof for up to an aggregate of $ 150.0 million, of which $ 50.0 million may be issued and sold pursuant to an at-the-market, or ATM, offering program for sales of the Company’s common stock under a sales agreement, or Sales Agreement, with SVB Securities LLC, or SVB.

The Company agreed to pay SVB up to 3.0 % of the gross proceeds sold through the Sales Agreement.

The Company’s common stock would be sold at prevailing market prices at the time of the sale and, as a result, prices may vary.

The Company has no t issued or sold any securities pursuant to the Shelf or ATM offering program.

Liquidity and Capital Resources

The Company has incurred operating losses and negative cash flows from operations since its inception and has an accumulated deficit of $ 470.9 million as of December 31, 2022.

For the years ended December 31, 2021 and 2020, the Company used $ 24.6 million and $ 21.6 million of cash in its operating activities, respectively.

For the years ended December 31, 2022 and 2021, the Company used $ 36.9 million and $ 24.6 million of cash, respectively, in its operating activities.

As of December 31, 2022, the Company had cash, cash equivalents and short-term investments of $ 77.4 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 and commissions and offering costs.

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 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 financial statements.

In connection with the New Term Loan described in Notes 6 and 15, 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 each of the years ended December 31, 2021 and 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 December 31, 2021, the Company was in compliance with all covenants of the New 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

In connection with the Term Loan described in Notes 6 and 14, the Company will need to be in compliance with a minimum annual net revenue covenant determined in accordance with generally accepted accounting principles of

NeuroPace, Inc.

Notes to 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 hospitals responded to new COVID-19 variants, including the Delta and Omicron variants.

$ 43.0 million and $ 45.0 million in the years ended December 31, 2022 and December 31, 2023, respectively, and maintain a minimum cash and cash equivalents balance of $ 5.0 million.

Our ability to raise additional capital may be adversely impacted by global economic conditions and the recent disruptions to, and volatility in, the financial markets in the United States and worldwide.

If we are unable to raise capital when needed, we will need to delay, limit, reduce or terminate planned commercialization or product development activities in order to reduce costs.

As of December 31, 2022, the Company was in compliance with all covenants of the Term Loan.

The global spread of the COVID-19 pandemic, including the different COVID-19 variants and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted the global economy and negatively impacted our business.

Beginning in March 2020, the Company’s net sales were negatively impacted by the COVID-19 pandemic as hospitals delayed or canceled elective procedures.

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 decrease occurred in the third and fourth quarters of 2021, as well as in the first half of 2022.

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.

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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.

Use of Estimates

The preparation of 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 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 convertible preferred stock warrant liability and, prior to the IPO, the valuation of its common stock.

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.

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.

NeuroPace, Inc.

Notes to Financial Statements

Segment and Geographical Information

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Revenue Recognition

The Company derives substantially all its revenue from sales of RNS Systems to hospitals facilities (typically comprehensive epilepsy centers, or Level 4 CECs) that implant its products.

NeuroPace, Inc.

Notes to Financial Statements

On January 1, 2019, the Company adopted Accounting Standards Codification, or ASC, Topic 606, “ Revenue from Contracts with Customers ,” using the modified retrospective method.

Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

The Company derives substantially all its revenue from sales of RNS Systems to hospital facilities (typically comprehensive epilepsy centers, or Level 4 CECs) that implant its products.

Beginning in the fourth quarter of 2022, the Company also derives revenue from sales of DIXI Medical products, primarily to our current customer base.

Under Accounting Standards Codification, or ASC, 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:

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At contract inception, the Company assesses the products or services promised within each contract, determines those that are performance obligations and assesses whether each promised product or service is distinct.

The Company’s contracts with customers often include a promise to transfer products, as well as an implied promise to provide a service to the customer, which is access to the Company’s Patient Data Management System, or PDMS, and nSight Platform.

The Company’s contracts with customers for the RNS System often include a promise to transfer products, as well as an implied promise to provide a service to the customer, which is access to the Company’s Patient Data Management System, or PDMS, and nSight Platform.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

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The products are highly interdependent and the Company is not able to fulfill each promise in the contract independently of the others.

Therefore, the Company has concluded that the RNS System and the Physician Tablet represent a single performance obligation.

Therefore, the Company has concluded that the RNS System

NeuroPace, Inc.

Notes to Financial Statements

and the Physician Tablet represent a single performance obligation.

The Company has determined that access to the PDMS and the nSight Platform are capable of being distinct because clinicians can utilize them with other components of the RNS System that are readily available, and are separately identifiable from other promises in the contract.

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All prices are at fixed amounts per the sales agreement with the customer and there are no discounts, rebates or other price concessions or a right of return.

NeuroPace, Inc.

Notes to Financial Statements

When a contract contains multiple performance obligations, the Company allocates the transaction price to each performance obligation based on its relative standalone selling price.

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If a standalone selling price is not directly observable, the Company estimates the standalone selling price considering market data, cost, gross margin, and other available information.

The Company delivers its products to a hospital on the date of the scheduled procedure.

The Company delivers its RNS System and related products to a hospital on the date of the scheduled procedure.

There is no commitment or contract until the delivery of the product and the procedure may be canceled at any time.

