NeuroPace(NPCE) - 2022 Q1 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) NeuroPace, Inc.'s unaudited Q1 2022 financial statements show a $11.5 million net loss, driven by increased operating expenses Condensed Balance Sheets Total assets decreased to $129.0 million by March 31, 2022, while total liabilities increased to $66.2 million Condensed Balance Sheet Data (in thousands) | | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $122,420 | $132,816 | | Total Assets | $128,982 | $133,562 | | Total Current Liabilities | $12,057 | $9,301 | | Total Liabilities | $66,159 | $60,059 | | Total Stockholders' Equity | $62,823 | $73,503 | Condensed Statements of Operations and Comprehensive Loss Q1 2022 revenue slightly increased to $11.4 million, but net loss widened to $11.5 million due to increased operating expenses Statement of Operations Highlights (in thousands) | | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Revenue | $11,374 | $11,217 | | Gross Profit | $8,259 | $8,493 | | Total Operating Expenses | $18,021 | $12,367 | | Loss from Operations | $(9,762) | $(3,874) | | Net Loss | $(11,461) | $(8,810) | | Net Loss Per Share | $(0.47) | $(32.73) | Condensed Statements of Cash Flows Operating activities used $11.4 million cash in Q1 2022, leading to a $11.7 million net cash decrease for the quarter Cash Flow Summary (in thousands) | | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,393) | $(5,936) | | Net cash used in investing activities | $(306) | $(5,035) | | Net cash provided by (used in) financing activities | $1 | $(1,578) | | Net decrease in cash and cash equivalents | $(11,698) | $(12,549) | Notes to Unaudited Condensed Financial Statements Notes detail accounting policies, IPO, liquidity, debt, and stock-based compensation, including ASC 842 adoption - The company has an accumulated deficit of $435.2 million as of March 31, 2022, but management believes existing cash, cash equivalents, and short-term investments of $103.2 million are sufficient to fund operations for at least the next 12 months[28][29] - The company has a $50.0 million term loan with CRG Partners at 12.5% interest per year, with the interest-only period extended to September 30, 2025, and the 2022 minimum annual net revenue covenant reduced to $43.0 million in March 2022[83][84][85] - Total unrecognized stock-based compensation expense related to unvested stock options and restricted stock units was $27.3 million as of March 31, 2022, to be recognized over a weighted average remaining period of 3.4 years[105] - Upon adoption of lease accounting standard ASC 842 on January 1, 2022, the company recognized right-of-use assets of $6.1 million and lease liabilities of $7.5 million[56] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial results, noting 1% revenue growth to $11.4 million, increased operating expenses, and sufficient liquidity Results of Operations Q1 2022 results show 1% revenue growth to $11.4 million, gross margin decline, and 46% operating expense increase, leading to a $9.8 million loss Q1 2022 vs Q1 2021 Results of Operations (in thousands) | | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $11,374 | $11,217 | $157 | 1% | | Gross Profit | $8,259 | $8,493 | $(234) | (3)% | | Research and development | $5,577 | $4,100 | $1,477 | 36% | | Selling, general and administrative | $12,444 | $8,267 | $4,177 | 51% | | Loss from operations | $(9,762) | $(3,874) | $(5,888) | 152% | | Net loss | $(11,461) | $(8,810) | $(2,651) | 30% | - Gross margin decreased to 72.6% in Q1 2022 from 75.7% in Q1 2021, primarily due to higher fixed costs per unit resulting from reduced production volume caused by COVID-19 volatility[148] - SG&A expenses increased by $4.2 million (51%) due to additional personnel, increased stock-based compensation, public company operating costs, and higher marketing and travel expenses[150] Liquidity and Capital Resources As of March 31, 2022, the company held $103.2 million in cash and investments, confirming sufficient capital for 12 months - As of March 31, 2022, the company had cash, cash equivalents and short-term marketable debt securities of $103.2 million[160] - The company believes its existing cash and investments will enable it to fund operating expenses for at least 12 months from the report's issuance date[160] Cash Flow Summary (in thousands) | | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,393) | $(5,936) | | Net cash used in investing activities | $(306) | $(5,035) | | Net cash provided by (used in) financing activities | $1 | $(1,578) | Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate sensitivity on $103.2 million in cash and investments, not materially affected by a 10% interest rate change - The company's main market risk is interest rate sensitivity on its $103.2 million portfolio of cash, cash equivalents, and short-term marketable debt securities[174] - Management states that due to the short-term and low-risk nature of its investments, an immediate 10% change in interest rates would not materially affect their fair value[174] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2022, and a material weakness in internal control was fully remediated - Management concluded that disclosure controls and procedures were effective as of March 31, 2022[177] - A previously disclosed material weakness related to segregation of duties over the review and approval of account reconciliations and manual journal entries was remediated as of March 31, 2022[178][179] Part II. Other Information Legal Proceedings Legal proceedings include a CFIUS inquiry and an October 2021 stockholder lawsuit, which the company is defending - The company received an inquiry from the Committee on Foreign Investment in the United States (CFIUS) in April 2021 and is cooperating fully[79][81] - A stockholder lawsuit was filed against the company and its board of directors in October 2021, alleging claims related to reverse stock splits, which the company believes have no merit[82] Risk Factors Key risks include COVID-19 impact, single product and supplier reliance, competition, and a history of net losses - The COVID-19 pandemic has negatively impacted and is expected to continue to impact sales and operations due to delayed or canceled elective procedures, hospital staffing shortages, and reduced patient diagnostic evaluations[189][192] - The business depends on a single product, the RNS System, and its success hinges on market acceptance, clinician adoption, and expanding patient referrals to Level 4 Comprehensive Epilepsy Centers (CECs)[200] - The company relies on single-source suppliers for key components like printed circuit assemblies and batteries, making it vulnerable to supply disruptions and price fluctuations[214][215] - The company has a history of net losses, with an accumulated deficit of $435.2 million as of March 31, 2022, and expects to incur losses for the foreseeable future[368] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred this quarter; $105.5 million IPO proceeds are being used as planned - There were no unregistered sales of equity securities in the quarter ended March 31, 2022[435] - The company received net proceeds of $105.5 million from its April 2021 IPO and confirms there has been no material change in the planned use of these funds[437] Defaults Upon Senior Securities The company reports that this item is not applicable - The company states this item is "Not applicable"[439] Mine Safety Disclosures The company reports that this item is not applicable - The company states this item is "Not applicable"[441] Other Information The company reports that this item is not applicable - The company states this item is "Not applicable"[442] Exhibits This section lists 10-Q exhibits, including the Term Loan Agreement amendment, officer certifications, and XBRL data - Key exhibits filed include the First Amendment to the Term Loan Agreement, CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL data files[444]