NEUROPACE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)


You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed financial statements and
the related notes and other financial information included elsewhere in this
Quarterly Report on Form 10-Q. This discussion and other parts of this report
contain forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions, which are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual results could
differ materially from those discussed in these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section of this report entitled "Risk
Factors," under Part II, Item 1A of this report and those discussed in our other
disclosures and filings.

Overview

We are a commercial-stage medical device company focused on transforming the
lives of people suffering from epilepsy by reducing or eliminating the
occurrence of debilitating seizures. Our novel and differentiated RNS System is
the first and only commercially available, brain-responsive neuromodulation
system that delivers personalized, real-time treatment at the seizure source. By
continuously monitoring the brain's electrical activity, recognizing
patient-specific abnormal electrical patterns, and responding in real time with
imperceptible electrical pulses to prevent seizures, our RNS System delivers the
precise amount of therapy when and where it is needed and provides exceptional
clinical outcomes with approximately three minutes of stimulation on average per
day. Our RNS System is also the only commercially available device that records
continuous brain activity data and allows clinicians to monitor patients not
only in person, but also remotely, in order to make more informed treatment
decisions, thus optimizing patient care. We believe the therapeutic advantages
of our RNS System, combined with the insights obtained from our extensive brain
data set, offer a significant leap forward in epilepsy treatment.

Our RNS System is currently indicated in the United States for use in adult
epilepsy patients, meaning patients who are 18 years of age or older, with
drug-resistant focal epilepsy. As of March 31, 2022, over 4,000 epilepsy
patients have received our RNS System. We believe our compelling body of
long-term clinical data, demonstrating continuous improvement in outcomes over
time, will support the continued adoption of our RNS System among the
approximately 575,000 adults in the United States with drug-resistant focal
epilepsy. We continue seeking indication expansion to, over time, more broadly
reach the entire approximately 1.2 million drug-resistant epilepsy patients in
the United States and may additionally seek to expand our operations to reach
the approximately 16.5 million drug-resistant epilepsy patients globally.

Our commercial efforts are focused on the comprehensive epilepsy centers, or
Level 4 CECs, that facilitate appropriate care for drug-resistant epilepsy
patients, including procedures for implantation of epilepsy neuromodulation
devices such as our RNS System. While most drug-resistant epilepsy patients
begin their care at physician offices or community hospitals, we estimate that
approximately 24,000 adult drug-resistant focal epilepsy patients are treated in
Level 4 CECs in the United States each year. We estimate that this patient pool
represents an annual core market opportunity of approximately $1.1 billion for
initial RNS System implants, and we expect that it will continue to grow as the
number of Level 4 CECs and the number of epilepsy specialists increase, as more
patients are referred to these CECs, and as more care for RNS-implanted patients
can happen outside of the Level 4 CECs. In addition, the sale of replacement
neuromodulation devices when the battery in our RNS neurostimulator approaches
end of service provides a recurring revenue stream that is additive to our
current $1.1 billion annual market opportunity for initial implants.

We received Premarket Approval, or PMA, from the FDA for our RNS System in late
2013 and began the commercial rollout of our RNS System in early 2014. We market
our RNS System in the United States through a direct sales organization
primarily to the epileptologists and neurosurgeons who respectively prescribe
and implant neuromodulation devices in the approximately 200 Level 4 CECs in the
United States. We have established a significant account base at these Level 4
CECs. Given the concentrated and underpenetrated nature of our target market, we
believe that through accelerated salesforce expansion, there is a significant
opportunity to efficiently grow our account base, drive higher utilization
within these centers, and expand our referral channel to increase the number of
drug-resistant patients referred to Level 4 CECs.

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The implant procedure for our RNS System and the ongoing patient treatment
provided by clinicians, including monitoring and programming, are reimbursed
under well-established physician and hospital codes. In addition, we believe
that our RNS System is currently the only neuromodulation system for epilepsy
with reimbursement available for periodic in-person or remote review of brain
activity data. Given the relatively young average age of our patient population,
our payor mix has historically been more heavily weighted towards commercial
payors. As of March 31, 2022, commercial payors have written positive coverage
policies that address over 200 million covered lives in the United States.
Medicare and Medicaid also routinely provide coverage for implantation of our
RNS System and follow-up care. Based on our experience, less than 1% of
potential RNS System patients have been unable to undergo an implant procedure
with our RNS System due to lack of payor coverage. We believe the established,
differentiated, and favorable reimbursement paradigm for our RNS System will
continue to support its broad commercial adoption.

