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Item 7. Management’s Discussion and Analysis

2024-03-05 compared with 2023-03-02 · 87 added, 101 removed, 197 unchanged (49% of the section changed)

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Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

We are a commercial-stage medical device company focused on transforming the lives of people living with epilepsy by reducing or eliminating the occurrence of debilitating seizures.

We are a medical device company focused on transforming the lives of people living with epilepsy by reducing or eliminating the occurrence of debilitating seizures.

Our novel and differentiated RNS System is the first and only commercially available, brain-responsive neuromodulation system that delivers personalized, real-time treatment at the seizure source.

By continuously monitoring the brain’s electrical activity, recognizing patient-specific abnormal electrical patterns, and responding in real time with imperceptible electrical pulses to prevent seizures, our RNS System delivers the precise amount of therapy when and where it is needed and provides exceptional clinical outcomes with approximately three minutes of stimulation on average per day.

By continuously monitoring and analyzing the brain’s electrical activity, recognizing patient-specific abnormal electrical patterns, and responding in real time with imperceptible electrical pulses to prevent seizures, our RNS System delivers the precise amount of therapy when and where it is needed and provides exceptional clinical outcomes with approximately three minutes of stimulation on average per day.

Our RNS System is also the only commercially available device that records continuous brain activity data and allows clinicians to monitor patients not only in person, but also remotely, in order to make more informed treatment decisions, thus optimizing patient care.

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We believe our compelling body of long-term clinical data, demonstrating continuous improvement in outcomes over time, will support the continued adoption of our RNS System among the approximately 575,000 adults in the United States with drug-resistant focal epilepsy.

We continue seeking indication expansion to, over time, more broadly reach the entire approximately 1.2 million drug-resistant epilepsy patients in the United States and have begun enrollment in clinical studies to broaden our indication including into generalized epilepsy.

We continue seeking indication expansion to, over time, more broadly reach the entire approximately 1.2 million drug-resistant epilepsy patients in the United States.

In December 2023, we finished enrolling and implanting the requisite number of patients for FDA submission in our clinical trial to evaluate RNS System use in the generalized epilepsy population.

We may additionally seek to expand our operations to reach the approximately 16.5 million drug-resistant epilepsy patients globally.

Our commercial efforts are focused on the comprehensive epilepsy centers, or CECs, including Level 4 CECs, that facilitate appropriate care for drug-resistant epilepsy patients.

This may include implantation of epilepsy neuromodulation devices such as our RNS System or the ongoing treatment of patients with neuromodulation devices.

While most drug-resistant epilepsy patients begin their care at physician offices or community hospitals, we estimate that approximately 24,000 adult drug-resistant focal epilepsy patients are treated in CECs in the United States each year.

We estimate that this patient pool represents an annual core market opportunity of approximately $1.1 billion for initial RNS System implants, and we expect that it will continue to grow as the number of CECs and the number of epileptologists increase, as more patients are referred to these CECs, and as more care for RNS-implanted patients can happen outside of the CECs.

In addition, the sale of replacement neuromodulation devices when the battery in our RNS neurostimulator approaches end of service provides a recurring revenue stream that is additive to our current $1.1 billion annual market opportunity for initial implants.

We received Premarket Approval, or PMA, from the FDA for our RNS System in late 2013 and began the commercial rollout of our RNS System in early 2014.

We market our RNS System in the United States through a direct sales organization primarily to the epileptologists and neurosurgeons who respectively prescribe and implant neuromodulation devices in the approximately 200 CECs in the United States.

We have historically marketed our RNS System in the United States through a direct sales organization primarily to the epileptologists and neurosurgeons who respectively prescribe and implant neuromodulation devices in the approximately 200 Level 4 CECs in the United States.

We have established a significant account base at these CECs.

Given the concentrated and underpenetrated nature of our target market, we believe that through our sales force, there is a significant opportunity to efficiently drive higher utilization within these centers, grow our account base, and expand our referral channel to increase the number of drug-resistant patients referred to the CECs.

We estimate that this patient pool represents an annual core market opportunity of approximately $1.1 billion for initial RNS System implants, and we expect that it will continue to grow as the number of Level 4 CECs and epileptologists increase, and as more patients are referred to these CECs.

