NeuroPace Inc 10-K

Item 8. Financial Statements and Supplementary Data. 114 INDEX TO FINANCIAL STATEMENTS Page(s) Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 116 Financial Statements: Balance Sheets 117 Statements of Operations and Comprehensive Loss 118 Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 119 Statements of Cash Flows 120 Notes to Financial Statements 122 115 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of NeuroPace, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of NeuroPace, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations and comprehensive loss, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “financial statements”). 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these financial statements in accordance with the standards of the PCAOB. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 San Jose, California March 2, 2023 We have served as the Company's auditor since 2003. 116 NeuroPace, Inc. Balance Sheets December 31, (in thousands, except share and per share amounts) 2022 2021 Assets Current assets Cash and cash equivalents $ 6,605 $ 19,187 Short-term investments 70,804 96,397 Accounts receivable 7,482 7,091 Inventory 9,712 7,822 Prepaid expenses and other current assets 3,111 2,319 Total current assets 97,714 132,816 Property and equipment, net 1,064 603 Operating lease right-of-use asset 14,838 — Restricted cash 122 122 Deferred offering costs 347 — Other assets 21 21 Total assets $ 114,106 $ 133,562 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 2,147 $ 1,378 Accrued liabilities 7,414 7,923 Operating lease liability 1,415 — Total current liabilities 10,976 9,301 Deferred rent, noncurrent — 911 Long-term debt 52,913 49,847 Operating lease liability, net of current portion 15,440 — Total liabilities 79,329 60,059 Commitments and contingencies (Note 5) 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 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 25 24 Additional paid-in-capital 506,713 497,522 Accumulated other comprehensive loss ( 1,108 ) ( 272 ) Accumulated deficit ( 470,853 ) ( 423,771 ) 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. 117 NeuroPace, Inc. Statements of Operations and Comprehensive Loss Year Ended December 31, (in thousands, except share and per share amounts) 2022 2021 Revenue $ 45,520 $ 45,183 Cost of goods sold 13,027 11,748 Gross profit 32,493 33,435 Operating expenses Research and development 21,946 18,211 Selling, general and administrative 51,341 38,961 Total operating expenses 73,287 57,172 Loss from operations ( 40,794 ) ( 23,737 ) Interest income 1,578 448 Interest expense ( 7,529 ) ( 7,410 ) Other income (expense), net ( 337 ) ( 5,381 ) Net loss $ ( 47,082 ) $ ( 36,080 ) Unrealized loss on available-for-sale debt securities ( 836 ) ( 305 ) Comprehensive loss $ ( 47,918 ) $ ( 36,385 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.91 ) $ ( 2.17 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 24,594,784 16,608,800 The accompanying notes are an integral part of these financial statements. 118 NeuroPace, Inc. Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) (in thousands, except share amounts) Shares Amount Shares Amount 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 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 Issuance of common stock pursuant to Employee Stock Purchase Plan — — 109,831 — 911 — — 911 Change in early exercise liability — — — — ( 2 ) — — ( 2 ) Stock-based compensation — — — — 4,288 — — 4,288 Balances at December 31, 2021 — — 24,452,999 24 497,522 ( 272 ) ( 423,771 ) 73,503 Net loss — — — — — — ( 47,082 ) ( 47,082 ) Unrealized loss on available-for-sale debt securities — — — — — ( 836 ) — ( 836 ) 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 Stock-based compensation — — — — 8,349 — — 8,349 Balances at December 31, 2022 — $ — 25,045,751 $ 25 $ 506,713 $ ( 1,108 ) $ ( 470,853 ) $ 34,777 The accompanying notes are an integral part of these financial statements. 119 NeuroPace, Inc. Statements of Cash Flows Year Ended December 31, (in thousands) 2022 2021 Cash flows from operating activities Net loss $ ( 47,082 ) $ ( 36,080 ) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation expense 8,349 4,288 Depreciation 267 296 Amortization of debt discount and issuance costs 258 267 Non-cash interest expense 874 806 PIK interest incurred but not paid on term loan 1,934 — Amortization of right-of-use asset 2,720 — Inventory write-downs 243 242 Realized loss from sale of short-term investments 356 — Change in fair value of redeemable convertible preferred stock warrant liability — 5,236 Changes in operating assets and liabilities Accounts receivable ( 391 ) 1,304 Inventory ( 2,133 ) ( 1,156 ) Prepaid expenses and other assets ( 792 ) ( 1,164 ) Accounts payable 647 479 Accrued liabilities ( 15 ) 1,719 Operating lease liabilities ( 2,104 ) — Other liabilities — ( 248 ) Deferred rent — ( 566 ) Net cash used in operating activities ( 36,869 ) ( 24,577 ) Cash flows from investing activities Acquisition of property and equipment ( 603 ) ( 384 ) Proceeds from sale of short-term investments 24,400 — Purchase of short-term investments — ( 85,012 ) 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 ) Repayment of debt — ( 4,090 ) Net cash provided by financing activities 490 102,526 Net decrease in cash and cash equivalents ( 12,582 ) ( 7,447 ) Cash, cash equivalents and restricted cash Beginning of year 19,309 26,756 End of year $ 6,727 $ 19,309 Reconciliation of cash, cash equivalents and restricted cash to balance sheets: Cash and cash equivalents $ 6,605 $ 19,187 Restricted cash 122 122 Total cash, cash equivalents and restricted cash $ 6,727 $ 19,309 The accompanying notes are an integral part of these financial statements. 120 NeuroPace, Inc. Statements of Cash Flows Supplemental disclosure of cash flow information: Cash paid for interest $ 4,464 $ 6,337 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 Purchase of property and equipment included in accounts payable $ 124 $ — The accompanying notes are an integral part of these financial statements. 