Once the device has been implanted in or otherwise provided to a patient, the customer is considered to have accepted the delivery (i.e., has approved the contract) and both parties are committed to perform their respective obligations.

Assuming all other revenue recognition criteria are met, the Company recognizes revenue from the sale of its products at a point in time when the procedure is completed and the device is implanted in a patient.

Assuming all other revenue recognition criteria are met, the Company recognizes revenue from the sale of its RNS System and related products at a point in time when the procedure is completed and the device is implanted in a patient.

The Company recognizes service revenue related to the PDMS and the nSight Platform on a ratable basis over the period in which the Company expects to provide access to clinicians.

The Company has concluded that the service revenue is immaterial.

The Company’s contracts with customers for DIXI Medical products generally include a promise to transfer products only.

As such, the Company recognizes revenue from the sale of DIXI Medical products at a point in time when the customer obtains control of the products.

The Company recognizes revenue for arrangements where it has satisfied its performance obligations but has not issued invoices.

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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.

NeuroPace, Inc.

Notes to Financial Statements

Short-term investments comprise available-for-sale debt securities, which are carried at fair value.

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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 redeemable convertible preferred stock warrant liability was 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).

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Restricted Cash

NeuroPace, Inc.

Notes to Financial Statements

Restricted cash is comprised of cash that is restricted as to withdrawal or use under the terms of certain contractual agreements.

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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.

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Accounts receivable are recorded at the invoiced amount and do not bear interest.

The Company regularly reviews accounts for collectability and establishes an allowance for probable credit losses and writes off uncollectible accounts as necessary.

The Company regularly reviews accounts for collectability and establishes an allowance for probable credit losses and writes off

NeuroPace, Inc.

Notes to Financial Statements

uncollectible accounts as necessary.

The Company determined that no reserve was required as of December 31, 2022 and December 31, 2021.

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If the estimate of future demand is too high, the Company may have to increase the reserve for excess inventory for that product and record a charge to the cost of goods sold.

NeuroPace, Inc.

Notes to Financial Statements

Property and Equipment, net

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The Company did no t record any impairment of long-lived assets for the years ended December 31, 2022 and December 31, 2021.

The Company accounts for leases in accordance with ASC Topic 840, Leases .

The Company leases its facilities and meets the requirements to account for these leases as operating leases.

For facility leases that contain rent escalations or rent concession provisions, the Company records its lease expense during the lease term on a straight line basis over the term of the lease.

The Company records differences between the rent paid and the straight-line rent as a deferred rent liability.

Leasehold improvements funded by landlord incentives or allowances are recorded as leasehold improvement assets and a corresponding deferred rent liability.

For the year ended December 31, 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.

The deferred rent liability is amortized on a straight-line basis as a reduction to rent expense over the term of the lease agreement.

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 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

NeuroPace, Inc.

Notes to Financial Statements

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 , including the package of practical expedients, which among other things, allowed the Company to carry forward prior conclusions about lease identification and classification, as well as elections to not record leases with an initial term of twelve months or less on the balance sheet, and to combine the lease and non-lease components in determining the lease liabilities and right-of-use assets.

Deferred Offering Costs

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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, $ 0.5 million of deferred offering costs were recorded on the 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.

Upon closing the IPO, all deferred offering costs were charged against the proceeds from the IPO and recorded in stockholders equity as a reduction of additional paid-in capital.

As of December 31, 2021, there were no deferred offering costs recorded on the balance sheet.

As of December 31, 2022, $ 0.3 million of deferred offering costs related to the at-the-market offering were recorded on the 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.

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 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

NeuroPace, Inc.

Notes to Financial Statements

within prepaid expenses and other current assets on the balance sheets.

As of December 31, 2021, $ 0.1 million of qualifying expenses have been incurred and funded by the NIH.

Derivative Instruments

The Company issued convertible notes in March 2019 and September 2019, or the 2019 Convertible Notes, and in January 2020 and March 2020, or the 2020 Convertible Notes, which contained embedded features that provided the lenders with multiple settlement alternatives.

Certain of these settlement features provided the lenders the right to receive cash or a variable number of shares upon the completion of a capital raising transaction, change of control or default by the Company, which are referred to as the “redemption features.”

The redemption features of the convertible notes met the requirements for separate accounting and were accounted for as a single derivative instrument.

The derivative instrument was recorded at fair value at inception and is subject to remeasurement to fair value at each balance sheet date, with any changes in fair value recognized in other income (expense), net in the statements of operations and comprehensive loss (see Note 3 and Note 6).

Upon the issuance of Series B’ redeemable convertible preferred stock, the derivative instrument was remeasured to fair value, the change in fair value was recorded as a component of other income (expense), net in the statements of operations and comprehensive loss, and the derivative instrument was extinguished with the fair value recognized in additional paid-in capital in the statements of redeemable convertible preferred stock and stockholders’ equity (deficit) (see Note 3).

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 December 31, 2022, $ 0.7 million of qualifying expenses have been incurred and funded by the NIH related to the first and second year funding.

As of December 31, 2022, the Company recorded prepaid expenses and other current assets of $ 0.1 million related to the second year funding.

Warranty costs are accrued based on the Company’s best estimates when management determines that it is probable a charge or liability has been incurred and the amount of loss can be reasonably estimated.