We currently manufacture our RNS System at and distribute all of our products
from our approximately 53,000 square foot facility in Mountain View, California.
This facility provides approximately 20,000 square feet of space for our
production and distribution operations, including manufacturing, quality control
and storage. We believe our existing facility will be sufficient to meet our
current and near-term manufacturing needs.

Since our inception, we have generated significant losses. To date, we have
financed our operations primarily through the sale of equity securities, debt
financing arrangements and sales of our products. As of March 31, 2022, we had
an accumulated deficit of $435.2 million, cash, cash equivalents and short-term
marketable debt securities of $103.2 million, and $50.1 million of outstanding
term loans, net of debt discount and issuance costs.

On April 21, 2021, we completed our initial public offering of our common stock,
or IPO, in which we issued and sold an aggregate of 6,900,000 shares of common
stock (inclusive of 900,000 shares pursuant to the exercise by the underwriters
of their option) at a price of $17.00 per share for aggregate cash proceeds of
approximately $105.5 million, net of underwriting discounts and commissions and
offering costs. The sale and issuance of 6,900,000 shares in the IPO closed on
April 26, 2021. Upon the closing of the IPO on April 26, 2021, all outstanding
shares of redeemable convertible preferred stock automatically converted into
16,614,178 shares of common stock. Subsequent to the closing of the IPO, there
were no shares of redeemable convertible preferred stock outstanding.

We have invested heavily and expect to continue to invest in research and
development and commercial activities. These research and development expenses
include clinical studies to demonstrate the safety and efficacy of our RNS
System and to obtain, as well as retain, FDA approval. We intend to continue
making significant investments in research and development, clinical studies and
regulatory affairs to support ongoing and future regulatory submissions for
retaining and expanding indications of our RNS System, including to adolescent
patients, ages 12-17, and drug-resistant generalized epilepsy patients, support
continuous improvements to our RNS System, and develop future products that
address neurological disorders. We have also made significant investments in
building our field commercial team and intend to make significant investments in
sales and marketing efforts in the future, including initiatives to drive
awareness and expand our referral channel to increase the number of
drug-resistant epilepsy patients referred to Level 4 CECs. Moreover, we expect
to continue to incur additional expenses associated with operating as a public
company. We may in the future seek to acquire or invest in additional
businesses, products, or technologies that we believe could complement or
enhance our products, enhance our technical capabilities or otherwise offer
growth opportunities, although we currently have no agreements or understandings
with respect to any such acquisitions or investments. Because of these and other
factors, we expect to continue to incur net losses and negative cash flows for
the next several years. We may require additional funding to support operations
and pay our obligations or may opportunistically seek to raise additional
capital, which may include future equity or debt financings.

We believe that our cash, cash equivalents and short-term investments will allow us to continue our operations for at least the next 12 months.

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RECENT DEVELOPMENTS

Impact of the COVID-19 pandemic

Since it was reported to have surfaced in December 2019, the SARS-CoV-2 strain
of coronavirus, or COVID-19, has spread across the world, being declared a
pandemic by the World Health Organization. Efforts to contain the spread of
COVID-19 have been significant and governments around the world, including in
the United States, have implemented severe travel restrictions, social
distancing requirements, quarantines, stay-at-home orders and other significant
restrictions. As a result, the current COVID-19 pandemic has presented a
substantial public health and economic challenge and is affecting hospitals,
physicians, patients, communities and business operations, as well as
contributing to significant volatility and negative pressure on the U.S. and
world economy and in financial markets.