121 NeuroPace, Inc. Notes to Financial Statements 1. The Company NeuroPace, Inc., or the Company, was incorporated in the state of Delaware on November 19, 1997. The Company is a commercial-stage medical device company that has developed the RNS System, the only commercially available brain-responsive neuromodulation system designed for treating medically refractory focal epilepsy by delivering personalized, real-time treatment at the seizure source. The Company began commercializing its products in the United States in 2014. Initial Public Offering On April 21, 2021, the Company’s registration statement on Form S-1 (File No. 333-254663) relating to its initial public offering, or IPO, of common stock became effective. The IPO closed on April 26, 2021, at which time the Company issued 6,900,000 shares of its common stock at a price of $ 17.00 per share, which included the issuance of shares in connection with the exercise by the underwriters of their option to purchase up to 900,000 additional shares. The Company received an aggregate of $ 117.3 million in gross proceeds, before underwriting discounts and commissions and offering costs, and approximately $ 105.5 million in net proceeds after deducting $ 8.2 million in underwriting discounts and commissions and $ 3.6 million in offering costs. Upon the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 16,614,178 shares of common stock, warrants to purchase 346,823 shares of Series B’ convertible preferred stock net exercised to 213,941 shares of Series B’ convertible preferred stock and subsequently converted into common stock on a one -to-one basis, and warrants to purchase 219 shares of common stock net exercised to 185 shares of common stock. In connection with the completion of its IPO, on April 26, 2021, the Company’s certificate of incorporation was amended and restated to provide for 200,000,000 authorized shares of common stock with a par value of $ 0.001 per share and 10,000,000 authorized shares of preferred stock with a par value of $ 0.001 per share. 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, 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, 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 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 122 NeuroPace, Inc. Notes to Financial Statements $ 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. If the Company cannot generate sufficient revenue in the future, the Company may not be in compliance with the annual net revenue covenant and the lender may call the debt resulting in the Company immediately needing additional capital, and resulting in a going concern. 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. The timing, extent and continuation of any increase in procedures, and any corresponding increase in sales of the Company’s products, and whether there could be a future decrease in the current level of procedures as a result of the COVID-19 pandemic or otherwise, remain uncertain and are subject to a variety of factors. 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP, as defined by the Financial Accounting Standards Board, or the FASB. Reverse Stock Split On April 9, 2021, the Company effected a 1-for-2.6 reverse stock split of its common stock and redeemable convertible preferred stock. The par value of the authorized stock was not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock and redeemable convertible preferred stock and related per share amounts contained in the accompanying financial statements have been retroactively revised to reflect the combined effect of the reverse stock split 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 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. 123 NeuroPace, Inc. Notes to Financial Statements Segment and Geographical Information The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets, comprised of property and equipment, are based in the United States. All of the Company’s revenue was in the United States for the years ended December 31, 2022 and December 31, 2021, based on the shipping location of the external customer. Revenue Recognition 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: i. identify the contract(s) with a customer; ii. identify the performance obligations in the contract; iii. determine the transaction price; iv. allocate the transaction price to the performance obligations in the contract; and v. recognize revenue when (or as) the entity satisfies a performance obligation. A contract with a customer exists when (i) the Company enters into a legally enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. 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 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. The Company evaluates each product or service promised in a contract to determine whether it represents a distinct performance obligation. A performance obligation is distinct if (i) the customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and (ii) the product or service is separately identifiable from other promises in the contract. The RNS System is a compilation of the Company’s products that includes its RNS neurostimulator, its cortical strip leads and depth leads, and its Patient Remote Monitor, as well as other implantable and non-implantable accessories. In addition, the Company’s products also include external components such as its Physician Tablet, which is used by clinicians to retrieve and review information from and program the implanted devices, as well as access to the Company’s PDMS, a secure online database that collects data transmitted from the Patient Remote Monitor and Physician Tablet, and nSight Platform, which provides physicians with summarized patient reports. The Company has determined that its RNS System and Physician Tablet are not capable of being distinct as they are not sold separately, the customer cannot benefit from the products individually, and there are no other resources readily available to the customer. 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 124 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. Therefore, the Company has concluded that access to the PDMS and nSight Platform represent separate performance obligations. In addition, training services generally occur prior to entering into a contract with the customer and therefore the training services are not considered to be a separate performance obligation. The Company determines the transaction price based on the amount it expects to be entitled to in exchange for transferring the promised product to the customer, which is based on the invoiced price for the products. 