NeuroPace(NPCE) - 2024 Q4 - Annual Report

Part I Item 1. Business NeuroPace develops the RNS System, a brain-responsive neuromodulation device for drug-resistant focal epilepsy, aiming to expand market adoption, indications, and leverage brain data - The company's core product is the RNS System, the first and only commercially available brain-responsive neuromodulation system for drug-resistant focal epilepsy, with over 6,000 patients treated as of December 31, 2024[21] - The RNS System is currently indicated for adults with drug-resistant focal epilepsy, representing an estimated $27 billion total addressable market in the U.S., with indication expansion pursued for generalized epilepsy and pediatric patients[23] - Recent real-world data demonstrates improving efficacy, with a median seizure frequency reduction of 82% at three or more years, superior to original pivotal study results[30][58] - In August 2022, NeuroPace became the exclusive U.S. distributor for DIXI Medical's Stereo EEG product line, providing an incremental revenue stream and earlier visibility into potential RNS System candidates[101] Our RNS System The RNS System is a closed-loop neuromodulation device that continuously monitors brain activity and delivers personalized electrical stimulation to prevent seizures, leveraging extensive patient data - The RNS System's implantable components include a neurostimulator placed in the skull and leads with electrodes on or within the brain, which sense electrical activity and provide targeted stimulation[43] - The system includes external components like the Patient Remote Monitor for data upload and a Physician Tablet for programming and reviewing iEEG data, supported by the PDMS secure online database and the nSight Platform for patient reports and programming suggestions[47][48][49][50][51] - As of December 31, 2024, the system has generated an extensive database of over nineteen million iEEG records from more than 6,000 patients, which is leveraged to improve clinical outcomes[52] - The current RNS System model has an average battery life of nearly eleven years, an increase from the previous model, with over 90% of patients choosing a replacement in 2019 when their device reached end-of-life[57] Clinical Data and Studies Clinical studies demonstrate the RNS System's efficacy, with a 75% median seizure reduction at nine years and 82% at 36 months, with ongoing studies for label expansion - The Long-Term Treatment (LTT) study, following patients for nine years, demonstrated a median seizure frequency reduction that improved from 44% at one year to 75% at nine years[84][85][86] - The recent Post-Approval Study showed even better real-world outcomes, with an 82.0% median seizure reduction at 36 months post-implant[92] - The company is conducting two key label expansion studies: the RESPONSE study for adolescents (ages 12-17) with focal epilepsy and the NAUTILUS study for patients with idiopathic generalized epilepsy (IGE), for which the RNS System received FDA Breakthrough Device Designation[93][94] Commercial Strategy and Collaborations NeuroPace employs a direct sales force, expanding its prescriber base beyond Level 4 CECs, and collaborates with DIXI Medical and Rapport Therapeutics for distribution and data leverage - A 2023 PMA-S approval expanded the potential prescriber base from Level 4 CECs to an additional 1,800 epileptologists and the entire population of functional neurosurgeons in the community[96] - The company has an exclusive distribution agreement with DIXI Medical for its Stereo EEG product line in the U.S., which is synergistic as it provides earlier access to patients in epilepsy monitoring units, with the initial three-year term expiring September 30, 2025[101] - A collaboration with Rapport Therapeutics leverages the RNS System's data and biomarker monitoring capabilities to evaluate a product candidate in Rapport's Phase 2a clinical trial[102] Manufacturing and Supply NeuroPace manufactures its RNS System in a 53,000 sq ft FDA-compliant facility in California, relying on single-source suppliers for critical components - All manufacturing and distribution occurs at the company's facility in Mountain View, California, which is FDA registered and compliant with QSR[130][133] - The company relies on single-source suppliers for key components, including printed circuit assemblies from Micro Systems Technologies Management AG and batteries from Greatbatch Ltd[135] - NeuroPace has participated in the FDA Voluntary Improvement Program for seven years, which involves annual on-site appraisals and quarterly check-ins in lieu of routine FDA facility inspections[134] Government Regulation The RNS System is a Class III medical device subject to stringent FDA regulations, healthcare fraud and abuse laws, and data privacy compliance - The RNS System is a Class III medical device, requiring the most stringent FDA review pathway, the Premarket Approval (PMA) application, which was originally approved in 2013[32][144] - The company's operations are subject to numerous healthcare fraud and abuse laws, such as the federal Anti-Kickback Statute, the False Claims Act, and the Physician Payments Sunshine Act, which regulate interactions with healthcare professionals[166][168][173][176] - The company must adhere to data privacy and security laws, including HIPAA and HITECH, which govern the handling of protected health information (PHI), with failure to comply resulting in significant civil and criminal penalties[191][192] Human Capital Resources As of December 31, 2024, NeuroPace had 184 U.S.-based employees, emphasizing retention and a value-driven culture, with 45% having five or more years of tenure - As of December 31, 2024, the company had 184 employees, all located in the U.S., with none represented by a labor union[196] - The company highlights strong employee retention, with 45% of its workforce (83 employees) having been with NeuroPace for at least five years[200] Item 1A. Risk Factors The company faces risks from RNS System market acceptance, single-source supplier dependence, intense competition, complex reimbursement, regulatory hurdles, and a history of net losses - The company's business depends primarily on the RNS System, which is only marketed in the U.S. for adults with drug-resistant focal epilepsy, and failure to expand market share and adoption will negatively affect sales[208] - NeuroPace depends on a limited number of single-source suppliers for critical components like printed circuit assemblies and batteries, making it vulnerable to supply shortages and price fluctuations[223] - The