Given the concentrated and underpenetrated nature of our target market, we believe that there is a significant opportunity to efficiently drive higher adoption and utilization within these centers, grow our account base, and expand our referral channel to increase the number of drug-resistant patients referred to Level 4 CECs.

In 2023, we received FDA approval of a PMA-S, which updated the qualification criteria for centers and clinicians that may prescribe and implant the RNS System.

This PMA-S allows us to expand our commercial efforts to target and be able to qualify approximately 1,800 additional epileptologists practicing outside of Level 4 CECs and the entire population of functional neurosurgeons.

We plan to address this opportunity in a targeted manner with incremental expansion of our sales force.

The implant procedure for our RNS System and the ongoing patient treatment provided by clinicians, including monitoring and programming, are reimbursed under well-established physician and hospital codes.

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We believe the established, differentiated, and favorable reimbursement paradigm for our RNS System will continue to support its broad commercial adoption.

Our RNS System has an estimated average battery life of nearly eleven years, an increase from the previous model of the device.

The sale of replacement neuromodulation devices provides a recurring revenue stream that is additive to the annual market opportunity for initial implants.

We currently manufacture our RNS System at and distribute our products from our approximately 53,000 square foot facility in Mountain View, California.

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Since our inception, we have generated significant losses.

To date, we have financed our operations primarily through the sale of equity securities, debt financing arrangements and sales of our products.

As of December 31, 2022, we had an accumulated deficit of $470.9 million, cash, cash equivalents and short-term marketable debt securities of $77.4 million, and $52.9 million of outstanding term loans, net of debt discount and issuance costs.

On April 21, 2021, we completed our initial public offering of our common stock, or IPO, in which we issued and sold an aggregate of 6,900,000 shares of common stock (inclusive of 900,000 shares pursuant to the exercise by the underwriters of their option) at a price of $17.00 per share for aggregate cash proceeds of approximately $105.5 million, net of underwriting discounts and commissions and offering costs.

The sale and issuance of 6,900,000 shares in the IPO closed on April 26, 2021.

We have financed our operations primarily through sales of our products, issuance of equity securities, and debt financing.

As of December 31, 2023, we had an accumulated deficit of $503.8 million, cash, cash equivalents and short-term investments of $66.5 million, and $57.0 million of outstanding term loans, net of debt discount and issuance costs.

We have invested heavily and expect to continue to invest in research and development and commercial activities.

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We intend to continue making significant investments in research and development, clinical studies and regulatory affairs to support ongoing and future regulatory submissions for retaining and expanding indications of our RNS System, including to patients with drug-resistant generalized epilepsy and adolescent patients, ages 12-17, support continuous improvements to our RNS System, and develop future products that address neurological disorders.

We have also made significant investments in building our field commercial team and intend to make significant investments in sales and marketing efforts in the future, including initiatives to drive awareness and expand our referral channel to increase the number of drug-resistant epilepsy patients referred to Level 4 CECs.

Moreover, we expect to continue to incur expenses associated with operating as a public company.

We may in the future seek to acquire or invest in additional businesses, products, or technologies that we believe could complement or enhance our products, enhance our technical capabilities or otherwise offer growth opportunities, although we currently have no agreements or understandings with respect to any such acquisitions or investments.

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We believe our existing cash, cash equivalents and short-term investments will allow us to continue our operations for at least the next 12 months.

Recent Developments

COVID-19 Pandemic Update

Our business, financial condition and results of operations have been and may continue to be significantly impacted by the COVID-19 pandemic.

Beginning in 2020, our revenue has been negatively impacted and has experienced volatility as hospitals delayed or canceled elective procedures in response to the pandemic, including

procedures to implant our RNS System.

In addition, hospitals have delayed or canceled admissions for epilepsy diagnostic evaluations, which has reduced and may continue to reduce our patient pipeline.

By the second half of 2022, the impact of the COVID-19 pandemic on our revenue had diminished.

However, the extent to which the pandemic continues to adversely impact our business, financial condition and results of operations is dependent on future developments that are highly uncertain and cannot be predicted, including the emergence of new COVID-19 variants and spikes in COVID-19 cases.