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. When a contract contains multiple performance obligations, the Company allocates the transaction price to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells its products or services. 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 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 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. These amounts are recorded as unbilled receivables, which are included in accounts receivable on the balance sheet, as the Company has an unconditional right to payment at the end of the applicable period. Payment terms are typically 30 days from the fulfillment of the orders and fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales, however, most of the Company’s sales are tax exempt. The Company believes that collection is probable as it has no history of uncollectible accounts and the customers are large, creditworthy institutions. As allowed under the practical expedient, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Costs associated with product sales include commissions, where the Company applies the practical expedient and recognizes commissions as expense when incurred because the expense is incurred over a period of time of less than one year. Commissions are reported in selling, general and administrative expense in the statements of operations and comprehensive loss. The Company’s only contract balances were accounts receivable of $ 7.5 million and $ 7.1 million as of December 31, 2022 and December 31, 2021, respectively. 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 125 NeuroPace, Inc. Notes to Financial Statements instruments. Short-term investments comprise available-for-sale debt securities, which are carried at fair value. The Company believes that its borrowings bear interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument approximates its fair value. The redeemable convertible preferred stock warrant liability 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). Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents that are available-for-sale marketable debt securities are recorded at fair value, based on quoted market prices. As of December 31, 2022 and December 31, 2021, the Company’s cash equivalents are entirely comprised of investments in money market funds. Restricted Cash Restricted cash is comprised of cash that is restricted as to withdrawal or use under the terms of certain contractual agreements. Restricted cash for the years ended December 31, 2022 and December 31, 2021 consists of collateral for the letter of credit issued during the year in connection with the Company’s facility lease (see Note 5). Concentration of Credit Risk, and Other Risks and Uncertainties Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, short-term investments and accounts receivable to the extent of the amounts recorded on the balance sheets. The Company’s cash is invested in one major financial institution in the United States. Deposits in this financial institution may exceed federally insured limits. The Company’s cash equivalents are invested in money market funds. The Company’s accounts receivable are due from a variety of health care organizations in the United States. For the years ended December 31, 2022 and December 31, 2021, there were no customers that represented 10% or more of revenue. As of December 31, 2022 and December 31, 2021, no customer represented 10% or more of the Company’s accounts receivable. The Company is subject to certain risks, including that its devices may not be approved or cleared or continue to be approved or cleared for marketing by governmental authorities or be successfully marketed for expanded indications. There can be no assurance that the Company’s products will achieve widespread adoption in the marketplace, nor can there be any assurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and speed and with appropriate performance characteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence on healthcare providers to prescribe initial implants and replacements, dependence upon third-party payors to provide adequate coverage and reimbursement, dependence on key personnel, single-source suppliers and vendors in connection with the manufacture of its products, concentration of Level 4 CECs and epileptologists, obtaining, maintaining, protecting, enforcing, and defending intellectual property rights and proprietary technology, product liability claims, legal proceedings, and compliance with government regulations. The Company’s medical devices require approvals or clearances from the U.S. Food and Drug Administration, or the FDA, or international regulatory agencies. In addition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If approvals or clearances were withdrawn by the FDA for the Company’s current products or if such approvals or clearances were denied or delayed for future products, product updates, or expanded indications for use, it would have a material adverse impact on the Company. Accounts Receivable 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 126 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. To date, the Company has not experienced any credit-related losses. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities in consideration of actual loss experiences, projected future demand, and remaining shelf life to record a provision for excess and obsolete inventory when appropriate. The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected lower of cost or net realizable value, and inventory in excess of expected requirements. The estimate of excess quantities is judgmental and primarily dependent on the Company’s estimates of future demand for a particular product. 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. Property and Equipment, net Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years . Leasehold improvements are amortized using the straight-line method over the shorter of the assets’ estimated useful lives or the remaining term of the lease. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is reflected in operations in the period realized. Maintenance and repairs are charged to operations as incurred. Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment exist, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition are less than their carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of the long-lived assets exceeds their fair value. The Company did no t record any impairment of long-lived assets for the years ended December 31, 2022 and December 31, 2021. Leases The Company leases its facilities and meets the requirements to account for these leases as operating leases. 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. 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 127 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 The Company capitalizes, within other assets, certain legal, accounting and other third-party fees that are directly related to the Company’s in-process equity financings, including its IPO, until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses. 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, 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 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 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. While the Company believes that historical experience provides a reliable basis for estimating such warranty cost, unforeseen quality issues or component failure rates could result in future costs in excess of such estimates. The warranty liability as of December 31, 2022 and December 31, 2021 was immaterial. 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 128 NeuroPace, Inc. Notes to Financial 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. Cost of Goods Sold The Company manufactures its products at its facility. Cost of goods sold consists primarily of costs related to materials, components and subassemblies, manufacturing overhead, direct labor, and reserves for excess and obsolete inventories. A significant portion of the Company’s cost of goods sold currently consists of manufacturing overhead costs. These overhead costs include the cost of facilities, material procurement, inventory control, quality assurance, equipment and operating supervision and management. Cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs and royalties. Shipping and handling costs are considered a fulfillment activity and are included in cost of goods sold as incurred. The Company is obligated to pay a royalty of 1 % of net sales for specified products under the terms of a cross-license agreement, subject to an aggregate cap of $ 100 million. The Company recorded royalty expenses of $ 0.4 million and $ 0.5 million for the years ended December 31, 2022 and December 31, 2021, respectively. Research and Development Expenditures The Company expenses research and development costs as incurred. Research and development expenses consist primarily of engineering, product development, clinical studies to develop and support the Company’s products, regulatory expenses, medical affairs and other costs associated with products and technologies that are in development, including quality assurance. Research and development expenses include employee compensation, including stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation and an allocation of facility overhead expenses. Additionally, research and development expenses include costs associated with clinical studies including clinical trial design, clinical site reimbursement, data management, travel expenses, the cost of products used for clinical trials and costs associated with regulatory compliance and submitting and maintaining regulatory filings. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs include design and production costs, including website development, physician and patient testimonial videos, written media campaigns, and other items. Advertising costs of $ 0.7 million and $ 0.1 million were expensed during the years ended December 31, 2022 and December 31, 2021, respectively. Stock-Based Compensation The Company accounts for stock-based employee compensation in accordance with ASC 718, Stock Compensation . ASC 718 requires the measurement of compensation based on the grant date fair value of the stock option or restricted stock unit (see Note 10). The Company amortizes the fair value of each award on a straight-line basis over the requisite service period of the award. Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 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 has a greater than 50 percent likelihood of being realized upon ultimate settlement. As 129 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 Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options, common stock subject to repurchase related to early exercise of stock options, and restricted stock units are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities. The Company considers the shares issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of the shares issued upon early exercise of stock options subject to repurchase do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods. Comprehensive Loss 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 on the balance sheets. JOBS Act Accounting Election The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases . ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This ASU provides a lessee with an option to not account for leases with a term of 12 months or less as leases in the scope of this ASU. This ASU also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This ASU should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements , which allows entities to elect an optional transition method where entities may continue to 130 NeuroPace, Inc. Notes to Financial Statements apply the existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoption rather than in the earliest period presented. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities , which delayed the adoption dates for ASU 2016-02 for non-public entities to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is allowed. The Company adopted Topic 842 effective January 1, 2022 using a modified retrospective method and did not restate comparative periods. The Company recognized ROU assets of $ 6.1 million and lease liabilities of $ 7.5 million for its operating leases as of January 1, 2022. In addition, the amount of the Company’s deferred rent as of December 31, 2021 of $ 1.4 million was removed upon adoption. The adoption of these ASUs did not have any impact on the 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): Measurement of Credit Losses on Financial Instruments , which amends existing guidance on the impairment of financial assets and adds an impairment model that is based on expected losses rather than incurred losses and requires an entity to recognize as an allowance its estimate of expected credit losses for its financial assets. An entity will apply this guidance through a cumulative-effect adjustment to retained earnings upon adoption (a modified-retrospective approach) while a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, adoption is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For SEC filers that are eligible to be smaller reporting companies and for all other entities, this ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures, and does not expect the standard will have a material impact on the Company’s financial statements and related disclosures. 3. Fair Value Measurements The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 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. The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following table summarizes the Company’s financial assets (cash equivalents and marketable securities) at fair value as of December 31, 2022 (in thousands): 131 NeuroPace, Inc. Notes to Financial Statements Fair Value as of December 31, 2022 Basis for Fair Value Measurements (Level 1) (Level 2) (Level 3) Assets: Money market funds, included in cash and cash equivalents $ 6,075 $ 6,075 $ — $ — Fixed income mutual funds, included in short-term investments 70,804 70,804 — — Total $ 76,879 $ 76,879 $ — $ — 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 Basis for Fair Value Measurements (Level 1) (Level 2) (Level 3) Assets: Money market funds, included in cash and cash equivalents $ 16,498 $ 16,498 $ — $ — Fixed income mutual funds, included in short-term investments 96,397 96,397 — — Total $ 112,895 $ 112,895 $ — $ — There were no liabilities measured at fair value on a recurring and non-recurring basis as of 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. government and U.S. government agencies. The Company’s available-for-sale investments comprise short-term investments in fixed income mutual funds, which primarily consist of debt securities issued by the U.S. government and U.S. government agencies and corporate bonds and notes. The following is a summary of the Company’s available-for-sale debt securities (in thousands): December 31, 2022 2021 Cost basis $ 71,912 $ 96,702 Unrealized gain (loss) ( 1,108 ) ( 305 ) Fair value $ 70,804 $ 96,397 In determining the fair value of the redeemable convertible preferred stock warrant liability, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 8). 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. 132 NeuroPace, Inc. Notes to Financial Statements 4. Balance Sheet Components Inventory Inventories consist of the following (in thousands): December 31, 2022 2021 Raw materials $ 2,818 $ 2,232 Work-in-process 1,523 879 Finished goods 5,371 4,711 Total $ 9,712 $ 7,822 Property and Equipment, net Property and equipment, net consists of the following (in thousands): December 31, 2022 2021 Machinery, equipment, furniture and fixtures $ 4,434 $ 3,742 Computer equipment and software 2,952 2,916 Leasehold improvements 2,402 2,402 9,788 9,060 Less: Accumulated depreciation ( 8,724 ) ( 8,457 ) Property and equipment, net $ 1,064 $ 603 Depreciation expense for the years ended December 31, 2022 and December 31, 2021 was $ 0.3 million and $ 0.3 million, respectively. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2022 2021 Payroll and related expenses $ 5,748 $ 6,547 Inventory-raw materials 764 251 Professional fees 227 109 Deferred rent, current — 490 Other 675 526 $ 7,414 $ 7,923 5. Commitments and Contingencies Facility Lease In August 2011, the Company entered into a non-cancelable operating lease for combined office and manufacturing facilities in Mountain View, California. The lease was scheduled to expire in April 2019 and was amended in May 2018 to extend it through June 2024. In August 2022, the Company amended the lease to extend it through June 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 133 NeuroPace, Inc. Notes to Financial Statements 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 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): December 31, 2021 2023 $ 3,172 2024 3,267 2025 1,666 Total $ 8,105 The maturities of operating lease liabilities as of December 31, 2022 are as follows (in thousands): December 31, 2022 2023 $ 2,773 2024 2,857 2025 2,942 2026 3,031 2027 3,122 Thereafter 8,232 Total undiscounted lease payments 22,957 Less: imputed interest 6,102 Total operating lease liability 16,855 Less: 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. 134 NeuroPace, Inc. Notes to Financial Statements Indemnifications In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made. The Company may, from time to time, be subject to claims or be required to defend actions related to its indemnification obligations. The Company indemnifies each of its directors and officers for certain events or occurrences, subject to certain limits, while the director or officer is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as the director or officer may be subject to any proceeding arising out of acts or omissions of such individual in such capacity. The maximum amount of potential future indemnification is unlimited. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has no t recognized any liabilities relating to these obligations as of December 31, 2022 and December 31, 2021. Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. The Company determined that no accrual related to contingencies was required as of December 31, 2022 and December 31, 2021. Legal Proceedings The Company is not involved in any pending legal proceedings that it believes could have a material adverse effect on its business, results of operations, financial condition, or cash flows. From time to time, the Company may pursue litigation to assert its legal rights and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. Such accruals, if any, reflect the estimable and probable costs that the Company may incur from the outcomes of its legal proceedings. Legal costs are expensed as incurred. There were no contingent liabilities requiring accrual at December 31, 2022 and 2021. 