What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-05 compared with 2023-03-02 · 180 added, 247 removed, 656 unchanged (39% of the section changed)

5 unchanged sentences

Statements of Operations and Comprehensive Loss

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

Statements of Stockholders’ Equity

Statements of Cash Flows

4 unchanged sentences

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”).

(the “Company”) as of December 31, 2023 and 2022, and the related statements of operations and comprehensive loss, of stockholders’ equity 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, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

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

Basis for Opinion

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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.

As disclosed in Note 6 to the financial statements, the Company has a term loan maturing in September 2025.

Management’s evaluation of the events and conditions related to future funding are described in Note 1.

/s/ PricewaterhouseCoopers LLP

23 unchanged sentences

Operating lease liability 1,627 1,415

Deferred revenue 1,090 —

Total current liabilities 16,229 10,976

Deferred rent, noncurrent — 911

Long-term debt 56,954 52,913

3 unchanged sentences

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

Preferred stock, $ 0.001 par value, 10,000,000 shares authorized and no shares issued and outstanding as of December 31, 2023 and December 31, 2022

Common stock, $ 0.001 par value, 200,000,000 shares authorized as of December 31, 2023 and December 31, 2022;

28 unchanged sentences

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

Statements of Stockholders’ Equity

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity

(in thousands, except share amounts) Shares Amount

Balances at January 1, 2022 24,452,999 $ 24 $ 497,522 $ ( 272 ) $ ( 423,771 ) $ 73,503

1 unchanged sentence

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

Net exercise of Series B’ redeemable convertible preferred stock warrants 213,941 5,606 — — — — — —

Conversion of redeemable convertible preferred stock into common stock ( 16,828,119 ) ( 147,028 ) 16,828,119 17 147,011 — — 147,028

Net exercise of common stock warrants — — 185 — — — — —

Issuance of common stock upon initial public offering, net of issuance costs and underwriting discount of $ 11,813

— — 6,900,000 7 105,480 — — 105,487

Issuance of common stock pursuant to stock option exercises 157,447 — 4 — — 4

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

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

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

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

Change in early exercise liability — — 4 — — 4

3 unchanged sentences

Net loss — — — — ( 32,956 ) ( 32,956 )

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

Unrealized loss adjustment for short-term investment — — — 1,108 — 1,108

Issuance of common stock pursuant to stock option exercises 889,968 1 148 — — 149

Issuance of common stock pursuant to Employee Stock Purchase Plan 280,599 — 654 — — 654

Issuance of common stock as part of At-the-Market offering, net of issuance costs of $ 509

933,500 1 7,621 — — 7,622

Issuance of common stock upon vesting of restricted stock units 728,986 1 ( 1 ) — — —

19 unchanged sentences

Amortization of right-of-use asset 1,433 2,720

Loss on short-term investments 315 356

Inventory write-downs 196 243

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

4 unchanged sentences

Accrued liabilities 3,768 ( 15 )

Deferred revenue 1,090 —

Operating lease liabilities ( 1,415 ) ( 2,104 )

Other liabilities — ( 248 )

Deferred rent — ( 566 )

Net cash used in operating activities ( 19,701 ) ( 36,869 )

2 unchanged sentences

Proceeds from sale of short-term investments 23,200 24,400

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

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

Net cash provided by investing activities 23,027 23,797

Cash flows from financing activities

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Taxes withheld and paid related to net share settlement of equity awards ( 259 ) ( 59 )

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

Proceeds from at-the-market offering, net of issuance costs 7,888 —

Payment of deferred offering costs ( 305 ) ( 347 )

Repayment of debt — ( 4,090 )

Net cash provided by financing activities 8,127 490

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

Net increase (decrease) in cash and cash equivalents 11,453 ( 12,582 )

Cash, cash equivalents and restricted cash

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Total cash, cash equivalents and restricted cash $ 18,180 $ 6,727

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

NeuroPace, Inc.

Statements of Cash Flows

Supplemental disclosure of cash flow information:

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Supplemental disclosures of non-cash investing and financing information:

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

NeuroPace, Inc.

Statements of Cash Flows

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

1 unchanged sentence

Purchase of property and equipment included in accounts payable $ 69 $ 124

Deferred offering costs offset against additional paid-in capital $ 265 $ —

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

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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 is a 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 agreed to pay Leerink up to 3.0 % of the gross proceeds of sales of common stock made 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.