The COVID-19 pandemic has negatively impacted our business, financial condition
and results of operations by decreasing and delaying procedures performed to
implant our RNS System, delaying and decreasing epilepsy diagnostic evaluations
at epilepsy monitoring units, or EMUs, as well as creating hospital staffing
shortages and periodic increased vacation demand as a result of loosening travel
restrictions, and we expect the pandemic will continue to negatively impact our
business, financial condition and results of operations. Beginning in March 2020
and through today, our net sales continue to be negatively impacted by the
COVID-19 pandemic as hospitals delay or cancel elective procedures, including
because of staffing shortages and patients fearing potential exposure. Many
state and local governments in the U.S. have issued periodic orders that
temporarily preclude elective procedures in order to conserve scarce health
system resources in view of the pandemic and to protect patient health. The
decreases in hospital admission rates and elective surgeries have reduced the
demand for elective procedures, including implantation of our RNS System. In
addition, hospitals delayed or cancelled admissions for epilepsy diagnostic
evaluations which we believe has reduced and will continue to temporarily reduce
our patient pipeline.

In response to the COVID-19 pandemic, we have made investments to implement various measures to help us manage its impact while maintaining business continuity to support our customers and patients. These measures include:

• Establish safety protocols, facility upgrades and work-from-home strategies to protect our employees;

• Ensure that our manufacturing and supply chain operations remain intact and operational;

• Keep our workforce intact, including our experienced and specialized employees WE
sales and clinical support team;

•Develop new methods of remote support for doctors in their use of our RNS system;

•Implement virtual physician training programs to support opening new accounts with minimal in-person interaction;

• Continue our physician education programs and direct patient marketing efforts through social media and other virtual forums; and

•Increased our capital resources through the issuance of our Series B convertible preferred shares in August 2020 and through the completion of our IPO in April 2021.

While our hospital customers began to gradually perform elective epilepsy
procedures again during the second half of 2020, we saw another reduction in
these procedures in late 2020, during parts of 2021, and in the beginning of
2022. Our business was negatively impacted in the third quarter of 2021 due to
the rise in COVID-19 Delta variant cases, increased vacation demand and hospital
staffing shortages and in the fourth quarter of 2021 due to the rise in COVID-19
Omicron variant cases and ongoing hospital staffing shortages. A surge in
Omicron variant cases early in the first quarter of 2022 had a significant
negative impact on our business due to limits on elective

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procedures and hospital staffing shortages until later in the quarter when COVID patient infections and hospital restrictions began to ease.

We believe the challenges resulting from COVID-19 will likely continue for the
duration of the pandemic, which is uncertain, and will continue to impact our
revenue and negatively impact our business, financial condition and results of
operations. While our business grew in 2021, we continue to experience
variability in RNS procedures, largely coinciding with periodic spikes in
COVID-19 cases. Given the dramatic increase in COVID-19 infections in the
beginning of 2022, we cannot provide assurance that we will not experience
additional negative impacts associated with COVID-19, which could be
significant. We believe that we may see fluctuations in RNS System procedures as
the impact of COVID-19 continues. In addition, due to the pandemic, our patient
pipeline may continue to be reduced temporarily due to a delay in the diagnostic
evaluations that are used to identify appropriate patients for our RNS System.
Further, once the pandemic subsides, there may be a substantial backlog of EMU
admissions and of procedures to be performed at hospitals for a variety of
medical conditions. As a result, patients seeking treatment with our RNS System
may have to navigate limited provider capacity. We believe this limited EMU and
hospital capacity could have a significant adverse effect on our business,
financial condition and results of operations throughout the remainder of and
following the end of the pandemic. We experienced unusual seasonality in the
third quarter of 2021 and may experience seasonality in the future as certain
pandemic restrictions are relaxed and physicians and patients take vacations,
resulting in a reduction in RNS procedures. Additionally, hospitals continue to
experience staffing shortages and may experience them in future, also resulting
in a reduction in RNS procedures. The extent to which the COVID-19 pandemic
impacts our business will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge
concerning the severity and spread of COVID-19 and its variants and the actions
to contain the spread of COVID-19 and its variants or treat its impact, among
others.

Our financial statements reflect judgments and estimates that may change in the future due to the COVID-19 pandemic.