6. Debt Term Loan In September 2020, the Company entered into a Term Loan Agreement with CRG Partners IV L.P. and its affiliates for total borrowings of up to $ 60.0 million, or the Term Loan, and borrowed $ 50.0 million. The remaining $ 10.0 million of the Term Loan was available to the Company for borrowing until March 31, 2022 if the Company achieved a revenue-based milestone in 2021. The revenue-based milestone was not achieved, and the remaining $ 10.0 million of the Term Loan expired without being drawn. The Term Loan 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 Term Loan includes a fee upon 135 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). The Company paid $ 1.0 million in fees to the lender and third parties which is reflected as a discount on the loan and is being accreted over the life of the loan using the effective interest method. Also, the Company issued warrants to the lender for a total of 346,823 shares of Series B’ redeemable convertible preferred stock. The warrants had a fair value of $ 0.6 million as of the issuance date, which was accounted for as debt issuance costs (see Note 8). During the 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): Term Loan 2023 $ 6,582 2024 6,600 2025 62,051 Total 75,233 Less: Unamortized debt discount and issuance cost ( 904 ) Less: Unaccreted backend fee ( 3,311 ) Less: Interest ( 18,105 ) Term Loan $ 52,913 Paycheck Protection Program In April 2020, the Company received $ 4.0 million from a federal Small Business Administration loan under the Paycheck Protection Program, or the PPP Loan. The note bore interest at 1.0 % per year on the outstanding principal amount and had a maturity date 24 months from the date of the note. No payments were due for the six-month period beginning on the date of the note. Payments of principal and interest were due over the following 18 months. The Small Business Administration modified the PPP Loan such that monthly payments of principal and interest were due from September 2021 through April 2022. In April 2021, the Company repaid its entire obligation under the PPP Loan amounting to $ 4.1 million, including principal of $ 4.0 million and interest of less than $ 0.1 million, using the proceeds from its IPO. 7. Redeemable Convertible Preferred Stock On April 26, 2021, upon the closing of the Company’s IPO, all outstanding redeemable convertible preferred stock automatically converted into 16,614,178 shares of common stock. There was no issued and outstanding redeemable convertible preferred stock as of December 31, 2022 and December 31, 2021. 8. Redeemable Convertible Preferred Stock Warrant Liability On September 24, 2020, in connection with entering into the Term Loan Agreement, the Company issued CRG Partners IV L.P. and its affiliates warrants to purchase 346,823 shares of Series B’ redeemable convertible preferred stock at an exercise price of $ 6.51339 per share, or the Series B’ Warrants, which was accounted as debt issuance costs. 136 NeuroPace, Inc. Notes to Financial Statements The Series B’ Warrants would terminate at the earlier of the ten-year anniversary from the issuance date, the closing of the Company’s IPO or liquidation of the Company. These warrants had a net exercise provision under which their holders could, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Series B’ Warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations. The fair value of the Series B’ Warrants on the date of issuance of $ 0.6 million was recorded as a debt discount. Upon the closing of the IPO, the Series B’ Warrants were net exercised to 213,941 shares of Series B’ redeemable convertible preferred stock and subsequently converted into common stock on a one -to-one basis. Upon the closing of the IPO, the Company remeasured the Series B’ Warrants to fair value of $ 5.6 million, which was the intrinsic value of net exercised common stock, as according to the Series B’ Warrant agreements the Series B’ Warrants were to be automatically exercised upon the IPO and the expected term of the Series B’ Warrants was zero immediately before the closing of the IPO. Upon the closing of the IPO, the redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital. The change in fair value of $( 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. 9. Common Stock The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 200,000,000 shares of $ 0.001 par value common stock. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the Board of Directors. As of December 31, 2022 and December 31, 2021, no dividends had been declared. As of December 31, 2022 and December 31, 2021, the Company had reserved common stock for future issuance as follows: Year Ended December 31, 2022 2021 Outstanding options under the 2021 Plan 3,446,583 3,038,970 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 Total 7,076,678 6,237,974 10. Stock Plans 2020 Stock Plan In August 2020, the Company adopted the 2020 Stock Plan, or the 2020 Plan, which provides for the granting of stock options to employees, directors and consultants of the Company. Stock options granted under the 2020 Plan may be either incentive stock options, or ISOs, nonqualified stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards or other stock awards. ISOs may only be granted to Company employees (including officers and directors who are also employees). Stock awards other than ISOs may be granted to company employees, directors and consultants. The maximum term of each stock option grant is ten years . 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. 