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The warranty liability as of December 31, 2022 and December 31, 2021 was immaterial.

Redeemable Convertible Preferred Stock

The Company recorded all shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs.

Redeemable convertible preferred stock was recorded outside of permanent equity because while it was not mandatorily redeemable, in certain events considered not solely within the Company’s control, such as a merger, acquisition, or sale of all or substantially all of the Company’s assets, each referred to as a “deemed liquidation event,” the redeemable convertible preferred stock would have become redeemable at the option of the holders of at least a majority of the then outstanding preferred shares.

The Company did not adjust the carrying value of the redeemable convertible preferred stock to its liquidation preference because a deemed liquidation event obligating the Company to pay the liquidation preference to holders of shares of redeemable convertible preferred stock was not probable of occurring.

Subsequent adjustments to the carrying values to the liquidation preference would have been made only if it became probable that such a deemed liquidation event would occur.

All outstanding shares of the redeemable convertible preferred stock converted into common stock upon effectiveness of the IPO.

Redeemable Convertible Preferred Stock Warrants

The Company’s redeemable convertible preferred stock warrants required liability classification and accounting as the underlying redeemable convertible preferred stock was considered contingently redeemable and may have obligated the Company to transfer assets to the holders at a future date upon occurrence of a deemed liquidation event.

The warrants were recorded at fair value upon issuance and were subject to remeasurement to fair value at each balance sheet date, with any changes in fair value recognized in other income (expense), net in the statements of operations and comprehensive loss.

Upon the closing of the IPO, the redeemable convertible preferred stock warrants were net exercised to Series B’ convertible preferred stock and subsequently converted into common stock on a one-to-one basis, and the redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital.

NeuroPace, Inc.

Notes to Financial Statements

of operations and comprehensive loss.

Cost of Goods Sold

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Advertising costs include design and production costs, including website development, physician and patient testimonial videos, written media campaigns, and other items.

Advertising costs of $ 0.1 million were expensed during both the years ended December 31, 2021 and December 31, 2020.

Advertising costs of $ 0.7 million and $ 0.1 million were expensed during the years ended December 31, 2022 and December 31, 2021, respectively.

Stock-Based Compensation

6 unchanged sentences

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities.

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.

The recognition and measurement of tax benefits requires significant judgment.

Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.

NeuroPace, Inc.

Notes to Financial Statements

of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.

The recognition and measurement of tax benefits requires significant judgment.

Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Net Loss per Share Attributable to Common Stockholders

1 unchanged sentence

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.

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.

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Comprehensive loss combines net loss and other comprehensive loss.

Other comprehensive loss represents unrealized gains or losses on short-term investments that are reported as a component of stockholders’ equity (deficit) on the balance sheets.

Other comprehensive loss represents unrealized gains or losses on short-term investments that are reported as a component of stockholders’ equity on the balance sheets.

JOBS Act Accounting Election

4 unchanged sentences

Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No.

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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.

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.

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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 delays the adoption dates for ASU 2016-02 for non-public entities to

Targeted Improvements , which allows entities to elect an optional transition method where entities may continue to

NeuroPace, Inc.

Notes to Financial Statements

fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

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 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 of approximately $ 6.1 million and corresponding lease liability of approximately $ 7.5 million for the Company’s facility lease upon adoption.

In addition, the amount of the Company’s deferred rent as of December 31, 2021 of $ 1.4 million will be removed upon adoption.

See Note 5 for more information related to the Company’s lease obligations, which are presented on an undiscounted basis therein.

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 statements of operations and comprehensive loss and 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):

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Early adoption is permitted.

The Company is currently evaluating the impact of this standard on its financial statements, but does not expect the standard will have a material impact on the Company’s financial statements.

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.

Fair Value Measurements

6 unchanged sentences

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

NeuroPace, Inc.

Notes to Financial Statements

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 December 31, 2021 (in thousands):

The following table summarizes the Company’s financial assets (cash equivalents and marketable securities) at fair value as of December 31, 2022 (in thousands):

NeuroPace, Inc.

Notes to Financial Statements

Fair Value as of December 31, 2022

4 unchanged sentences

Total $ 76,879 $ 76,879 $ — $ —

There were no liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 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):

The following table summarizes the Company’s financial assets (cash equivalents and marketable securities) at fair value as of December 31, 2021 (in thousands):

Fair Value as of December 31, 2021

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Total $ 112,895 $ 112,895 $ — $ —

Redeemable convertible preferred stock warrant liability 369 — — 369

Total $ 369 $ — $ — $ 369

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

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government agencies.

The Company’s available-for-sale investments comprise short-

NeuroPace, Inc.

Notes to Financial Statements

term investments in fixed income mutual funds, which primarily consist of debt securities issued by the U.S.

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.