Factors affecting our performance

We believe there are several important factors that have impacted and that we
expect will continue to impact our business and results of operations. These
factors include:

Awareness of clinicians, hospitals and patients and acceptance of our RNS system

Our goal is to establish our RNS System as a standard of care for drug-resistant
epilepsy. We intend to continue to promote awareness of our RNS System within
existing and new accounts through additional investments in training and
education of clinicians, epilepsy centers, hospitals and patients on the
clinical benefits of our RNS System for the treatment of drug-resistant
epilepsy. In addition, we intend to publish additional clinical data in
scientific journals and to continue presenting at medical conferences. We plan
to continue building patient awareness through increasing direct-to-patient
marketing initiatives, which include advertising, social media and online
education. We also intend to continue supporting patient and referring clinician
outreach efforts to help increase the number of appropriate patients with
drug-resistant epilepsy being treated at Level 4 CECs. These efforts require
significant investment by our marketing and sales organization.

Our ability to retain our experienced sales team and increase their productivity

We have made significant investments in, and will continue to invest in,
recruiting, training and retaining our experienced and specialized direct sales
team, which includes Therapy Consultants and Field Clinical Engineers.
Significant education and training is required for our team to achieve the level
of technical competency with our products that is expected by clinicians and to
gain experience building demand for our RNS System. Upon completion of initial
training, our personnel typically require time in the field to grow their
network of accounts, build relationships with clinicians and increase their
productivity to the levels we expect. We believe successfully training,
developing and retaining our Therapy Consultants and Field Clinical Engineers
will be required to achieve growth. In addition, the loss of any productive
sales personnel would have a negative impact on our ability to grow our
business.

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Competition

Our industry is highly competitive and subject to rapid change from the
introduction of new products and technologies and the marketing activities of
industry participants. There are two primary treatment alternatives for adults
with drug-resistant epilepsy: (i) an ablative or resective surgery; and (ii)
implantation of a neuromodulation device. Within neuromodulation, we currently
compete with two manufacturers of neuromodulation devices. These companies have
longer operating histories, significantly greater resources and name
recognition, and established relationships with physicians and hospitals that
treat patients with epilepsy. In addition to competing for market share, we also
compete against these companies for personnel, including qualified sales and
other personnel that are necessary to grow our business.

Leverage our manufacturing capacity to further improve our gross margin

With our current operating model and infrastructure, we believe that we have the
capacity to significantly increase our manufacturing production. If we grow our
revenue and sell more RNS Systems, our fixed manufacturing costs will be spread
over more units, which we believe will reduce our manufacturing costs on a
per-unit basis and in turn improve our gross margin. In addition, we intend to
continue investing in manufacturing efficiencies in order to reduce our overall
manufacturing costs. However, other factors will continue to impact our gross
margin such as the cost of materials, components and subassemblies, pricing,
procedure mix, and geographic sales mix to the extent that we commercialize our
RNS System outside of the United States.

Invest in research and development, including clinical studies, to expand our addressable market

We intend to continue investing in clinical studies and existing and next
generation technologies to further improve our RNS System and clinical outcomes,
enhance the patient and provider experience and broaden the patient population
that can be treated with our RNS System. In addition, we are continuing to
leverage our extensive database of intracranial electroencephalogram, or iEEG,
data and our advanced data analysis capabilities to equip clinicians with the
data they need to establish optimal program settings for each patient.

While research and development and clinical studies are time consuming and
costly, we believe that a pipeline of product enhancements and new products that
improve efficacy, safety and ease of use is important for supporting increased
adoption of our RNS System.

Change of procedure due mixture to a longer device replacement cycle

We derive revenue from sales of our RNS System to hospital facilities both for
initial RNS System implant procedures and for replacement procedures when our
implanted devices reach end of service. We launched our current neurostimulator
model in 2018. The FDA recently approved labeling changes indicating that this
device has an average battery life of nearly eleven years, an increase from the
previous assumption of eight years. We expect that our revenue from replacement
procedures will decrease over the next few years as a result of the extended
replacement cycle of the newer device. In addition, a change in procedure mix
between initial and replacement procedures may have a negative impact on our
gross margin.

Components of our operating results

Revenue

We derive substantially all our revenue from sales of our RNS System to hospital
facilities (typically Level 4 CECs) that implant our RNS System. We currently
deliver our RNS System to a hospital on the date of the scheduled procedure.
There is no commitment to purchase our RNS System until the delivery of the
product, as the procedure may be canceled at any time.