For further information, refer to “Risk Factors” in Part II, Item 1A of this Annual Report on Form 10-K.

Collaborations and Partnerships

DIXI Distribution Agreement

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These products are used in the epilepsy monitoring units, or EMUs, of comprehensive epilepsy centers to determine where epileptic seizures originate.

In addition to providing us with an incremental revenue stream, the DIXI Medical partnership will provide us with improved visibility of patients moving through the EMUs, many of whom may be candidates for our RNS System.

In addition to providing us with an incremental revenue stream, the DIXI Medical

partnership provides us with improved visibility of patients moving through the EMUs, many of whom may be candidates for our RNS System.

This synergistic partnership leverages our field organization that is already calling on the same customers and supports our objective to engage earlier in the diagnostic and therapy selection process.

DIXI Medical will supply us with ongoing commercial support and will supply us with DIXI Medical products as ordered by us.

In consideration for DIXI Medical’s ongoing commercial support, we paid DIXI Medical $2.0 million in the fourth quarter of 2022 and will pay $1.25 million in each of the fourth quarters of 2023 and 2024, for a total of $4.5 million.

We recognized incremental operating expenses of approximately $1.3 million primarily in the fourth quarter of 2022 associated with the distribution launch.

We will incur ongoing expenses in connection with our performance under the Distribution Agreement, although we expect that ongoing quarterly expenses will be less than in the fourth quarter of 2022.

DIXI Medical provides us with ongoing commercial support and supplies the DIXI Medical products we order.

Rapport Agreement

In November 2023, we entered into a collaboration agreement with Rapport Therapeutics, Inc., or Rapport, a clinical-stage biotechnology company, to leverage our data as well as our RNS System’s unique biomarker monitoring and data analysis capabilities.

The collaboration evaluates biomarker changes in currently implanted RNS System patients that have enrolled in Rapport’s Phase 2a clinical trial of its product candidate.

Pursuant to this agreement, we will provide information to Rapport that will help evaluate the impact of their product candidate on certain biomarkers of patients with focal onset seizures.

Factors Affecting Our Performance

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We plan to continue building patient awareness through direct-to-patient marketing initiatives, which include advertising, social media and online education.

We also intend to continue supporting patient and referring clinician outreach efforts to help increase the number of appropriate patients with drug-resistant epilepsy being treated at CECs.

We also intend to continue supporting patient and referring clinician outreach efforts to help increase the number of appropriate patients with drug-resistant epilepsy being treated at CECs, including by way of our expansion into the community setting.

These efforts require significant investment by our marketing and sales organization.

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Upon completion of initial training, our personnel typically require time in the field to grow their network of accounts, build relationships with clinicians and increase their productivity to the levels we expect.

We believe successfully training, developing and retaining our Therapy Consultants and Field Clinical Engineers will be required to achieve

We believe successfully training, developing and retaining our Therapy Consultants and Field Clinical Engineers will be required to achieve growth.

In addition, the loss of any productive sales personnel would have a negative impact on our ability to grow our business.

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This device has an average battery life of nearly eleven years, an increase from the previous model of the device.

We expect that our revenue from replacement procedures will decrease over the next few years as a result of the extended replacement cycle of the newer device.

We expect that the percentage of our revenue from replacement procedures may continue to decrease over the next few years as a result of the extended replacement cycle of the newer device.

In addition, a change in procedure mix between initial and replacement procedures may have a negative impact on our gross margin.

Beginning in the fourth quarter of 2022, we also derive revenue from sales of DIXI Medical products.

A change in product mix between sales of our RNS System and DIXI Medical products may have a negative impact on our gross margin.

Beginning in the fourth quarter of 2022, we also began to derive revenue from sales of DIXI Medical products.

A change in product mix between sales of our RNS System and DIXI Medical products would cause variability in our gross margin.

Components of Our Results of Operations

We derive most of our revenue from sales of our RNS System to hospital facilities (typically Level 4 CECs) that implant our RNS System.

We currently deliver our RNS System to a hospital on the date of the scheduled procedure.

There is no commitment to purchase our RNS System until the delivery of the product, as the procedure may be canceled at any time.