In November 2023, the Company issued and sold 933,500 shares of common stock under the Sales Agreement for gross proceeds of $ 8.1 million.

The shares were sold at a weighted average price of $ 8.71 per share for aggregate net proceeds of approximately $ 7.6 million, after deducting sales commission and offering expenses.

As of December 31, 2023, we have $ 41.9 million remaining under our ATM program.

Liquidity and Capital Resources

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

Historically, the Company has funded its operations principally through the sales of its products, issuance of equity securities and debt financing.

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

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.

In connection with the Term Loan described in Note 6, the Company will need to be in compliance with a minimum annual net revenue covenant determined in accordance with generally accepted accounting principles of $ 45.0 million and $ 70.0 million in the years ended December 31, 2023 and December 31, 2024, 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.

The Company’s 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.

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

As of December 31, 2023, 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.

Summary of Significant Accounting Policies

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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.

NeuroPace, Inc.

Notes to Financial Statements

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 uses significant judgment when making estimates related to the provision for excess and obsolete inventories.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

NeuroPace, Inc.

Notes to Financial Statements

Segment and Geographical Information

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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.

All of the Company’s revenue, with the exception of less than $ 0.1 million, was in the United States for the year ended December 31, 2023, based on the shipping location of the external customer.

All of the Company’s revenue was in the United States for the year ended December 31, 2022, 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.

The Company derives most of 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 its current customer base.

Beginning in the fourth quarter of 2023, the Company also derives revenue from services provided to Rapport Therapeutics, or Rapport.

The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC, 606, “Revenue from Contracts with Customers.” Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

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

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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.

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

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

The Company has concluded that the RNS System and its related products represent a single performance obligation, as the customer cannot benefit from the products individually, and that access to the PDMS and nSight Platform represent separate performance obligations, as the clinicians can utilize them with other components of the RNS System that are readily available.

The Company determines the transaction price based on the amount it expects to be entitled to in exchange for transferring the promised product or service to the customer, which is based on the invoiced price for the products or

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.

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

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

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

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

The Company typically 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.

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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 also ships the RNS System and related products to customers who place orders ahead of scheduled procedures.

Such orders or contracts generally include a promise to transfer products only.

As such, the Company recognizes revenue from these orders or contracts at a point in time when the customer obtains control of the products.

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 has concluded that such 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 under its contract with Rapport to provide biomarker monitoring and data analysis services.

Revenue from biomarker monitoring is recognized ratably over the two-year contractual support period, as the benefits provided by the Company’s performance are simultaneously consumed by the customer.

Revenue related to data analysis is recognized upon completion of the services.

The Company’s contract with Rapport commenced during the fourth quarter of 2023, and the related revenue recognized as of December 31, 2023 is immaterial.

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

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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

The Company’s contract balances were accounts receivable of $ 12.3 million and $ 7.5 million as of December 31, 2023, and December 31, 2022, respectively.

NeuroPace, Inc.

Notes to Financial Statements

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

The Company’s contract liabilities consist of deferred revenue for remaining performance obligations by the Company to transfer goods or services for which the Company has received consideration.

The Company’s deferred revenue balance was $ 1.1 million as of December 31, 2023, which is expected to be recognized as revenue in 2024.

The Company had no deferred revenue as of December 31, 2022.

Fair Value of Financial Instruments

The Company has a short-term investment in a fixed income mutual fund, which is classified as equity security and carried at fair value based on quoted market prices.

Changes in the fair value of the short-term investment are recorded in income or loss.

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).

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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.

Cash equivalents that are available-for-sale investments are recorded at fair value, based on quoted market prices.

As of December 31, 2023 and December 31, 2022, the Company’s cash equivalents are entirely comprised of investments in money market funds.

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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 is invested in major financial institutions in the United States.

Deposits in these financial institutions may exceed federally insured limits, and the Company is exposed to credit risk on deposits in the event of default of the financial institutions to the extent account balances exceed the amount insured by the Federal Deposit Insurance Corporation.

The Company’s cash equivalents are invested in money market funds.

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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 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 comprehensive epilepsy centers, or 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.

NeuroPace, Inc.

Notes to Financial Statements

The Company’s medical devices require approvals or clearances from the U.S.

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

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

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.

The Company makes estimates on the collectability of customer accounts based primarily on analysis of historical trends and experience, the age of the receivable and changes in customers’ financial condition.