company competes with larger, well-capitalized companies like LivaNova (VNS System) and Medtronic (DBS System), which have more established sales programs and broader resources[233][234][235] - The company has a history of net losses ($27.1 million in 2024, $33.0 million in 2023) and an accumulated deficit of $531.0 million as of year-end 2024, and expects to incur losses for the foreseeable future[395] - The existing Term Loan Agreement contains restrictive covenants, including minimum annual revenue and liquidity requirements, which if breached, could lead to an event of default and immediate repayment[397] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[462] Item 1C. Cybersecurity NeuroPace manages cybersecurity risks through an information security program, overseen by its Privacy and Security Officer and audit committee, involving threat assessment, mitigation, and vendor management - The company's cybersecurity risk management is overseen by the Privacy and Security Officer and the board of directors' audit committee[471][472] - The risk management strategy includes monitoring the threat environment, conducting vulnerability scans, penetration testing, and engaging third-party experts to identify and assess threats[464][467] - A vendor management program is in place to manage cybersecurity risks from third-party providers, involving security questionnaires, risk assessments, and contractual obligations[468] Item 2. Properties The company leases a 53,000 sq ft facility in Mountain View, California, for its headquarters and manufacturing, with the lease expiring in 2030 - The company's headquarters and manufacturing facility is a leased 53,000 sq. ft. space in Mountain View, CA, with the lease expiring in 2030[476] Item 3. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - The company is not currently involved in any material legal proceedings[672] Item 4. Mine Safety Disclosures This item is not applicable to the company - None[478] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NeuroPace's common stock trades on Nasdaq under "NPCE" since April 2021, with no anticipated dividends, and $92.7 million of IPO proceeds used for general corporate purposes - The company's common stock trades on the Nasdaq under the symbol "NPCE" since April 22, 2021[481] - The company does not plan to pay cash dividends in the foreseeable future[483] - From the April 2021 IPO, which raised $105.5 million in net proceeds, approximately $92.7 million has been used for general corporate purposes as of December 31, 2024[486] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenue grew 22% to $79.9 million, net loss narrowed to $27.1 million, with $52.8 million in cash, supplemented by a $69.8 million follow-on offering Results of Operations (FY 2024 vs. FY 2023) | | Years Ended December 31, | | | | | :--- | :--- | :--- | :--- | :--- | | (in thousands) | 2024 | 2023 | $ Change | % Change | | Revenue | $79,906 | $65,421 | $14,485 | 22% | | Gross Profit | $59,085 | $48,122 | $10,963 | 23% | | Gross Margin | 73.9% | 73.6% | | | | Total Operating Expenses | $80,756 | $75,296 | $5,460 | 7% | | Loss from Operations | $(21,671) | $(27,174) | $5,503 | (20)% | | Net Loss | $(27,141) | $(32,956) | $5,815 | (18)% | - Revenue growth of 22% in FY2024 was driven by an increase in RNS System units sold and higher sales of DIXI Medical products, which accounted for 17% of total revenue[523] - As of December 31, 2024, the company had $52.8 million in cash, cash equivalents, and short-term investments, and $59.5 million in outstanding debt, which management believes is sufficient to fund operations for at least the next 12 months[494][496] - In February 2025, the company raised approximately $69.8 million in net proceeds from a follow-on offering, using $49.5 million to repurchase all shares held by significant stockholder KCK Ltd[531] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity on its $52.8 million cash and investments, with no material impact expected from a 10% rate change - The company's main market risk is interest rate sensitivity on its $52.8 million of cash, cash equivalents, and short-term investments[557] - Due to the short-term and low-risk nature of its investments, the company does not expect a 10% change in interest rates to have a material impact on the fair value of its financial instruments[557] Item 8. Financial Statements and Supplementary Data This section presents the company's audited financial statements for 2024 and 2023, including an unqualified opinion from PricewaterhouseCoopers LLP - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the financial statements, stating they present fairly, in all material respects, the financial position of the company[566] Key Balance Sheet Data (as of Dec 31, 2024) | Account | Amount (in thousands) | | :--- | :--- | | Assets | | | Cash, cash equivalents & short-term investments | $52,755 | | Total Current Assets | $81,339 | | Total Assets | $94,647 | | Liabilities & Equity | | | Total Current Liabilities | $15,156 | | Long-term debt | $59,525 | | Total Liabilities | $86,634 | | Total Stockholders' Equity | $8,013 | Key Statement of Operations Data (Year ended Dec 31, 2024) | Account | Amount (in thousands) | | :--- | :--- | | Revenue | $79,906 | | Gross Profit | $59,085 | | Total Operating Expenses | $80,756 | | Net Loss | $(27,141) | | Net Loss Per Share | $(0.93) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on accounting and financial disclosure - None[733] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[734] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[737] - The report does not include an auditor's attestation on internal controls, as the company is exempt as an emerging growth company[738] Item 9B. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 trading plans during Q4 2024 - No directors or officers adopted, modified, or terminated any Rule 10b5-1 trading plans during the quarter ended December 31, 2024[739] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[743] Item 11. Executive Compensation Information on executive and director compensation is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[746] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[747] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[748] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[749] Part IV Item 15. Exhibit and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Annual Report on Form 10-K - This item lists the financial statements and exhibits filed with the 10-K[752][754] Item 16. Form 10–K Summary The company indicates no Form 10-K summary - None[763]