Our revenue fluctuates primarily based on the volume of procedures performed and
the procedure mix between initial and replacement implants. Our revenue also
fluctuates and in the future will continue to fluctuate from quarter-to-quarter
due to a variety of factors, including the success of our sales force in
expanding adoption of our RNS System in new accounts and the number of
physicians who are aware of and prescribe our RNS System.

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Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of costs related to materials, components
and subassemblies, personnel-related expenses for our manufacturing and quality
assurance employees, including expenses related to stock-based compensation,
manufacturing overhead, charges for excess, obsolete and non-sellable
inventories, and royalties. Overhead costs include the cost of quality
assurance, testing, material procurement, inventory control, operations
supervision and management personnel, an allocation of facilities and
information technology expenses, including rent and utilities, and equipment
depreciation. Cost of goods sold also includes certain direct costs such as
those incurred for shipping our RNS System. We record adjustments to our
inventory valuation for estimated excess, obsolete and non-sellable inventories
based on assumptions about future demand, past usage, changes to manufacturing
processes and overall market conditions. We expect cost of goods sold to
increase in absolute dollars as more of our RNS Systems are sold.

We calculate gross margin as gross profit divided by revenue. Our gross margin
has been and will continue to be affected by a variety of factors, primarily by
our manufacturing costs and pricing. Our gross margin may increase over the long
term to the extent our production volume increases as our fixed manufacturing
costs would be spread over a larger number of units, thereby reducing our
per-unit manufacturing costs. We expect our gross margin to fluctuate from
period to period, however, based upon the factors described above.

Functionnary costs

Our operating expenses consist of research and development expenses and selling, general and administrative expenses.

Research and development costs

Our research and development activities primarily consist of engineering and
research programs associated with our products under development and clinical
studies. Research and development expenses include personnel-related costs for
our research and development employees, including expenses related to
stock-based compensation, consulting services, clinical trial expenses,
regulatory expenses, prototyping, testing, materials and supplies, and allocated
overhead including facilities and information technology expenses. Our clinical
trial expenses include costs associated with clinical trial design, clinical
trial site development and study costs, data management costs, related travel
expenses, the cost of products used for clinical activities, and costs
associated with our regulatory compliance. We expense research and development
costs as they are incurred. We expect our research and development expenses to
increase in absolute dollars as we hire additional personnel to develop new
product offerings and product enhancements and conduct studies for expanded
indications for use.

Selling, general and administrative expenses

Our selling, general and administrative expenses consist primarily of
personnel-related costs for our sales and marketing employees, including
stock-based compensation and sales-based variable compensation, travel expenses,
consulting, public relations costs, direct marketing, customer training, trade
show and promotional expenses and allocated facility and information technology
expenses, and for administrative personnel that support our general operations
such as executive management, information technology, finance, accounting,
customer services, human resources and legal personnel. We expense sales
variable compensation when revenue related to the underlying sale is recognized.
Selling, general and administrative expenses also include costs attributable to
professional fees for legal, accounting and tax services, insurance and
recruiting fees.

We intend to continue to increase our sales and marketing spending to support
increased adoption of our RNS System. We expect our sales and marketing expenses
to increase in absolute dollars as we hire additional personnel and add programs
in order to more fully penetrate the market opportunity. We expect our
administrative expenses, including stock-based compensation expense, to increase
as we increase our headcount and expand our systems to support our operations as
a public company. Additionally, we anticipate increased expenses related to
audit, legal, regulatory and tax-related services associated with being a public
company, compliance with exchange listing and Securities and Exchange
Commission, or SEC, requirements, director and officer insurance premiums and
investor relations costs. Our selling, general and administrative expenses may
fluctuate from period to period as we continue to grow.

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Expenses and interest income

Interest expense consists primarily of interest expense related to our term loan
facility, including amortization of debt discount and issuance costs. Interest
income is predominantly derived from investing surplus cash in money market
funds and short-term marketable debt securities.

Other income (expenses), net

Other income (expense), net, consists primarily of changes in the fair value of our liability for redeemable convertible preferred stock warrants.