4 unchanged sentences

Fair value $ 70,804 $ 96,397

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

Derivative Instrument Redeemable Convertible Preferred Stock Warrant Liability

Fair value as of January 1, 2020 $ 4,719 $ —

Recognition of redeemable convertible preferred stock warrant liability — 550

Recognition of derivative instrument related to 2020 Convertible Notes 1,669 —

Change in fair value included in other income (expense), net ( 149 ) ( 181 )

Extinguishment of derivative instrument

Fair value as of December 31, 2020

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 December 31, 2021

The fair value of the derivative instrument was 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 order to estimate the fair value of the 2019 Convertible Notes and 2020 Convertible Notes, the Company estimated the future payoff in each scenario, discounted them to a present value and then probability weighted them based upon the Company’s best estimate of the likelihood of each event occurring.

The primary inputs for the valuation approach included the probability of achieving various settlement scenarios that provide the lenders the rights or the obligations to receive cash or a variable number of shares upon the completion of a capital transaction.

The probability assumptions as of inception dates in 2019 included a 99 % probability of conversion into equity in a capital transaction, discount rates of 1.7 % - 11.5 % were applied, and the expected time to the occurrence of the respective scenarios ranged between 0.5 years and 1.8 years.

The probability assumptions as of inception dates in 2020 included a 50 % probability of conversion into equity in a capital transaction, discount rates of 0.07 % - 12.2 % were applied, and the expected time to the occurrence of the respective scenarios ranged between 0.3 years and 0.8 years.

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

The fair value of the redeemable convertible preferred stock warrant liability was $ 0.4 million as of January 1, 2021.

The Company recorded a change in fair value of $ 5.2 million in 2021, which is included in other income (expense), net in the statement of operations.

The warrants were net exercised to shares of common stock upon the closing of the IPO, and there were no warrants outstanding for the purchase of redeemable convertible preferred stock as of December 31, 2021 and 2022.

NeuroPace, Inc.

Notes to Financial Statements

for the purchase of redeemable convertible preferred stock as of December 31, 2021, as all such warrants were net exercised to shares of common stock upon the closing of the IPO.

Balance Sheet Components

24 unchanged sentences

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 a graduated scale;

however, rent expense is recognized on a straight-line basis over the lease term.

The Company has

In August 2022, the Company amended the lease to extend it through June 2030.

The second amendment contained a rent free period from September 2022 through December 2022.

The Company has an option to extend the lease for a period of five years , commencing on July 1, 2030 and expiring on June 30, 2035.

In conjunction with the original lease agreement, the Company obtained a letter of credit

NeuroPace, Inc.

Notes to Financial Statements

an option to extend the lease for a period of 5 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.

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 years ended December 31, 2021 and December 31, 2020 was $ 2.8 million and $ 2.7 million, respectively.

As of December 31, 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:

The deferred rental payments accrued interest at an annual rate of 8.0 % starting in October 2020 and were paid in three equal monthly installments commencing in April 2021.

Rent expense for the year ended December 31, 2021 was $ 2.8 million.

As of December 31, 2021, $ 1.4 million was recorded as deferred rent liability.

The Company’s future minimum lease payments under the non-cancelable operating lease as of December 31, 2021 were as follows (in thousands):

Total $ 8,105

The maturities of operating lease liabilities as of December 31, 2022 are as follows (in thousands):

Thereafter 8,232

Total undiscounted lease payments 22,957

imputed interest 6,102

Total operating lease liability 16,855

current portion 1,415

Operating lease liability, net of current portion $ 15,440

Operating lease cost was $ 2.7 million for the year ended December 31, 2022.

As of December 31, 2022, the remaining term for the operating lease in Mountain View, California was 7.5 years, and the discount rate used to measure the lease liability for such operating lease upon recognition was 8.5 %.

During the year ended December 31, 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 twelve months beginning October 2022, and increase the purchase minimum by 10 % for each of the two subsequent years.

NeuroPace, Inc.

Notes to Financial Statements

Indemnifications

12 unchanged sentences

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 nature of the loss contingencies relating to claims that have been asserted against us are described below.

NeuroPace, Inc.

Notes to Financial Statements

For example, 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, filed a complaint in the United States District Court for the Northern District of California, entitled James Jacoby et al.

NeuroPace, Inc., et al.

3:21-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.

The complaint was amended on December 28, 2021 to name additional defendants.

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.

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 and had a maturity date of September 30, 2020.

The Term Loan was interest-only through December 31, 2019.

Following the interest-only period, principal payments were to be made in equal installments at the end of the next three calendar quarters along with 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 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 million, or the New Term Loan, and borrowed $ 50 million.

The remaining $ 10.0 million of the New 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 met, and the remaining $ 10.0 million of the New Term Loan expired without being drawn.

NeuroPace, Inc.

Notes to 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.

The Company is not involved in any pending legal proceedings that it believes could have a material adverse effect on its business, results of operations, financial condition, or cash flows.

From time to time, the Company may pursue litigation to assert its legal rights and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business.

The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required.

Such accruals, if any, reflect the estimable and probable costs that the Company may incur from the outcomes of its legal proceedings.

Legal costs are expensed as incurred.

There were no contingent liabilities requiring accrual at December 31, 2022 and 2021.

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 2020, the Company had the option to pay the entire interest paid-in-kind, or PIK, by increasing the principal of the Term Loan.

From January 2021 through June 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 2022 through December 2022, the Company elected the PIK option, increasing the principal of the Term Loan by $ 1.9 million.