The Company uses its judgment, based on the best available facts and circumstances, and records an allowance against amounts due to reduce the receivable to the amount that is expected to be collected.

The Company determined that no allowance was required as of December 31, 2023 and December 31, 2022.

To date, the Company has not experienced any material credit-related losses.

Inventories are valued at the lower of cost or net realizable value.

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

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

Property and Equipment, net

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The Company did no t record any impairment of long-lived assets for the years ended December 31, 2023 and December 31, 2022.

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

NeuroPace, Inc.

Notes to Financial Statements

Company will exercise that option.

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.

Since the Company’s lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment at commencement date in determining the present value of future payments.

The ROU asset also includes any lease payments made to the lessor at or before the commencement date, minus lease incentives received, and initial direct costs incurred.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company elected certain practical expedients under ASC 842 , 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.

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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.

Upon issuing shares under the ATM offering in November 2023, $ 0.3 million of deferred offering costs were charged against the proceeds from the ATM offering and recorded in stockholders equity as a reduction of additional paid-in capital.

As of December 31, 2023 and 2022, $ 0.4 million and $ 0.3 million of deferred offering costs related to the ATM offering were recorded on the balance sheets, respectively.

Government Programs

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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.

On May 25, 2023, the Company received funding approval for year three in the amount of $ 3.0 million, which includes $ 1.5 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.

Through December 31, 2023, $ 2.0 million of qualifying expenses have been incurred and funded by the NIH related to the first, second and third year of funding.

As of December 31, 2023, the Company recorded prepaid expenses and other current assets of $ 0.1 million related to the third year of funding.

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

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

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.

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, 2023 and December 31, 2022 was immaterial.

Cost of Goods Sold

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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.

Cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs.

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

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The Company amortizes the fair value of each award on a straight-line basis over the requisite service period of the award.

The Company accounts for income taxes under the liability method.

The Company accounts for income taxes under the asset and 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.

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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 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.

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.

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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

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):

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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.

The Company adopted this ASU effective January 1, 2023.

The adoption of this ASU did not have a material impact on the Company’s financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

NeuroPace, Inc.

Notes to Financial Statements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures .

The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker, or CODM, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss.

This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in this ASU and existing segment disclosures in Topic 280.

This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements.

The Company is currently evaluating the impact this standard will have on the disclosures within our financial statements.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures .

The ASU requires greater disaggregation of information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid.

The ASU applies to all entities subject to income taxes and is intended to help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax information that affects cash flow forecasts and capital allocation decisions.

The ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

The ASU should be applied on a prospective basis although retrospective application is permitted.

The Company is currently evaluating the impact this standard will have on the disclosures within our financial statements.

Fair Value Measurements

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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.

The Company’s available-for-sale investment comprises a short-term investment in a fixed income mutual fund, which primarily invests in 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):

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.

NeuroPace, Inc.

Notes to Financial Statements

Interest income from short-term investment is recorded in interest income.

As of December 31, 2022, the Company’s short-term investment had a fair value of $ 70.8 million, a cost basis of $ 71.9 million, and an unrealized loss of $ 1.1 million, which was recorded in accumulated other comprehensive loss.

During the year ended December 31, 2023, the Company recognized $ 1.0 million in unrealized gains from its short-term investment.

As of December 31, 2023, the Company’s short-term investment had a cumulative unrealized net loss of $ 0.1 million, which included an adjustment of $ 1.1 million unrealized loss recorded in other income (expense), net in the year ended December 31, 2023.

The adjustment was not material to any previously issued financial statements.

Balance Sheet Components

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Total $ 11,214 $ 9,712

NeuroPace, Inc.

Notes to Financial Statements

Property and Equipment, net

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Payroll and related expenses $ 9,655 $ 5,748

Inventory-raw materials 764 251

Inventory purchases 588 764

Professional fees 30 227

Deferred rent, current — 490

Other 907 675

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

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

NeuroPace, Inc.

Notes to Financial Statements

for $ 0.9 million in lieu of a security deposit.

In conjunction with the original lease agreement, the Company obtained a letter of credit for $ 0.9 million in lieu of a security deposit.

In May 2019, the letter of credit was amended and reduced to $ 0.7 million.

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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):

Total $ 8,105

NeuroPace, Inc.