Operating results

Comparison of the three months ended March 31, 2022 and 2021

The following table summarizes our results of operations for the periods
indicated (in thousands):

                                             Three Months Ended March 31,
                                               2022                   2021               Change                % Change
Revenue                                 $         11,374          $   11,217          $      157                         1  %
Cost of goods sold                                    3,115               2,724                 391                     14  %
Gross profit                                          8,259               8,493               (234)                     (3) %
Operating expenses
Research and development                              5,577               4,100               1,477                     36  %
Selling, general and administrative                  12,444               8,267               4,177                     51  %
Total operating expenses                             18,021              12,367               5,654                     46  %
Loss from operations                                (9,762)             (3,874)             (5,888)                    152  %
Interest income                                         134                  26                 108                    415  %
Interest expense                                    (1,830)             (1,849)                  19                     (1) %
Other income (expense), net                             (3)             (3,113)               3,110                        NM
Net loss                                $        (11,461)         $   (8,810)         $   (2,651)                       30  %


NM = Not meaningful

Revenue

Revenue increased by $0.2 million, or 1%, to $11.4 million during the three
months ended March 31, 2022, compared to $11.2 million during the three months
ended March 31, 2021. The increase in revenue was primarily due to an increase
in the number of units sold for initial implant procedures in the three months
ended March 31, 2022 as compared to the three months ended March 31, 2021.
Revenue from sales of our RNS System for replacement procedures represented
approximately 23% of our total revenue for the three months ended March 31, 2022
as compared to approximately 28% for the three months ended March 31, 2021. All
of our revenue was generated from sales in the United States.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $0.4 million, or 14%, to $3.1 million during the
three months ended March 31, 2022, compared to $2.7 million during the three
months ended March 31, 2021. The increase was primarily due to an increase in
indirect labor costs including stock-based compensation and reduced production
volume as a result of the increased volatility resulting from the COVID-19
pandemic, particularly the Omicron variant, in the three months ended March 31,
2022. Our gross margin decreased from 75.7% for the three months ended March 31,
2021 to 72.6% for the three months ended March 31, 2022 primarily due to higher
fixed costs per unit as a result of the reduced production volume.

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Research and development costs

Research and development expenses increased by $1.5 million, or 36%, to $5.6
million during the three months ended March 31, 2022, compared to $4.1 million
during the three months ended March 31, 2021. The increase in research and
development expenses was primarily due to an increase of $1.1 million in
personnel-related expenses primarily due to hiring additional personnel to
support product development efforts and clinical studies, an increase of $0.2
million in product development costs, and an increase of $0.2 million in costs
associated with our clinical studies.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $4.2 million, or 51%,
to $12.4 million during the three months ended March 31, 2022, compared to $8.3
million during the three months ended March 31, 2021. The increase in selling,
general and administrative expenses was primarily due to an increase of $1.8
million in personnel-related expenses primarily due to hiring additional
personnel and to stock-based compensation, an increase of $1.3 million in
general and administrative costs related to operating as a public company, and
an increase of $0.8 million in sales, field support and marketing costs
including travel, contractors, and digital advertising due to an increased focus
on marketing activities to support commercial growth and returning operations to
pre-pandemic levels.

Interest Expense and Income

Interest expense was $1.8 million for both the three months ended March 31, 2022
and 2021 due to the approximately same average balances of our term loans during
the three months ended March 31, 2022 compared to the three months ended
March 31, 2021. Interest income increased by $0.1 million for the three months
ended March 31, 2022 compared to the three months ended March 31, 2021,
primarily due to an increase in average balances of our money market funds and
short-term marketable debt securities.

Other income (expenses), net

Other income (expense), net decreased by $3.1 million to less than $0.1 million
during the three months ended March 31, 2022, compared to ($3.1) million during
the three months ended March 31, 2021, primarily due to an increase in the fair
value of redeemable convertible preferred stock warrant liability by $3.1
million due to an increase in the fair value of our redeemable convertible
preferred stock prior to our IPO in the three months ended March 31, 2021.