The Term Loan was interest-only through September 2023, which could be extended through September 2025 at the Company’s option if the Company completed its IPO on or prior 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 December 31, 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 Term Loan includes a fee upon

NeuroPace, Inc.

Notes to Financial Statements

repayment of the loan equal to 10 % of the aggregate principal amount being prepaid or repaid, or the backend fee.

As of December 31, 2022, the Term Loan had an annual effective interest rate of 15.68 % 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).

2 unchanged sentences

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 years ended December 31, 2021 and December 31, 2020, the Company recorded interest expense related to deferred financing and debt issuance costs of the New Term Loan of $ 0.3 million and $ 0.1 million, respectively.

Interest expense on the New Term Loan was $ 7.4 million and $ 2.0 million during the years ended December 31, 2021 and December 31, 2020, respectively.

As of December 31, 2021, future minimum payments for the New Term Loan are as follows (in thousands):

New Term Loan

During the years ended December 31, 2022 and December 31, 2021, the Company recorded interest expense related to debt discount and debt issuance costs of the Term Loan of $ 0.3 million and $ 0.3 million, respectively.

Interest expense on the Term Loan was $ 7.5 million and $ 7.4 million during the years ended December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022, future minimum payments for the Term Loan are as follows (in thousands):

Unamortized debt discount and issuance cost ( 904 )

1 unchanged sentence

Interest ( 18,105 )

New Term Loan $ 49,847

Term Loan $ 52,913

Paycheck Protection Program

5 unchanged sentences

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.

NeuroPace, Inc.

Notes to Financial Statements

2019 and 2020 Convertible Notes

In March and September 2019, Company issued the 2019 Convertible Notes to certain investors for aggregate proceeds of $ 21.3 million.

In January and March 2020, the Company raised $ 7.1 million and $ 5.4 million, respectively, through the sale and issuance of 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 $ 18.0 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 year ended December 31, 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 year ended December 31, 2020, $ 10.3 million of convertible notes were issued to related parties, resulting in interest expense of $ 1.3 million.

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.

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.

NeuroPace, Inc.

Notes to Financial Statements

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:

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.

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, or 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.

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.

NeuroPace, Inc.

Notes to Financial Statements

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.

After the payment to the holders of redeemable convertible preferred stock of the full preferential amounts specified above, all of the remaining assets of the Company available for distribution to stockholders would have been distributed among the holders of Series B’ redeemable convertible preferred stock, Series A’ redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock held by each such holder, treating for this purpose all shares of redeemable convertible preferred stock as if converted to common stock prior to such liquidation, dissolution or winding up of the Company.

The Company’s redeemable convertible preferred stock was convertible into shares of common stock at the option of a holder on a one-for-one basis with the conversion ratio subject to standard antidilutive adjustments, such as stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like.

The initial conversion price was $ 4.3423 and $ 58.1750 per share of Series B’ and Series A’ redeemable convertible preferred stock, respectively.

Each share of Series A’ redeemable convertible preferred stock was convertible into shares of common stock immediately upon the date specified by written consent or written agreement of the holders of a majority of the outstanding shares of Series A’ redeemable convertible preferred stock.

Each share of Series B’ redeemable convertible preferred stock was convertible into shares of common stock immediately upon (A) the date specified by written consent or written agreement of the holders of a majority of the outstanding shares of Series B’ redeemable convertible preferred stock and the Requisite Significant New Holders (as defined below) and (B) any firm commitment underwritten public offering approved by two new investors that had committed to the investment of an aggregate of $ 7,499,900 or more (each, a “Significant Investor”) in the Initial Closing and the Deferred Closing combined (such two Significant Investors, together, the “Requisite Significant New Holders”).

Voting Rights

The holders of redeemable convertible preferred stock had the right to one vote for each share of common stock into which such redeemable convertible preferred stock could then have been converted.

With respect to such vote, the holder had full voting rights and powers equal to the voting rights and powers of the holders of common stock, would have been entitled to notice of any stockholders’ meeting in accordance with the bylaws of the Company, and would have been entitled to vote, together with holders of common stock, with respect to any question upon which holders of common stock have the right to vote.

Redemption and Balance Sheet Classification

The redeemable convertible preferred stock was recorded within mezzanine equity because, while it was not mandatorily redeemable, it would have become redeemable at the option of the holders upon the occurrence of certain deemed liquidation events that were considered not solely within the Company’s control.

There was no issued and outstanding redeemable convertible preferred stock as of December 31, 2022 and December 31, 2021.

Redeemable Convertible Preferred Stock Warrant Liability

On September 24, 2020, in connection with entering into the New Term Loan Agreement, the Company issued CRG Partners IV L.P.

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.

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The fair value of the Series B’ Warrants on the date of issuance of $ 0.6 million was recorded as a debt discount.

The Series B’ Warrants had a fair value of $ 0.4 million as of December 31, 2020.

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’ Warrants 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 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 $( 5.2 ) million and $ 0.2 million during the years ended December 31, 2021 and 2020, respectively, was recorded as a component of other income (expense), net in the statements of operations and comprehensive loss.