We derive most of our revenue from sales of our RNS System to hospital facilities that implant our RNS System.

Our revenue fluctuates primarily based on the volume of procedures performed and the procedure mix between initial and replacement implants.

Our revenue also fluctuates and in the future will continue to fluctuate from quarter-to-quarter due to a variety of factors, including the success of our sales force in expanding adoption of our RNS System in new accounts and the number of physicians who are aware of and prescribe our RNS System.

Our revenue also has fluctuated and in the future will continue to fluctuate from quarter-to-quarter due to a variety of factors, including the success of our sales force in expanding adoption of our RNS System in new accounts and the number of physicians who are aware of and prescribe our RNS System.

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

Our revenue from the sale of DIXI Medical products will fluctuate in the future due to a variety of factors, including our ability to take market share from competitive SEEG products.

Our revenue from the sale of DIXI Medical products will fluctuate in the future due to a variety of factors, including our ability to take market share from competitive Stereo EEG products.

Beginning in the fourth quarter of 2023, we also derive revenue from services provided to Rapport pursuant to our collaboration agreement with Rapport.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of costs related to materials, components and subassemblies, personnel-related expenses for our manufacturing and quality assurance employees, including stock-based compensation, manufacturing overhead, charges for excess, obsolete and non-sellable inventories, and royalties.

Overhead costs include the cost of quality assurance, testing, material procurement, inventory control, operations supervision and management personnel, an allocation of facilities and information technology expenses, including rent and utilities, and equipment depreciation.

Cost of goods sold consists primarily of costs related to materials, components and subassemblies, personnel-related expenses for our manufacturing and quality assurance employees, including stock-based compensation, manufacturing overhead and charges for excess, obsolete and non-sellable inventories.

equipment depreciation.

Cost of goods sold also includes certain direct costs such as those incurred for shipping our RNS System.

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Our gross margin may increase over the long term to the extent our production volume increases as our fixed manufacturing costs would be spread over a larger number of units, thereby reducing our per-unit manufacturing costs.

We expect our gross margin to fluctuate from period to period, however, based upon the factors described above.

We expect our gross margin will fluctuate from period to period, however, based upon the factors described above.

Operating Expenses

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We expense research and development costs as they are incurred.

We expect our research and development expenses to increase in absolute dollars as we continue to develop new product offerings and product enhancements and conduct studies for expanded indications for use.

We expect our research and development expenses will increase in absolute dollars as we continue to develop new product offerings and product enhancements and conduct studies for expanded indications for use.

Selling, General and Administrative Expenses

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We expect our sales and marketing expenses will increase in absolute dollars as we hire additional personnel and add programs in order to more fully penetrate the market opportunity.

We expect our administrative expenses, including stock-based compensation expense, will increase as we increase our headcount and expand our systems to support our operations as a public company.

Additionally, we may incur increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, and director and officer insurance premiums.

We expect our administrative expenses, including stock-based compensation expense, will increase as we increase our headcount to support our growth.

Additionally, we may incur increased expenses related to audit, legal, regulatory and tax-related services, compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, and director and officer insurance premiums.

Our selling, general and administrative expenses may fluctuate from period to period as we continue to grow.

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Interest expense consists primarily of interest expense related to our term loan facility, including amortization of debt discount and issuance costs.

Interest income is predominantly derived from investing surplus cash in money market funds and short-term marketable debt securities.

Interest income is predominantly derived from investing surplus cash in money market funds and short-term marketable securities.

Other Income (Expense), Net

Other income (expense), net primarily consists of changes in the fair value of our redeemable convertible preferred stock warrant liability.

Other income (expense), net primarily consists of gain and loss from short-term investments.

Results of Operations

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The increase in revenue was primarily due to an increase in the number of units sold for initial implant procedures as well as an increase in pricing, and the addition of sales of DIXI Medical products which began in the fourth quarter of 2022, partially offset by a decrease in units sold for replacement implant procedures in the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Initial implant revenue was $35.7 million in the year ended December 31, 2022, a 6% increase from $33.7 million in the prior year period.