Cash and capital resources

Prior to our IPO, we financed our operations primarily through private
placements of equity securities, debt financing arrangements and sales of our
RNS System. As of March 31, 2022, we had cash, cash equivalents and short-term
marketable debt securities of $103.2 million, compared to $115.6 million at
December 31, 2021, and $50.1 million outstanding under the Term Loan, net of
debt discount and issuance costs, compared to $49.8 million at December 31,
2021. In September 2020, we entered into the Term Loan for total borrowings of
up to $60 million and borrowed $50 million. In April 2021, we completed our IPO
and received $105.5 million in net proceeds after deducting underwriting
discounts and commissions and offering costs, of which $4.1 million was used to
repay the PPP loan.

2020 Term Loan

In September 2020, we entered into the Term Loan with CRG Partners IV L.P. and
its affiliates for total borrowings of up to $60 million and borrowed $50
million. The remaining $10.0 million was available to us for borrowing until
March 31, 2022 if we achieved a revenue-based milestone in 2021. The
revenue-based milestone was not met, and the remaining $10.0 million of the Term
Loan expired without being drawn. The borrowings under the Term Loan are secured
by substantially all of our properties, rights and assets, including
intellectual property.

The loan bears interest at a rate of 12.5% per year. Payments under the loan are
made quarterly with payment dates fixed at the end of each calendar quarter. The
loan was interest-only through September 30, 2023, which could

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be extended through September 30, 2025 at our option if we completed our IPO on
or prior September 30, 2023. In connection with closing the IPO, we 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 repayment of the loan equal to 10% of the aggregate
principal amount being prepaid or repaid.

We 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.

Paycheck Protection Program

In April 2020, we received $4.0 million from a federal Small Business
Administration loan under the Paycheck Protection Program. 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. Payments of principal and interest
were due from September 2021 through April 2022. In April 2021, we repaid our
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 our IPO.

Future funding needs

We expect to incur continued expenditures in the future in support of our
commercialization efforts in the United States. In addition, we intend to
continue to make investments in clinical studies, development of new products,
and other ongoing research and development programs. We also expect to incur
additional expenses to expand our commercial organization and efforts and
additional costs associated with continuing to re-establish operations to
pre-pandemic levels and to plan for continued growth. We may incur additional
expenses to further enhance our research and development efforts and pursue
commercial opportunities outside of the United States. We lease our office and
manufacturing facilities in Mountain View, California under a non-cancelable
operating lease which expires in June 2024. Future minimum lease payments under
non-cancelable operating leases were $7.3 million as of March 31, 2022. See
"Facility Lease" in Note 5 to our condensed financial statements included
elsewhere in this Quarterly Report on Form 10-Q for additional information.

As of March 31, 2022, we had cash, cash equivalents and short-term marketable
debt securities of $103.2 million. Based on our current planned operations, we
expect that our cash, cash equivalents and short-term marketable debt securities
will enable us to fund our operating expenses for at least 12 months from the
issuance of our condensed financial statements as of and for the three months
ended March 31, 2022. We have based these estimates on assumptions that may
prove to be wrong, and we could utilize our available capital resources sooner
than we expect.

Due to the many risks and uncertainties associated with the research, development and commercialization of medical devices, we are unable to estimate the exact amount of our working capital requirements. Our future financing needs will depend on many factors, including:

• the costs of activities related to the commercialization and commercialization of our RNS system in United States and elsewhere, and the costs of manufacturing and distribution;

•research and development activities that we intend to undertake, including product improvements and clinical studies for extension of indications that we intend to pursue;

•the impact of the COVID-19 pandemic on our business;

•the cost of obtaining, maintaining, defending, applying and protecting any patents and other intellectual property rights;

• whether or not we pursue acquisitions or investments in businesses, products or technologies complementary to our current activities;

• the degree and rate of increased market acceptance of our RNS system in United States and market acceptance elsewhere;

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•our need to set up additional internal infrastructure and systems;

• our ability to hire additional personnel to support our operations as a public company; and

•the emergence of competing technologies or other adverse market developments.

If we do raise additional capital through public or private equity or
convertible debt offerings, the ownership interest of our existing stockholders
will be diluted, and the terms of these securities may adversely affect our
stockholders' rights. If we raise additional capital through debt financing, we
may be subject to covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or
declaring dividends. 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. In addition, COVID-19 has
negatively impacted our business by decreasing and delaying procedures performed
to implant our RNS System, and we expect the pandemic will continue to
negatively impact our business, which may negatively impact our future
liquidity.

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