The redeemable convertible preferred stock warrant liability was valued using the following assumptions under the Black-Scholes option pricing model:

Stock price $ 3.43 $ 4.34

Expected term (in years) 9.7 10.0

Expected volatility 39.0 % 38.4 %

Weighted average risk-free interest rate 0.91 % 0.67 %

Dividend yield — % — %

The Company’s Certificate of Incorporation, as amended in April 2021, authorizes the Company to issue 200,000,000 shares of $ 0.001 par value common stock.

The change in fair value of $( 5.2 ) million during the year ended December 31, 2021 was recorded as a component of other income (expense), net in the statements of operations and comprehensive loss.

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 December 31, 2022 and December 31, 2021, no dividends had been declared.

NeuroPace, Inc.

Notes to Financial Statements

As of December 31, 2022 and December 31, 2021, the Company had reserved common stock for future issuance as follows:

Year Ended December 31,

Conversion of Series A’ redeemable convertible preferred stock — 635,048

Conversion of Series B’ redeemable convertible preferred stock — 15,979,130

Outstanding options under the 2021 Plan 3,446,583 3,038,970

Outstanding options under the 2020 Plan — 2,835,265

Options available for future grant under the 2020 Plan — 818,889

Outstanding options under the 2021 Plan 3,038,970 —

Options available for future grant under the 2021 Plan 2,132,750 —

Shares available for future grant under the 2021 Plan 1,443,946 2,132,750

Outstanding restricted stock units under the 2021 Plan 1,756,209 596,085

Common stock available for ESPP 429,940 470,169

Redeemable convertible preferred stock warrants issued and outstanding — 346,823

Common stock warrants issued and outstanding — 219

Total 7,076,678 6,237,974

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The exercise price of ISOs and NSOs granted to a 10% stockholder shall not be less than 110 % of the estimated fair value of the shares on the date of grant as determined by the Company’s board of directors.

Prior to the adoption of 2020 Plan, the Company granted options under the 2009 Plan.

The 2009 Plan expired in September 2019;

as a result, 2,039 shares that were available for issuance were retired.

The 2009 Plan will continue to govern the terms and conditions of the outstanding awards granted under it.

NeuroPace, Inc.

Notes to Financial Statements

2021 Equity Incentive Plan

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Generally, options and restricted stock units vest over a four-year period.

NeuroPace, Inc.

Notes to Financial Statements

Upon the closing of the IPO, 485,581 shares available under the 2020 Plan were cancelled.

Upon the closing of the IPO, 485,581 shares available under the 2020 Plan were canceled.

In January 2023, the number of shares of common stock available for issuance under the 2021 Plan was increased by 1,252,287 shares as a result of the automatic increase provision in the 2021 Plan.

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Shares available for grant as of January 1, 2021 818,889

Shares authorized 3,591,888

( 2,951,534 )

Shares available for grant as of December 31, 2020

Authorized 2,900,000

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Granted/Awarded ( 1,218,021 )

( 1,218,021 )

Canceled 117,463

Shares available for grant as of December 31, 2021 2,132,750

Authorized 1,222,649

Granted/Awarded ( 2,260,197 )

Canceled 340,308

Withheld for taxes 8,436

Shares available for grant as of December 31, 2022 1,443,946

A summary of stock option activity for the years ended December 31, 2022 and 2021 is set forth below:

NeuroPace, Inc.

Notes to Financial Statements

Options Outstanding

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Exercised ( 300,768 ) $ 0.03

Cancelled ( 183,007 ) $ 46.82

Canceled ( 84,507 ) $ 0.48

Balances as of December 31, 2021

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Exercised ( 157,447 ) $ 0.03

Cancelled ( 84,507 ) $ 0.48

Canceled ( 125,158 ) $ 6.99

Balances at December 31, 2022

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Early Exercise of Stock Options

The terms of the Company’s 2020 Plan permit the exercise of options granted under the plans prior to vesting, subject to required approvals.

The terms of the Company’s 2020 Plan permit the exercise of options granted under the plan prior to vesting, subject to required approvals.

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.

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Shares purchased by 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

NeuroPace, Inc.

Notes to Financial Statements

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.

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 sheets and will be transferred into common stock and additional paid-in capital as the shares vest.

As of December 31, 2022 and December 31, 2021 there were 78,389 and 174,171 early exercised options subject to repurchase, respectively.

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In January 2023, the number of shares of common stock available for issuance under the ESPP was increased by 250,457 shares as a result of the automatic increase provision in the ESPP.

The first offering period was for 6.6 months 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 Company issued 284,758 and 109,831 shares under the ESPP for the years ended December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022, 429,940 shares under the ESPP remain available for purchase.

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Activity with respect to restricted stock units, or RSUs, was as follows:

NeuroPace, Inc.

Notes to Financial Statements

Number of Shares Underlying Outstanding Restricted Stock Units Weighted Average Grant Date Fair Value

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Granted 629,041 $ 22.14

Cancelled ( 32,956 ) $ 23.58

Canceled ( 32,956 ) $ 23.58

Unvested, December 31, 2021 596,085 $ 22.06

Granted 1,569,979 $ 7.72

Vested ( 194,705 ) $ 22.78

Canceled ( 215,150 ) $ 13.95

Unvested, December 31, 2022 1,756,209 $ 10.15

The fair value of RSUs is based on the Company’s closing stock price on the date of grant.