137 NeuroPace, Inc. Notes to Financial Statements 2021 Equity Incentive Plan In April 2021, prior to the IPO closing, the Company’s board of directors and stockholders approved the 2021 Equity Incentive Plan, or the 2021 Plan, which became effective upon the IPO closing. The Company initially reserved 2,900,000 shares of common stock for issuance of share-based compensation awards, including ISOs, NSOs, stock appreciation rights, restricted stock units and other stock-based awards. ISOs may be granted only to Company employees (including officers and directors who are also employees). Shares of common stock subject to awards granted under the 2020 Plan that are forfeited or lapse unexercised will be available for issuance under the 2021 Plan. Once the 2021 Plan became effective, no further grants were made under the 2020 Plan. Options under the 2021 Plan may be granted for periods of up to 10 years at exercise prices no less than the fair market value of the Company’s common stock on the date of grant; provided, however, that the exercise price of an ISO granted to a 10% stockholder may not be less than 110 % of the fair market value of the shares on the date of grant and such option may not be exercisable after the expiration of five years from the date of grant. Vesting conditions determined by the plan administrator may apply to stock options and may include continued service, performance and/or other conditions. Generally, options and restricted stock units vest over a four-year period. 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. A summary of shares available for grant under the 2021 Plan is as follows: Shares Available for Grant Shares available for grant as of January 1, 2021 818,889 Authorized 2,900,000 Retired ( 485,581 ) Granted/Awarded ( 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: 138 NeuroPace, Inc. Notes to Financial Statements Options Outstanding Number of Shares Weighted-Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Balances as of January 1, 2021 2,835,265 $ 0.03 9.57 Granted 588,980 $ 13.40 Exercised ( 300,768 ) $ 0.03 Canceled ( 84,507 ) $ 0.48 Balances as of December 31, 2021 3,038,970 $ 2.61 8.83 Granted 690,218 $ 7.83 Exercised ( 157,447 ) $ 0.03 Canceled ( 125,158 ) $ 6.99 Balances at December 31, 2022 3,446,583 $ 3.61 8.06 Vested and exercisable at December 31, 2022 1,682,772 $ 2.13 7.76 Vested and expected to vest at December 31, 2022 3,446,583 $ 3.61 8.06 The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money at period end. The total intrinsic value of stock options exercised was $ 0.9 million and $ 2.3 million during the years ended December 31, 2022 and December 31, 2021, respectively, determined at the date of each stock option exercise. Early Exercise of Stock Options 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. The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. 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 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. Employee Stock Purchase Plan In April 2021, the Company adopted the 2021 Employee Stock Purchase Plan, or ESPP. The Company allows eligible employees to purchase shares of the Company's common stock through payroll deductions at a price equal to 85 % of the lesser of the fair market value of the stock as of the first date or the ending date of each offering period, which is typically six months . There were 580,000 shares of common stock initially reserved for issuance under the ESPP. In January 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 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. The offering period and purchase period is determined by the board of directors. A new offering period of six months has been authorized beginning December 7, 2022 through June 6, 2023. Restricted Stock Units Activity with respect to restricted stock units, or RSUs, was as follows: 139 NeuroPace, Inc. Notes to Financial Statements Number of Shares Underlying Outstanding Restricted Stock Units Weighted Average Grant Date Fair Value Unvested, January 1, 2021 — $ — Granted 629,041 $ 22.14 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. Stock-Based Compensation The Company recognized stock-based compensation as follows (in thousands): Year Ended December 31, 2022 2021 Cost of goods sold $ 518 $ 270 Research and development 2,304 1,227 Selling, general and administrative 5,527 2,791 Total stock-based compensation $ 8,349 $ 4,288 The above stock-based compensation expense related to the following equity-based awards (in thousands): Year Ended December 31, 2022 2021 Stock options and restricted stock units $ 7,949 $ 3,128 ESPP 400 1,160 Total stock-based compensation $ 8,349 $ 4,288 As of December 31, 2022, the total unrecognized stock-based compensation expense related to unvested stock options and restricted stock units was $ 19.8 million, which will be amortized on a straight-line basis over a weighted average remaining period of 2.8 years. As of December 31, 2022, the Company had unrecognized stock-based compensation expense relating to the ESPP awards of approximately $ 0.1 million, which is expected to be recognized over a weighted-average period of 0.4 years. The total fair value of options that vested during the years ended December 31, 2022 and December 31, 2021 was $ 1.8 million and $ 0.4 million, respectively. The options granted during the years ended December 31, 2022 and December 31, 2021 had a weighted average grant date fair value of $ 7.83 per share and $ 7.78 per share, respectively. 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 140 NeuroPace, Inc. Notes to Financial Statements awards. The fair value of employee stock options was estimated using the following assumptions for the years ended December 31, 2022 and December 31, 2021: Year Ended December 31, 2022 2021 Expected term (in years) 5.27 - 6.25 6.00 - 6.25 Expected volatility 50 % - 52 % 50 % - 53 % Weighted average risk-free interest rate 1.79 % - 3.56 % 0.59 % - 1.33 % Fair value of common stock $ 6.30 - $ 8.15 $ 0.40 - $ 21.67 Dividend yield — % — % The expected term of stock options represents the weighted-average period the stock options are expected to remain outstanding. 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 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. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of not to declare and pay dividends. Prior to the IPO the fair value of the Company’s common stock was determined by the board of directors with assistance from management and, in part, on input from an independent third-party valuation firm. The board of directors determined the fair value of common stock by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock, operating and financial performance, the lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Subsequent to the Company’s IPO, the fair value of the Company’s common stock is determined based on its closing market price. The Company accounts for forfeitures as they occur. 