Replacement implant revenue was $8.2 million in the year ended December 31, 2022, a 29% decrease from $11.5 million in the prior year period.

This reduction in replacement implant revenue was expected due to the longer replacement cycle of our newer device.

DIXI Medical products was $1.6 million compared to $0 in the prior year period, as we began distributing these products in the fourth quarter of 2022.

All of our revenue was generated from sales in the United States.

Revenue from sales of our RNS System for replacement procedures represented approximately 5% of our total revenue for the year ended December 31, 2023, as compared to approximately 18% for the year ended December 31, 2022.

Substantially all of our revenue, with the exception of less than $0.1 million, was generated from sales in the United States.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $4.3 million, or 33%, to $17.3 million during the year ended December 31, 2023, compared to $13.0 million during the year ended December 31, 2022.

The increase was primarily due to cost associated with distribution of DIXI Medical products, as well as to an increase in indirect labor costs including stock-based compensation, partially offset by the decrease in sales volume for replacement procedures in the year ended December 31, 2022.

Our gross margin decreased from 74.0% for the year ended December 31, 2021 to 71.4% for the year ended December 31, 2022 primarily due to higher fixed costs per unit as a result of the lower production volume, and lower gross margin for distribution of DIXI Medical products as compared to the gross margin for sales of our RNS System.

The increase was primarily due to the increase in the number of units sold for initial implant procedures and the costs associated with distribution of DIXI Medical products.

Our gross margin increased from 71.4% for the year ended December 31, 2022 to 73.6% for the year ended December 31, 2023 primarily due to lower fixed costs per unit as a result of increased production volume of the RNS System, partially offset by the lower gross margin from distribution of DIXI Medical products.

Research and Development Expenses

Research and development expenses increased by $3.7 million, or 21%, to $21.9 million during the year ended December 31, 2022, compared to $18.2 million during the year ended December 31, 2021.

The increase in research and development expenses was primarily due to an increase of $2.5 million in personnel-related expenses, including stock based compensation, largely resulting from hiring additional personnel to support product development efforts and clinical studies, an increase of $0.6 million in product development costs, and an increase of $1.0 million in costs associated with our clinical studies.

The increases were offset in part by a decrease of $0.3 million in allocated facility and information technology expenses, including rent, utilities and depreciation.

Research and development expenses decreased by $1.2 million, or 5%, to $20.8 million during the year ended December 31, 2023, compared to $21.9 million during the year ended December 31, 2022.

The decrease in research and development expenses was primarily due to a decrease of $0.9 million in outside services primarily for product development and clinical studies and an increase of $0.8 million in funds received under the NIH funding agreement

which are recognized as a reduction in research and development expenses.

The decreases were offset in part by an increase of $0.7 million in personnel-related expenses, including stock-based compensation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $3.2 million, or 6%, to $54.5 million during the year ended December 31, 2023, compared to $51.3 million during the year ended December 31, 2022.

The increase in selling, general and administrative expenses was primarily due to an increase of $7.0 million in personnel-related expenses primarily due to hiring additional personnel, including expanding our sales force, and to stock-based compensation, an increase of $2.2 million in general and administrative costs related to operating as a public company, an increase of $3.0 million in sales, field support and marketing costs including travel, contractors, and digital advertising due to increased marketing activities to support commercial growth and returning operations to pre-pandemic levels as well as to one-time costs associated with launch of the DIXI Medical partnership, and an increase of $0.2 million in allocated facility and information technology expenses, including rent, utilities and depreciation.

The increase in selling, general and administrative expenses was primarily due to an increase of $4.9 million in personnel-related expenses driven by an increase in sales-based variable compensation as a result of the increase in revenue during the year ended December 31, 2023, compared to the year ended December 31, 2022, and stock-based compensation, an increase of $0.8 million in sales, field support and marketing costs including expenses for ongoing commercial support provided by DIXI Medical in connection with distributing their products, and an increase of $0.4 million in expenses related to commercial operations.

The increases were offset in part by a decrease of $3.1 million in general and administrative costs, primarily outside services and insurance.

