NeuroPace, Inc. 10-Q Summary — Quarter Ended June 30, 2021
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 company markets and manufactures its products in the United States, primarily for Level 4 comprehensive epilepsy centers. The filing covers the three and six months ended June 30, 2021, with comparable periods in 2020.
NeuroPace completed its initial public offering in April 2021, issuing 6.9 million shares at $17.00 per share and receiving approximately $105.5 million in net proceeds. All outstanding redeemable convertible preferred stock converted into common stock upon the IPO.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $12.6 million | $7.6 million | $23.8 million | $17.6 million |
| Gross profit | $9.4 million | $5.4 million | $17.9 million | $12.5 million |
| Gross margin | 74.1% | 71.0% | 74.9% | 70.8% |
| Loss from operations | $(4.6) million | $(3.4) million | $(8.5) million | $(8.9) million |
| Net loss | $(8.5) million | $(8.8) million | $(17.3) million | $(15.5) million |
| Net loss per share | $(0.48) | $(43.44) | $(1.93) | $(76.76) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(12.0) million | $(9.8) million |
Revenue increased primarily because of higher unit sales for initial implant procedures. Replacement procedures represented approximately 27% of first-half 2021 revenue, compared with approximately 32% of full-year 2020 revenue.
Research and development expense was $4.4 million in the quarter and $8.5 million year to date. Selling, general and administrative expense was $9.5 million in the quarter and $17.8 million year to date, reflecting higher personnel, incentive, public-company, sales, marketing and field-support costs.
At June 30, 2021, cash and cash equivalents were $31.2 million and short-term investments were $96.7 million, for total cash, cash equivalents and short-term investments of approximately $127.9 million. The company had an accumulated deficit of $405.0 million and total stockholders’ equity of $88.7 million.
Long-term debt was $49.4 million, consisting primarily of the New Term Loan. The loan bears stated interest of 12.5%, has an effective annual interest rate of 15.66%, and is secured by substantially all company assets, including intellectual property. The interest-only period was extended through September 30, 2025, with principal due in one installment on September 30, 2025. The company repaid its $4.0 million PPP loan in April 2021.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue rose 65% to $12.6 million; first-half revenue rose 35% to $23.8 million.
- Gross margin improved to 74.1% in the quarter and 74.9% year to date, compared with 71.0% and 70.8%, respectively, primarily because higher production volumes reduced fixed manufacturing costs per unit.
- Quarterly operating loss widened by $1.2 million, while the first-half operating loss improved by $0.4 million.
- Quarterly net loss improved modestly, but first-half net loss increased by $1.8 million. The year-to-date deterioration was driven largely by a $5.2 million unfavorable change in the fair value of the preferred stock warrant liability, compared with a favorable $0.1 million derivative remeasurement in the prior-year period.
- Interest expense declined by 51% for the quarter and 45% for the first half because the 2021 periods no longer included comparable convertible-note and prior-term-loan balances.
- Operating cash use increased to $12.0 million from $9.8 million for the first half, while cash and investments increased substantially following the IPO.
- Common shares outstanding increased from 314,096 at December 31, 2020 to 24.3 million at June 30, 2021, primarily because of the IPO, preferred-stock conversion and warrant exercises.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a specific revenue or earnings forecast in the filing. Management expects continued net losses and negative cash flows for the next several years as it invests in commercialization, clinical studies, research and development, indication expansion and public-company infrastructure.
Management believes available cash, cash equivalents and short-term investments are sufficient to fund planned operations for at least 12 months from the issuance of the interim financial statements. The New Term Loan requires minimum annual GAAP revenue of $43.0 million beginning in 2021 and minimum cash and cash equivalents of $5.0 million. Failure to meet these covenants could permit the lender to accelerate the debt and could require additional financing.
COVID-19 continued to reduce and delay elective epilepsy diagnostic and implant procedures, create variability in procedure volumes and constrain access to hospitals and clinicians. Management cited encouraging signs, including new-account expansion, physician participation in virtual education and recovery in hospital procedure levels, but cautioned that additional outbreaks, backlogs, hospital capacity constraints and seasonality could adversely affect results.
Key operating risks include reliance on a single product and a concentrated customer base, dependence on Level 4 epilepsy centers, reimbursement and regulatory risks, competition from larger medical-device companies, single-source suppliers, manufacturing concentration in one Mountain View facility, clinical-study execution, intellectual-property risks and data-privacy obligations.
The company reported a continuing material weakness in internal control over financial reporting related to segregation of duties over account reconciliations and manual journal entries. Remediation efforts were ongoing and had not fully resolved the weakness as of June 30, 2021.
The filing states that the company was cooperating with the Committee on Foreign Investment in the United States regarding an inquiry received from the U.S. Department of Treasury on April 20, 2021. Management believed the RNS System was not a critical technology within CFIUS jurisdiction, but the matter remained a potential legal and regulatory contingency.
No material legal proceedings requiring accrual were reported. The company disclosed approximately $9.7 million of remaining contractual facility lease payments through June 2024 and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether procedure volumes and revenue growth remain durable after COVID-19-related disruptions and potential seasonal effects.
- Progress toward the $43.0 million annual revenue covenant and compliance with the $5.0 million minimum cash covenant under the New Term Loan.
- The company’s expected cash-burn rate and whether additional equity or debt financing will be required before profitability.
- Remediation of the material weakness in internal control over financial reporting.
- Progress and regulatory timing for proposed indication expansions to adolescents and patients with generalized drug-resistant epilepsy.
- Reimbursement stability, market adoption, competitive developments and the effect of the longer device replacement cycle on future revenue mix.
- Potential outcomes of the CFIUS inquiry and any related regulatory, legal or disclosure obligations.
- Supply continuity and qualification of alternatives for single-source components, including batteries and printed circuit assemblies.