Notes to Financial Statements

The maturities of operating lease liabilities as of December 31, 2023 are as follows (in thousands):

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Operating lease liability, net of current portion $ 13,814

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

Operating lease cost was $ 2.8 million and $ 2.7 million for the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, the remaining term for the operating lease in Mountain View, California was 6.5 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.

During the years ended December 31, 2023 and 2022, cash paid for amounts included in operating lease liabilities of $ 2.8 million and $ 2.1 million, respectively, was included in cash flows from operating activities on the condensed statements of cash flows.

Distribution Agreement

In August 2022, the Company entered into an exclusive distribution agreement, or the Distribution Agreement, with DIXI Medical USA Corp, or DIXI Medical, pursuant to which the Company becomes the exclusive U.S.

distributor of DIXI Medical’s product line.

To maintain the exclusive distributor rights, the Company is committed to purchase a minimum of $ 2.4 million of DIXI Medical’s products during the twelve months beginning October 2022, and increase the purchase minimum by 10 % for each of the two subsequent years.

NeuroPace, Inc.

Notes to Financial Statements

The Company met the purchase commitment for the first twelve months.

Indemnifications

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The Company determined that no accrual related to contingencies was required as of December 31, 2023 and December 31, 2022.

NeuroPace, Inc.

Notes to Financial Statements

Legal Proceedings

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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.

The Term Loan bore interest at a rate of 12.5 % per year.

In February 2023, the Term Loan was amended which increased the annual interest rate from 12.5 % to 13.5 % effective March 1, 2023.

The amendment was accounted as a debt modification and the Term Loan’s effective interest rate increased from 15.7 % to 16.8 %.

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 December 2022, the Company had 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.

From January 2023 through June 2025, the Company has the option to pay interest as follows:

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For each payment date from April 2022 through December 2023, the Company elected the PIK option, increasing the principal of the Term Loan by $ 4.6 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.

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 to 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

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.

The Term Loan includes a fee upon repayment of the loan equal to 10 % of the aggregate principal amount being prepaid or repaid, or the backend fee.

As of December 31, 2023, the Term Loan had an annual effective interest rate of 16.9 % per year.

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The financial covenants require that the Company achieve minimum annual revenue thresholds commencing in 2021 and maintain a minimum balance of cash and cash equivalents (see Note 1).

In February 2023, the Term Loan was amended to reduce the minimum annual net revenue covenant to $ 45.0 million for the year ended December 31, 2023.

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).

The warrants had a fair value of $ 0.6 million as of the issuance date, which was accounted for as debt issuance costs.

During the years ended December 31, 2023 and December 31, 2022, 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 $ 8.5 million and $ 7.5 million during the years ended December 31, 2023 and December 31, 2022, respectively.

NeuroPace, Inc.

Notes to Financial Statements

As of December 31, 2023, future minimum payments for the Term Loan are as follows (in thousands):

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Term Loan $ 56,954

Paycheck Protection Program

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

The note bore interest at 1.0 % per year on the outstanding principal amount and had a maturity date 24 months from the date of the note.

No payments were due for the six-month period beginning on the date of the note.

Payments of principal and interest were due over the following 18 months.

The Small Business Administration modified the PPP Loan such that monthly payments of principal and interest were due from September 2021 through April 2022.

In April 2021, the Company repaid its entire obligation under the PPP Loan amounting to $ 4.1 million, including principal of $ 4.0 million and interest of less than $ 0.1 million, using the proceeds from its IPO.

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.

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.

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.

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.

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Shares available for future grant under the 2021 Plan 1,314,502 1,443,946

Outstanding options under the 2023 Inducement Plan 380,424 —

Outstanding restricted stock units under the 2021 Plan 2,430,803 1,756,209

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

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.

The Company initially reserved 2,900,000 shares of common stock for issuance of share-based compensation awards, including ISOs,

NeuroPace, Inc.

Notes to Financial Statements

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).

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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.

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

In January 2024, the number of shares of common stock available for issuance under the 2021 Plan was increased by 1,391,173 shares as a result of the automatic increase provision in the 2021 Plan.

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Authorized 1,222,649

Retired ( 485,581 )

Granted/Awarded ( 2,260,197 )

Canceled 340,308

Withheld for taxes 8,436

Shares available for grant as of December 31, 2022

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Shares available for grant as of December 31, 2023

2023 Inducement Plan

In July 2023, the Company’s Compensation Committee of the Board of Directors approved the NeuroPace, Inc.