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The above stock-based compensation expense related to the following equity-based awards (in thousands):

NeuroPace, Inc.

Notes to Financial Statements

Year Ended December 31,

Stock options and restricted stock units $ 7,949 $ 3,128

ESPP 400 1,160

Total stock-based compensation $ 8,349 $ 4,288

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The Company estimated the fair value of stock options using the Black-Scholes option pricing model.

The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards.

The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the

NeuroPace, Inc.

Notes to Financial Statements

The fair value of employee stock options was estimated using the following assumptions for the years ended December 31, 2022 and December 31, 2021:

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Weighted average risk-free interest rate 1.79 % - 3.56 %

0.59 % - 1.33 %

Fair value of common stock $ 6.30 - $ 8.15

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The Company does not have sufficient historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term of options and has opted to use the “simplified method,” whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

The expected stock price volatility assumption was determined by examining the historical volatilities for publicly-traded industry peers, as the Company does not have sufficient trading history for its common stock.

The expected stock price volatility assumption was determined by a combination of the Company’s historical stock trading volatility and the historical volatilities of industry peers, as the Company does not have sufficient trading history to solely rely on the volatility of its common stock.

The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.

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The Company accounts for forfeitures as they occur.

NeuroPace, Inc.

Notes to Financial Statements

In November 2020, the Company’s board of directors approved the repricing of all outstanding stock options for employees, officers and consultants.

The Company has treated the repricing as a modification of terms of the options outstanding.

The fair value of the modification was determined as the difference in the fair value of each option immediately before and after the repricing using the Black-Scholes option pricing model with a dividend rate of 0 %, a risk free rate of 0.53 %, a volatility of 51 %, an expected term of 6.25 years, and a market price of $ 0.78 per share.

The repricing resulted in an incremental compensation cost of $ 0.1 million for the year ended December 31, 2020.

The Company’s operations and income tax components are solely in the United States.

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The Company accounts for income taxes in accordance with ASC 740, which requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period.

Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance.

Because of the Company's recent history of operating losses, management believes that recognition of the deferred

NeuroPace, Inc.

Notes to Financial Statements

tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance.

A reconciliation of the statutory U.S.

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Total — % — %

The tax effects of temporary differences that give rise to significant components of the deferred tax asset are as follows (in thousands):

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities are as follows (in thousands):

Deferred tax assets:

Net operating loss carryforwards $ 40,884 $ 35,754

Research and development credits 12,088 11,121

Research and development expenditures, capitalized for tax 4,563 —

Fixed assets and inventory 159 120

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Interest expense carryforward 3,850 2,616

Operating lease liability 4,442 —

Other 1,521 781

51,992 44,220

Gross deferred tax assets 68,687 51,992

Deferred tax liabilities:

Operating lease right-of-use asset ( 3,910 ) —

Total deferred tax liabilities ( 3,910 ) —

Valuation allowance ( 64,777 ) ( 51,992 )

Net deferred tax assets $ — $ —

Beginning January 1, 2022, the Tax Cuts and Jobs Act, or the Tax Act, eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenses pursuant to Internal Revenue Code Section 174.

The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses.

As a result of this provision of the Tax Act, deferred tax assets related to capitalized research expenses increased by $ 4.6 million.

We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes, as well as for tax attribute carryforwards.

We regularly evaluate the positive and negative evidence in determining the realizability of our deferred tax assets.

Based upon the weight of

NeuroPace, Inc.

Notes to Financial Statements

available evidence, which includes our historical operating performance and reported cumulative net losses since inception, we maintained a full valuation allowance on the net deferred tax assets as of December 31, 2021 and 2020.

Based upon the weight of available evidence, which includes our historical operating performance and reported cumulative net losses since inception, we maintained a full valuation allowance on the net deferred tax assets as of December 31, 2022 and 2021.

We intend to maintain a full valuation allowance on our deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

The valuation allowance increased by $ 12.8 million and $ 7.8 million during the years ended December 31, 2022 and 2021, respectively.

The current year change in the valuation

NeuroPace, Inc.

Notes to Financial Statements

allowance is primarily the result of $ 16.7 million increase in gross deferred tax assets net of a $ 3.9 million increase in deferred tax liabilities.

As of December 31, 2022, the Company had net operating loss, or NOL, carryforwards of $ 151.6 million and $ 142.6 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively.

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The gross deferred tax assets disclosed above exclude NOL and credit carryforwards that are expected to expire due to the Section 382 limitation.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, an economic stimulus package in response to the COVID-19 global pandemic and the Families First Coronavirus Response Act, or FFCR Act, which permits employees of certain organizations paid sick time stemming from COVID-19-related issues.

The CARES Act contains several corporate income tax provisions, including making remaining alternative minimum tax credits immediately refundable;

providing a 5-year carryback of NOLs generated in tax years 2018, 2019, and 2020, and removing the 80% taxable income limitation on utilization of those NOLs if carried back to prior tax years or utilized in tax years beginning before 2021;

temporarily liberalizing the interest deductibility rules under Section 163(j) of the CARES Act, by raising the adjusted taxable income limitation from 30% to 50% for tax years 2019 and 2020 and giving taxpayers the election of using 2019 adjusted taxable income for purposes of computing 2020 interest deductibility.