Interest Expense and Income

Interest expense increased by $0.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to an increase in average balances of our Term Loan as a result of using the paid-in-kind option for interest whereby we added part of the interest due to the Term Loan's principal balance instead of paying it in cash for the payment dates on June 30, 2022, September 30, 2022 and December 31, 2022.

Interest income increased by $1.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase in average balances of our money market funds and short-term marketable debt securities and higher interest yields in the year ended December 31, 2022.

Interest expense increased by $1.0 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, due to an increase in average balances of our Term Loan as a result of using the paid-in-kind option for interest whereby we added part of the interest due to the Term Loan's principal balance instead of paying it in cash for the payment dates from April 2022 through December 2023, and to an increase in the Term Loan interest rate from 12.5% to 13.5% during the year ended December 31, 2023.

Interest income increased by $1.5 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher interest yields in the year ended December 31, 2023, partially offset by a decrease in average balances of our money market funds and short-term marketable securities.

Other Income (Expense), net

Other income (expense), net increased by $5.0 million to $(0.3) million during the year ended December 31, 2022, compared to $(5.4) million during the year ended December 31, 2021, primarily due to an increase in the fair value of redeemable convertible preferred stock warrant liability by $5.2 million due to an increase in the fair value of our redeemable convertible preferred stock prior to our IPO in the year ended December 31, 2021.

Other income (expense), net increased by less than $0.1 million to ($0.3) million during the year ended December 31, 2023, compared to ($0.3) million during the year ended December 31, 2022, primarily due to a reduction in unrealized loss, net on short-term investments in the year ended December 31, 2023.

Liquidity and Capital Resources

Prior to our IPO, we financed our operations primarily through the sale of equity securities, debt financing arrangements and sales of our RNS System.

As of December 31, 2022, we had cash, cash equivalents and short-term marketable debt securities of $77.4 million, compared to $115.6 million at December 31, 2021, and $52.9 million outstanding under the Term Loan, net of debt discount and issuance costs, compared to $49.8 million at December 31, 2021.

We have financed our operations primarily through sales of our products, issuance of equity securities and debt financing.

As of December 31, 2023, we had cash, cash equivalents and short-term investments of $66.5 million, compared to $77.4 million at December 31, 2022, and $57.0 million outstanding under the Term Loan, net of debt discount and issuance costs, compared to $52.9 million at December 31, 2022.

In September 2020, we entered into the Term Loan for total borrowings of up to $60.0 million and borrowed $50.0 million.

In April 2021, we completed our IPO and received $105.5 million in net proceeds after deducting underwriting discounts and commissions and offering costs, of which $4.1 million was used to repay the $4.0 million federal Small Business Administration loan under the Paycheck Protection Program received in April 2020.

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

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

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

We have not issued or sold any securities pursuant to the Shelf or ATM offering program.

In April 2021, we completed our IPO and received $105.5 million in net proceeds after deducting underwriting discounts and commissions and offering costs.

In November 2022, we entered into a Sales Agreement with Leerink Partners LLC, or Leerink, to sell shares of our common stock, from time to time, through an at-the-market, or ATM, equity offering program under which Leerink will act as our sales agent and pursuant to which we may sell common stock for aggregate gross sales proceeds of up to $50.0 million.

In November 2023, we received net proceeds of approximately $7.6 million from the sale of shares of common stock pursuant to our ATM offering program, after deducting sales commission and offering expenses.

As of December 31, 2023, we have $41.8 million remaining under our ATM program.

In September 2020, we entered into the Term Loan with CRG Partners IV L.P.

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The revenue-based milestone was not met, and the remaining $10.0 million of the Term Loan expired without being drawn.

The borrowings under the Term Loan are secured by substantially all of our properties, rights and assets, including intellectual property.

The Term Loan bears interest at a rate of 13.5% per year.

Payments under the loan are made quarterly with payment dates fixed at the end of each calendar quarter.

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

From January 2021 through December 2022, we had the option to pay interest as follows:

7.5% per annum in cash and 5.0% per annum paid-in-kind, or PIK, by increasing the principal of the Term Loan.

From January 2023 through June 2025, we have 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 loan.

8.5% per annum 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 2023, we elected the PIK option, increasing the principal of the Term Loan by $4.6 million.