11. Income Taxes The Company’s operations and income tax components are solely in the United States. From inception through 2022 , the Company has only generated pretax losses in the United States and has not generated any pretax income or loss outside of the United States. The Company did not record a provision (benefit) for income taxes for the years ended December 31, 2022 and 2021 . 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 141 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. federal rate to the Company’s effective tax rate is as follows: December 31, 2022 2021 Tax at federal statutory rate 21.0 % 21.0 % State taxes, net of federal benefit 7.2 % 4.0 % Research and development tax credit 1.4 % 1.3 % Stock-based compensation ( 1.9 ) % ( 1.1 ) % Nondeductible interest expense ( 0.5 ) % ( 0.6 ) % Warrant mark-to-market adjustment — % ( 3.0 ) % FIN 48 reserve ( 0.2 ) % ( 0.2 ) % Change in valuation allowance ( 26.8 ) % ( 21.5 ) % Other ( 0.2 ) % 0.1 % Total — % — % The tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities are as follows (in thousands): December 31, 2022 2021 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 Accruals and reserves 1,180 1,600 Interest expense carryforward 3,850 2,616 Operating lease liability 4,442 — Other 1,521 781 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 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 142 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. The federal and state NOL carryforwards begin expiring in 2022 and 2028, for federal and state purposes, respectively. As of December 31, 2022, the amount of federal NOL carryforwards that does not expire is $ 99.1 million (subject to certain utilization limitations). As of December 31, 2022, the Company had research and development credit carryforwards of $ 3.5 million and $ 12.6 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal credit carryforwards begin expiring in 2036 and the state credits carryforward indefinitely. Utilization of the Company’s NOL and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions included in the Internal Revenue Code, or Section 382, and similar state provisions. An annual limitation may result in the expiration of NOL and credit carryforwards before utilization. The Company conducted Section 382 studies as of 2016 and 2021 and has determined that it experienced Section 382 ownership changes in 2016 and in 2021. The 2016 ownership change resulted in permanent limitations of its NOL and credit carryforwards. The 2021 ownership change did not result in permanent limitations of its NOL or credit carryforwards. It has been determined that $ 226.8 million and $ 150.7 million of federal and state NOL carryforwards, respectively, have been permanently limited and will expire unutilized. It has also been determined that $ 10.4 million of federal research and development credits have been permanently limited and will expire unutilized. The gross deferred tax assets disclosed above exclude NOL and credit carryforwards that are expected to expire due to the Section 382 limitation. 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 or 2022. California Assembly Bill 85 (AB 85) was signed into law by Governor Gavin Newsom on June 29, 2020. The legislation suspends the California NOL deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation on certain California tax credits for 2020, 2021, and 2022. The legislation disallows the use of California NOL deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $1,000,000. The carryover periods for NOL deductions disallowed by this provision will be extended. 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. California Senate Bill 113 (SB 113), was signed into law by Governor Newsom on February 9, 2022. The legislation contains important California tax law changes, including reinstatement of business tax credits and net NOL deductions limited by AB 85 mentioned above. 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. The unrecognized tax benefits, if recognized, would not have an impact on the Company's effective tax rate, due to the valuation allowance. It is unlikely that the amount of unrecognized tax benefits will significantly change over the next twelve months. No liability related to uncertain tax positions is recorded in the financial statements. 143 NeuroPace, Inc. Notes to Financial Statements A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands): Year Ended December 31, 2022 2021 Beginning balance $ 1,489 $ 1,390 Increase in balance related to tax positions taken during the current year 112 99 Increase in balance related to tax positions taken during prior years — Ending balance $ 1,601 $ 1,489 It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary. The Company determined that no accrual for interest and penalties related to unrecognized tax benefits was required as of December 31, 2022 and December 31, 2021. All of the Company’s tax years will remain open for examination by the federal and state authorities for 3 and 4 years, respectively, from the date of utilization of its tax attributes. 12. Net Loss per Share Attributable to Common Stockholders The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except for share and per share amounts): Year Ended December 31, 2022 2021 Numerator: Net loss attributable to common stockholders $ ( 47,082 ) $ ( 36,080 ) Denominator: Weighted-average common stock outstanding used to compute basic and diluted net loss per share 24,594,784 16,608,800 Net loss per share attributable to common stockholders, basic and diluted $ ( 1.91 ) $ ( 2.17 ) 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: December 31, 2022 2021 Options to purchase common stock 3,446,583 3,038,970 Unvested early exercised common stock options 78,389 174,171 Unvested restricted stock units 1,756,209 596,085 Shares committed under ESPP 190,613 114,736 Total Shares 5,471,794 3,923,962 13. 401(k) Savings Plan On January 1, 2000, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. To date, the Company has made no contributions to the 401(k) plan. 144 NeuroPace, Inc. Notes to Financial Statements 14. 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. 145 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.