NeuroPace, Inc. 2023 Q2 Form 10-Q Summary
Business context and reporting period
NeuroPace is a commercial-stage medical device company focused on the RNS System, a brain-responsive neuromodulation device for adults with drug-resistant focal epilepsy. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The company generated revenue solely in the United States and had more than 5,000 RNS System patients as of June 30, 2023.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $16.5 million, up 62% | $31.0 million, up 44% |
| Gross profit | $12.0 million | $22.3 million |
| Gross margin | 72.5%, versus 73.2% | 72.1%, versus 72.9% |
| Loss from operations | $7.9 million | $16.2 million |
| Net loss | $9.1 million, or $0.36 per share | $19.5 million, or $0.77 per share |
| Cash used in operating activities | Not separately provided | $14.1 million |
- Second-quarter revenue growth reflected higher initial-implant unit volumes, pricing increases and DIXI Medical product sales, partly offset by lower replacement-implant volumes.
- Replacement-procedure revenue was approximately 5% of second-quarter revenue and less than 10% of first-half revenue, versus approximately 21% and 22%, respectively, in the comparable 2022 periods.
- Research and development expense declined 6% in both the quarter and first half, while selling, general and administrative expense increased 13% and 11%, respectively.
- Interest expense increased to $2.1 million in the quarter and $4.1 million in the first half, primarily because of higher term-loan balances from paid-in-kind interest. Interest income increased due to higher yields.
- Cash, cash equivalents and short-term investments totaled $63.6 million at June 30, 2023, compared with $77.4 million at December 31, 2022. Cash and cash equivalents were $7.9 million, including $0.1 million of restricted cash.
- Total assets were $102.2 million and stockholders’ equity was $21.2 million at June 30, 2023. Accumulated deficit was $490.4 million.
- Net cash increased $1.3 million during the first half, primarily because $15.5 million of short-term investments were sold, offsetting $14.1 million of operating cash use.
Debt, commitments and liquidity
- Term-loan carrying value was $54.9 million at June 30, 2023, versus $52.9 million at year-end 2022. The loan bears a 13.5% annual interest rate, has an effective interest rate of 16.8%, is secured by substantially all company assets and includes a 10% repayment fee.
- Principal repayment is due in a single installment on September 30, 2025, following an interest-only period. The company elected the PIK option through June 2023, increasing principal by $3.2 million since April 2022.
- The 2023 minimum annual net-revenue covenant is $45.0 million, and the minimum cash-and-cash-equivalents covenant is $5.0 million. The company stated that it was in compliance as of June 30, 2023.
- Management believes available cash, cash equivalents and short-term investments will fund planned operations for at least 12 months from issuance of the interim financial statements. However, failure to meet the revenue covenant could permit the lender to call the debt and create a need for additional capital.
- The company has $21.6 million of undiscounted remaining facility lease payments through 2030 and a commitment to purchase minimum amounts of DIXI Medical products, beginning at $2.4 million for the initial 12-month period and increasing thereafter.
Material changes and unusual items
- DIXI Medical distribution revenue began in the fourth quarter of 2022 and contributed to revenue growth in 2023. The agreement also requires $1.25 million payments to DIXI Medical in each of the fourth quarters of 2023 and 2024 for commercial support.
- The February 2023 term-loan amendment increased the annual interest rate from 12.5% to 13.5% and reduced the 2023 minimum annual net-revenue covenant to $45.0 million.
- The company recognized a $0.7 million net loss on short-term investments in the first half of 2023, compared with a $0.1 million loss in the prior-year period. A $1.1 million accumulated unrealized loss was reclassified to other income or expense during 2023.
- Stock-based compensation increased to $4.8 million in the first half from $4.1 million. Unrecognized stock-based compensation was $19.0 million at June 30, 2023.
- The NIH approved $3.0 million of year-three funding for the company’s epilepsy research program, including $1.5 million for subawards. The company had recorded $0.1 million in prepaid assets related to this funding at quarter-end.
Outlook, management commentary and risks
Management expects continued investment in commercialization, sales and marketing, clinical studies, regulatory activities, product enhancements and potential indication expansion. The company expects continued net losses and negative cash flows for the next several years and may require additional equity or debt financing.
- Planned growth initiatives include broader adoption at comprehensive epilepsy centers, expanded referral pathways, potential use in generalized epilepsy and adolescents ages 12–17, and possible international expansion.
- The company expects gross margin to benefit over time from greater manufacturing volume, but margins may fluctuate with product mix, pricing, material costs and the lower margin of DIXI products.
- Key risks include dependence on the RNS System and a concentrated customer base, competition from larger medical-device companies, reimbursement changes, regulatory approval and label-expansion uncertainty, clinical-study delays, product liability, intellectual-property disputes, cybersecurity and privacy risks, and reliance on single-source suppliers.
- COVID-19-related revenue effects had diminished by the second half of 2022, but hospital staffing, procedure volumes, diagnostic evaluations and potential future variants remain uncertain.
- The company manufactures at one Mountain View, California facility and relies on several single-source suppliers for critical components, including batteries and printed circuit assemblies.
- Management reported that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter. No material legal proceedings or accrued contingent liabilities were reported.
Important facts for investors to verify
- Progress toward the $45.0 million 2023 minimum-revenue covenant and continued compliance with the $5.0 million minimum-cash covenant.
- Ability to fund operations through the next 12 months while operating losses and cash burn continue.
- Magnitude and timing of the $64.0 million of scheduled 2025 term-loan payments, including the repayment fee and PIK interest effects.
- Sustainability of initial-implant growth and the effect of declining replacement-procedure revenue on future sales and margins.
- Revenue contribution, gross margin and purchase commitments associated with the DIXI Medical distribution agreement.
- Timing and probability of FDA label expansion for generalized epilepsy and adolescents.
- Exposure to reimbursement changes, supplier disruptions, product recalls, clinical-study outcomes and cybersecurity incidents.