The Term Loan was interest-only through September 30, 2023, which could be extended through September 30, 2025 at our option if we completed our IPO on or prior September 30, 2023.

The Term Loan was interest-only through September 30, 2023, which could be extended through September 30, 2025 at our option if we completed our IPO on or prior to September 30, 2023.

In connection with closing the IPO, we extended the interest-only period to September 30, 2025.

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We 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.

Paycheck Protection Program

In April 2020, we received $4.0 million from a federal Small Business Administration loan under the Paycheck Protection Program, or 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.

Payments of principal and interest were due from September 2021 through April 2022.

In April 2021, we repaid our 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 our IPO.

Future Funding Requirements

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In addition, we intend to continue to make investments in clinical studies, development of new products, and other ongoing research and development programs.

We may incur additional expenses to expand our commercial organization to re-establish operations to pre-pandemic levels, and to plan for continued growth.

We may incur additional expenses to expand our commercial organization to support our continued growth.

We may incur additional expenses to further enhance our research and development efforts and to pursue commercial opportunities outside of the United States.

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See “Facility Lease” in Note 5 to our financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

As of December 31, 2022, we had cash, cash equivalents and short-term marketable debt securities of $77.4 million.

Based on our current planned operations, we expect that our cash, cash equivalents and short-term marketable debt securities will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year ended December 31, 2022.

As of December 31, 2023, we had cash, cash equivalents and short-term investments of $66.5 million.

Based on our current planned operations, we expect that our cash, cash equivalents and short-term investments will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year ended December 31, 2023.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

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• the research and development activities we intend to undertake, including product enhancements and clinical studies for indication expansions that we intend to pursue;

• the impact of the COVID-19 pandemic on our business;

• the cost of obtaining, maintaining, defending, enforcing, and protecting any patents and other intellectual property rights;

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• the emergence of competing technologies or other adverse market developments.

If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may adversely affect our stockholders’ rights.

If we raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may adversely affect our stockholders’ rights.

If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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.

In addition, COVID-19 has negatively impacted our business by decreasing and delaying procedures performed to implant our RNS System, and we expect the pandemic will continue to negatively impact our business, which may negatively impact our future liquidity.

Our ability to raise additional capital may be adversely impacted by global economic conditions and disruptions to, and volatility in, the financial markets in the United States and worldwide, as well as those more specifically impacting our industry.

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.

Summary Statements of Cash Flows

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Financing activities 8,127 490

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

Net increase (decrease) in cash and cash equivalents

$ 11,453 $ (12,582)

Cash Flows Used in Operating Activities

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Cash used in operating activities was primarily a result of the net loss of $33.0 million, adjusted for non-cash charges of $15.7 million and change in operating assets and liabilities of $2.5 million.

The non-cash charges primarily consisted of $8.3 million of stock-based compensation, $2.7 million of amortization of right-of-use assets, $1.9 million of interest incurred but paid-in-kind, $0.9 million of non-cash interest expense related to our term loan and $0.4 million of realized loss from sale of short-term investments.

The change in operating assets and liabilities was due to an increase in accounts receivable of $0.4 million primarily due to slower payments by our customers, an increase in inventories of $2.1 million largely due to inventory purchased from DIXI Medical under the Distribution Agreement, an increase in prepaid expenses and other assets of $0.8 million, a decrease in operating lease liabilities of $2.1 million due to cash paid for rent, offset in part by an increase in accounts payable of $0.6 million.

The increase in prepaid expenses and other assets and accounts payable was primarily the result of the timing of payments to our vendors.

The non-cash charges primarily consisted of $9.6 million of stock-based compensation, $2.7 million of interest incurred but paid-in-kind, $1.4 million of amortization of right-of-use assets, $1.1 million of non-cash interest expense related to our Term Loan, $0.3 million of amortization of debt discount and issuance costs and $0.3 million of loss from short-term investments.