2023 Inducement Plan, or the Inducement Plan.

The terms of the Inducement Plan are similar to the terms of the 2021 Plan with the exception that incentive stock options may not be issued under the Inducement Plan and awards under the Inducement Plan may only be issued to eligible recipients under the applicable Nasdaq rules.

The Inducement Plan was adopted by the Compensation Committee without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules.

The Company has initially reserved 380,424 shares of its common stock for issuance pursuant to awards granted under the Inducement Plan, and granted an option to purchase 380,424 shares of its common stock to its Chief Executive Officer, or CEO, as a material inducement for the CEO to join the Company.

A summary of stock option activity for the years ended December 31, 2023 and 2022 is set forth below:

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Canceled ( 663,075 ) $ 5.00

Balances at December 31, 2022

Balances as of December 31, 2023

2,588,765 $ 4.51 7.17

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Early Exercise of Stock Options

The terms of the Company’s 2020 Plan permit the exercise of options granted under the 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 terms of the Company’s 2020 Plan and the 2021 Plan permit the exercise of options granted under the plans prior to vesting, subject to required approvals.

The shares of common stock issued from the early exercise of unvested stock options are restricted and continue to vest over the original implied service period.

The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination.

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.

The shares purchased by the employees and non-employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be outstanding until those shares vest.

The cash received in exchange for exercised and unvested shares related to stock options granted is recorded as a liability for the early exercise of stock options in accrued liabilities on the accompanying balance sheet and will be transferred into common stock and additional paid-in capital as the shares vest.

As of December 31, 2023 and December 31, 2022 there were 30,211 and 78,389 shares of common stock, respectively, issued pursuant to early exercised options and subject to repurchase.

Employee Stock Purchase Plan

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A new offering period of six months has been authorized beginning December 7, 2023 through June 6, 2024.

Restricted Stock Units

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

NeuroPace, Inc.

Notes to Financial Statements

Compensation expense is calculated using the fair value of the employees' purchase rights under the Black-Scholes model, which was estimated using the following assumptions:

Year Ended December 31,

Expected term (in years) 0.5 0.5

Expected volatility 63 % - 90 %

Weighted average risk-free interest rate 5.36 % - 5.43 %

1.75 % - 4.72 %

Fair value of common stock $ 4.20 - $ 8.49

$ 1.72 - $ 6.14

Dividend yield — % — %

Restricted Stock Units

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

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

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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

Granted 2,063,174 $ 4.77

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Unvested, December 31, 2023

2,430,803 $ 6.52

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

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Stock options and restricted stock units $ 9,271 $ 7,949

ESPP 400 1,160

Total stock-based compensation $ 9,558 $ 8,349

NeuroPace, Inc.

Notes to Financial Statements

As of December 31, 2023, the total unrecognized stock-based compensation expense related to unvested stock options and restricted stock units was $ 16.0 million, which will be amortized on a straight-line basis over a weighted average remaining period of 2.2 years.

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

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

NeuroPace, Inc.

Notes to Financial Statements

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

The fair value of employee stock options was estimated using the following assumptions for the years ended December 31, 2023 and December 31, 2022:

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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 fair value of the Company’s common stock is determined based on its closing market price on the date of grant.

The Company accounts for forfeitures as they occur.

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( 0.5 ) % ( 0.5 ) %

Warrant mark-to-market adjustment — % ( 3.0 ) %

FIN 48 reserve ( 0.3 ) % ( 0.2 ) %

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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.

allowance is primarily the result of $ 7.0 million increase in gross deferred tax assets net of a $ 0.5 million decrease in deferred tax liabilities.

As of December 31, 2023, the Company had net operating loss, or NOL, carryforwards of $ 155.0 million and $ 150.3 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively.

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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.

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

As of December 31, 2023, the Company had unrecognized tax benefits of $ 1.7 million related to $ 4.1 million and $ 13.2 million of federal and state research and development tax credit carryforwards, respectively.

8 unchanged sentences

Increase in balance related to tax positions taken during the current year 136 112

Increase in balance related to tax positions taken during prior years —

Decrease in balance related to tax positions taken during prior years ( 7 ) —

Ending balance $ 1,730 $ 1,601

14 unchanged sentences

Total Shares 5,130,881 5,471,794

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.

NeuroPace, Inc.

Notes to Financial Statements

Subsequent Event

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

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

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

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data