The CARES Act did not have a material impact on the Company’s tax provision for the years ended December 31, 2020 or 2021.

The Consolidated Appropriations Act, 2021, which was enacted on December 27, 2020, has expanded, extended, and clarified selected CARES Act provisions, specifically on Paycheck Protection Program loans and Employee Retention Tax Credits, 100% deductibility of business meals as well as other tax extenders.

The Consolidated Appropriations Act did not have a material impact on the Company’s tax provision for the years ended December 31, 2020 or 2021.

The American Rescue Plan Act of 2021 was signed into law on March 11, 2021 expanding the definition of covered employees as defined under Section 162(m).

The provisions under the expanded definition of covered employees did not have a material impact on the Company’s tax positions for the year ended December 31, 2021

The provisions under the expanded definition of covered employees did not have a material impact on the Company’s tax positions for the year ended December 31, 2021 or 2022.

California Assembly Bill 85 (AB 85) was signed into law by Governor Gavin Newsom on June 29, 2020.

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The carryover periods for NOL deductions disallowed by this provision will be extended.

Additionally,

NeuroPace, Inc.

Notes to Financial Statements

any business credit will only offset a maximum of $5,000,000 of California tax.

Additionally, any business credit will only offset a maximum of $5,000,000 of California tax.

Given the Company’s taxable loss position, this legislation did not impact the tax provision for the years ended December 31, 2021 or 2022.

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The new tax law should be accounted for under ASC 740 in the period of enactment (2022) but is not expected to have a material impact on the Company’s tax provision due to its taxable loss position.

On August 16, 2022, the President signed into law H.R.

5376 (commonly called the “Inflation Reduction Act of 2022”).

The primary tax provisions in the new law include an alternative minimum tax on certain large corporations, a tax on stock buybacks and certain energy-related tax credits, each of which become effective after December 31, 2022.

The provisions of the Inflation Reduction Act of 2022 are not expected to have a material impact on the Company’s financial statements and related disclosures.

As of December 31, 2022, the Company had unrecognized tax benefits of $ 1.6 million related to $ 0.3 million and $ 1.3 million of federal and state research and development tax credit carryforwards, respectively.

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No liability related to uncertain tax positions is recorded in the financial statements.

NeuroPace, Inc.

Notes to Financial Statements

A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):

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Year Ended December 31,

Net loss $ ( 36,080 ) $ ( 24,278 )

Reduction of Series A' redeemable convertible preferred stock liquidation value — 228

Net loss attributable to common stockholders $ ( 47,082 ) $ ( 36,080 )

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Net loss per share attributable to common stockholders, basic and diluted $ ( 1.91 ) $ ( 2.17 )

In connection with issuance of Series B’ redeemable convertible preferred stock, the Company amended the terms of the existing Series A’ redeemable convertible preferred stock and reduced the liquidation preference of Series A’ redeemable convertible preferred stock from $ 116.350 to $ 58.175 .

The reduction of Series A’ redeemable convertible preferred stock liquidation preference was accounted for as an extinguishment with $ 0.2 million recognized as extinguishment gain in accumulated deficit in the quarter ended September 30, 2020.

NeuroPace, Inc.

Notes to Financial Statements

extinguishment gain reduced the net loss attributable to common stockholders for the year ended December 31, 2020.

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares:

Redeemable convertible preferred shares — 16,614,178

Options to purchase common stock 3,446,583 3,038,970

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Shares committed under ESPP 190,613 114,736

Redeemable convertible preferred stock warrants — 346,823

Total Shares 5,471,794 3,923,962

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To date, the Company has made no contributions to the 401(k) plan.

Related Parties

Covidien Group S.a.r.l., an indirect wholly-owned subsidiary of Medtronic, plc, became a holder of more than five percent of the Company’s capital stock in August 2020.

Pursuant to the terms of a cross-license with Medtronic, the Company made royalty payments of approximately $ 0.4 million during both the years ended December 31, 2021 and 2020 (Note 2).

As of December 31, 2021, Covidien Group S.a.r.l.

held less than five percent of the Company’s capital stock.

In August 2020, the Company reimbursed KCK Ltd., a greater than five percent stockholder, a total of approximately $ 0.3 million for executive recruitment services that had been paid by KCK to the service providers on behalf of the Company.

Also see Note 6 for additional related party transactions related to the 2019 and 2020 Convertible Notes.

Subsequent Events

In March 2022, the New Term Loan was amended to reduce the minimum annual net revenue covenant to $ 43.0 million for the year ended December 31, 2022 .

NeuroPace, Inc.

Notes to Financial Statements

Subsequent Event

In February 2023, the Term Loan was amended to reduce the minimum annual net revenue covenant to $ 45.0 million for the year ending December 31, 2023, include revenue under the Distribution Agreement as well as sales of the Company’s RNS System as eligible for meeting the minimum revenue requirement, and increase the annual interest rate from 12.5 % to 13.5 % effective January 1, 2023.

The Company has the option to pay 8.5 % per annum interest in cash and 5 % per annum interest in kind by increasing the principal of the Term Loan.

The amended terms will not have a material impact on the Company’s financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data