The change in operating assets and liabilities was due to an increase in accounts receivable of $4.9 million primarily due to an increase in sales of our products including our RNS System and DIXI Medical products, an increase in inventories of $1.7 million largely due to an increase in raw materials and finished goods partially offset by a reduction in work-in-process inventory, a decrease in operating lease liabilities of $1.4 million due to cash paid for rent net of the accretion of imputed interest, offset in part by a decrease in prepaid expenses and other assets of $0.4 million, an increase in accrued liabilities of $3.8 million primarily due to an increase in accrued employee bonuses and payroll related expenses, and an increase in deferred revenue of $1.1 million related to our collaboration agreement with Rapport Therapeutics.

Net cash used in operating activities was $36.9 million for the year ended December 31, 2022.

Cash used in operating activities was primarily a result of the net loss of $47.1 million, adjusted for non-cash charges of $15.0 million and change in operating assets and liabilities of $4.8 million.

The non-cash charges primarily consisted of $5.2 million in change in the fair value of redeemable convertible preferred stock warrant liability, $0.8 million of non-cash interest expense related to our term loans, and $4.3 million of stock-based compensation.

The change in operating assets and liabilities was due to an increase in prepaid expenses and other assets of $1.2 million primarily due to the timing of payments to our vendors, an increase in inventories of $1.2 million largely due to an increase in finished goods, and a decrease in deferred rent of $0.6 million offset in part by a decrease in accounts receivable of $1.3 million primarily due to more timely payments by our customers, an increase in accrued liabilities of $1.7 million, and an increase in accounts payable of $0.5 million.

The increase in accrued liabilities and accounts payable was primarily the result of the timing of payments to our vendors.

Cash Flows Provided by (Used in) Investing Activities

Net cash provided by investing activities was $23.8 million for the year ended December 31, 2022, which primarily consisted of sales of marketable debt securities of $24.4 million, which amounts were partially offset by purchases of property and equipment of $0.6 million.

Net cash used in investing activities was $85.4 million for the year ended December 31, 2021, which consisted of purchases of marketable debt securities of $85.0 million and purchases of property and equipment of $0.4 million.

The non-cash charges primarily consisted of $8.3 million of stock-based compensation, $2.7 million of amortization of right-of-use assets, $1.9 million of interest

incurred but paid-in-kind, $0.9 million of non-cash interest expense related to our Term Loan and $0.4 million of realized loss from sale of short-term investments.

The increase in prepaid expenses and other assets and accounts payable was primarily the result of the timing of payments to our vendors.

Cash Flows Provided by Investing Activities

Net cash provided by investing activities was $23.0 million for the year ended December 31, 2023, which primarily consisted of sales of short-term investments of $23.2 million, partially offset by purchases of property and equipment of $0.2 million.

Net cash provided by investing activities was $23.8 million for the year ended December 31, 2022, which primarily consisted of sales of short-term investments of $24.4 million, partially offset by purchases of property and equipment of $0.6 million.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $8.1 million for the year ended December 31, 2023, which primarily consisted of $7.9 million of net cash proceeds from our At-the-Market offering and proceeds from the issuance of common stock under employee plans of $0.8 million, partially offset by taxes withheld and paid related to net share settlement of equity awards of $0.3 million and payment of deferred offering costs of $0.3 million.

Net cash provided by financing activities was $0.5 million for the year ended December 31, 2022, which primarily relates to receipt of proceeds from the issuance of common stock under employee plans of $0.9 million, partially offset by payment of deferred offering costs of $0.4 million.

Net cash provided by financing activities was $102.5 million for the year ended December 31, 2021, which primarily relates to receipt of proceeds from our IPO of $109.1 million and proceeds from issuance of common stock under the employee stock purchase plan of $0.9 million, partially offset by payment of deferred offering costs of $3.4 million and repayment of debt obligations of $4.1 million under the PPP Loan.

Critical Accounting Estimates

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If our estimate of future demand is too high, we may have to write-down excess inventory for the product and record a charge to cost of goods sold, which could have a material adverse effect on our results of operations.

Inventory write-downs were $0.2 million and $0.2 million for the years ended December 31, 2023 and December 31, 2022, respectively.

JOBS Act Accounting Election

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We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financials to those of other public companies more difficult.

We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of our IPO, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

As a result, our financial statements

may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financials to those of other public companies more difficult.

We will cease to be an emerging growth company on the date that is the earliest of (i) December 31, 2026, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years, or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

Further, even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis