Good afternoon, and welcome to NeuroPace's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Thank you, operator. Good afternoon, and thank you for participating in today's call. Joining me from NeuroPace are Mike Favet, CEO; and Rebecca Kuhn, CFO. Earlier today, NeuroPace released financial results for the first quarter ended March 31, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including those around NeuroPace's clinical trials and those relating to our operating trends and future financial performance, FDA approvals, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, revenue outlook, commercial expansion, product performance and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a more detailed description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the Securities and Exchange Commission or SEC, including our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 10, 2022, and our quarterly report on Form 10-Q to be filed with the SEC on May 12, 2022, as well as any reports that we may file with the SEC in the future. This conference call contains time-sensitive information, which we believe is accurate only as of the live broadcast on May 12, 2022. NeuroPace disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. And with that, I'll turn the call over to Mike.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. For today's call, I will provide opening comments and a business update, followed by Rebecca, who will provide additional detail regarding our quarterly results and full year 2022 financial outlook before opening the call to Q&A. Moving on to our quarterly results. We started the year strong, generating $11.4 million of total revenue for the first quarter of 2022. Initial implant revenue in the first quarter of 2022 was $8.8 million and came in above the top end of the first quarter guidance range. We experienced significant business disruption from January through early February, primarily as a result of the Omicron variant, resulting in one of our most COVID-impacted period to-date. We rebounded nicely in the second half of the quarter, specifically in the second half of February, we saw a marked improvement in procedure volumes from January levels. Our business improved further in March, when we saw a meaningful uptick in implant procedure volumes, which we believe to be a combination of rescheduled procedures from earlier in the quarter and new procedures. Given the COVID-19 related challenges faced in the early part of the quarter, we are pleased with our results. Although we experienced a nice recovery fueled in part by rescheduled implant procedures in March, we believe that severe COVID-related disruptions in January and February caused a significant reduction in the number of patients coming through epilepsy monitoring units, or EMUs during that time. The patients coming through the EMU diagnostic process feed the pipeline for our RNS System plants. We believe that the EMU volumes largely returned to 2021 levels in March, as the impact from Omicron subsided, but the reduced number of patients coming through the EMUs in the first half of Q1 will limit…

Thanks, Mike. NeuroPace's revenue for the first quarter of 2022 was $11.4 million, compared to $11.2 million for the first quarter of 2021. Growth in the quarter was primarily driven by an increase in unit sales of our RNS System to comprehensive epilepsy centers for initial implant procedures. In the first quarter, revenue from initial implants was $8.8 million, compared to $8.1 million for the first quarter of 2021. Growth in the quarter was driven primarily by an increase in the number of initial implant procedures, despite headwinds from the Omicron variant in the first half of the quarter. Revenue from replacement implants was $2.6 million, compared to $3.1 million in the first quarter of 2021. We continue to expect replacement implant revenue generally to decrease for the next several years due to the transition to the current model of our device, which has a longer-lasting battery. Gross margin for the first quarter of 2022 was 73% compared to 76% in the first quarter of 2021. The decline in gross margin relative to the prior year period was primarily due to an increase in indirect labor costs resulting from stock-based compensation and reduced production volume as a result of the increased volatility resulting from the COVID-19 pandemic. Total operating expenses in the first quarter of 2022 were $18 million, compared with $12.4 million in the same period of the prior year. R&D expense in the first quarter of 2022 was $5.6 million, compared with $4.1 million in the same period of 2021. The increase in R&D expense was primarily driven by an increase in personnel, product development and clinical study expenses. SG&A expense in the first quarter of 2022 was $12.4 million, compared with $8.3 million in the prior year period. The increase in SG&A was primarily driven by increased…

[Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Your line is open.

Hi. This is actually Rohin on for Robbie. Thanks for taking the question, and congratulations on a good quarter. To start, would you be able to give us some more color on revenue cadence for the year? The first quarter came in a little higher than expectations due to better recovery in February. So how you view current guidance in light of this? Also, does the range contemplate any further COVID variability? And then I have a follow-up question.

Very good, Rohin. Thanks for the question. So let me start off with just a general comment and the observation that you made. We're very pleased with the way that we started the year with being able to recover from the challenges at the beginning of the quarter due to the Omicron variant. As we think about the guidance for the year, we've reiterated the $45 million to $48 million guidance that we provided in the Q1 – in the earnings call a few months ago. Really, the rationale for that is that we're continuing to execute on the core commercial strategies, increasing the number of centers that are implanting, increasing utilization. We anticipate that through the year, we'll continue to drive increases in both utilization and number of centers and planning, resulting in implant revenue from initial system implants continuing to increase through the year. And then counterbalancing that, we expect that the replacement implant revenue as anticipated will continue to decrease through the year resulting in that total amount. We did have the near-term, short-term dynamics that were happening in Q1 with the delays and procedures that happened in the early part of the quarter. We're very pleased at the speed at which we were able to recover those delayed cases in the second half of Q1. And then anticipate that there's going to be some impact of the number of patients coming through the epilepsy monitoring units in Q1, having an impact on Q2 with the recovery happening there faster than we anticipated when we provided an update a few months ago. But the trends that we're seeing overall in the epilepsy monitoring units are positive. We're seeing that those volumes of patients coming through the EMU have increased over the last couple of months compared to the decreased levels that we saw at the beginning of Q1. And overall, the backlog of patients that we're hearing from our customers at the epilepsy monitoring units has continued to grow, and we're anticipating that those numbers of patients coming through will continue to increase through the course of the year, providing an opportunity for us to be able to grow the business in addition through – in addition to the efforts that we're doing on the commercial side. So just in general, we're seeing that second half of the year is going to be continuing to grow in initial implant revenue on allowing us to get to the guidance that we provided for the year overall.

Okay. Great. And would you be able to comment on how much of the headwind staffing is in the EMU relative to lower patient volumes due to COVID, at least in the first quarter, and where you're seeing with staffing moving forward? Are you seeing kind of like higher utilization levels offsetting this with more doctors implanting a greater share of patients alongside the new center additions? Just want to get your thoughts on that dynamic. Thanks.

The dynamic that happened in the first quarter with Omicron was different than what we saw in the previous waves of the pandemic, where previously, the Delta variants, some of the other variants were more causing epilepsy centers – causing hospital administration to say that they weren't going to be doing elective procedures because of concerns about the hospitals filling up, ICU capacity. Really, what we saw from the Omicron variant was a much larger number of people being infected. That included staff at the hospitals, which limited the ability of the centers to treat patients, to schedule procedures, to bring them through the diagnostic process. That had exacerbated staffing challenges. So we've talked previously about hospital staffing, in particular, the nurse staffing and the technician staffing. The Omicron and the number of people that were infected made that even worse in the first half of the quarter. We know that the hospitals are continuing to try to build up their capacity in terms of the staffing, that continues to be a factor. And when we look at the number of patients coming through the up-listing monitoring units now, meaning the last couple of months, that has primarily been a factor of staffing and then just increasing patient confidence of coming into the hospitals. We expect that's a longer-term trend where the hospitals are trying to increase the staffing levels. And we know that they're working to do that. But that's definitely been a key reason why in 2021 and the start of 2022, we haven't guided epilepsy monitoring unit volumes, you get back to the levels that they were pre-pandemic.

Okay. Great. Thank you so much.

Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question, and congrats on a nice quarter here. Mike, just maybe to put a finer point on the one of the prior questions. Are you signaling because of the pipeline here within the EMUs that Q2 is going to be for initial implants, it's going to be flat or down sequentially? I think it was pretty clear that you expect replacements to kind of continue to decline through this year. But on initial implants, I wasn't sure what you were signaling for Q2.

We didn't provide specific Q2 guidance, we reiterated the full year guidance. And coming off of Q1, when we came in ahead of the guidance that we provided for Q1, a reason – part of the reason for coming in ahead of the guidance we provided in Q1 was that the patients that we knew were delayed at the beginning of the quarter. The recovery of those patients or the scheduling and completion of the implant of those patients happened faster than what we had anticipated that they would. So we were very pleased with the recovery, and overall, the growth that we were able to demonstrate in the first quarter. The result of that is that those patients did get – the delayed patients did get implemented in Q1. And we're feeling the impact of the patients coming through – the fewer patients that came through the EMU at the first part of the quarter. So not providing specific numbers for Q2, but just thinking about the dynamics that are happening in the near-term, we are having some effect of the EMU process in the first quarter impacting the start – specifically the start to the second quarter. And then seeing that normalize here through the last couple of months, which continues to give confidence in the ability to grow the business in the second half of the year.

Okay. And just switching gears on the market expansion studies. So NAUTILUS and the adolescent study. Can you remind us again, please, how long you think those will take to enroll, so we just can kind of think through kind of approval time lines?

We haven't provided specific enrollment time guidance. So that I'll remind you of the key factors that are involved with that. So the NAUTILUS study, which is our top priority for expanded indication, we're expecting to start enrollment in that study around the middle of this year. We know that we need to enroll about 100 patients to be able to implant over 80 patients in that trial. We know that it's a one year follow-up study for the indication and then a PMA submission or PMA supplement submission that happens on the other side of that. So the time to enroll those 100 patients in the trial, we haven't provided that information. Yes, we'll give more clarity on that as we are able to get enrolling and understand how many sites are able to get up and running to be able to complete that. So the start of enrollment again around the middle of this year, about 100 patients that we need to enroll, and then a one year follow-up for the primary endpoint. The response study – the adolescent study is very similar to that. So a little bit smaller number of patients, so kind of 75 patients that need to be implanted at a minimum for that study, but similar kind of magnitude, one year follow-up for the primary end point of that study as well. So I would say, overall, kind of similar size study, similar amount of follow-up, and then PMA supplement submission for both of those.

Are there any precedents Mike, that you can point us to on how long it would take to enroll 100 patients in implant 80?

So I don't have any specific precedents for the amount of time that it's going to take to enroll. I will reiterate that our focus is primarily on the NAUTILUS study. So as an organization, that's where we're putting the majority of our effort, it represents the largest market opportunity in terms of the number of patients and a new opportunity to expand into an area that we're quite excited about. So internally, we're focused primarily on the NAUTILUS study and moving into generalized epilepsy. Again, we'll provide more clarity as we get into the enrollment in the study and understand the number of centers, but I don't have that specific comparison to be able to point you to.

All right. Thanks so much.

Our next question comes from Michael Polark with Wolfe Research. Your line is open.

Hey, good evening. Good afternoon. Thank you for taking the questions. First one, gross margin. It sounded like some non-cash comp, lower overhead absorption in the quarter. But I also heard COVID volatility, and it wasn't clear if that was just, hey, look, volumes have been disrupted in the trailing six to 12 months, and so you've been turning down production, and so there is deleverage? Or if that was a comment on supply chain and sourcing and componentry and input costs going up? So any additional color on the cost of goods here and what influenced gross margin in the quarter would be helpful.

Sure. I'll take that. Thanks, Mike. So our gross margin in the first quarter was 73%, that's consistent with our gross margin in the fourth quarter. And currently, that's our baseline. There's nothing really unusual in the first quarter, we did have some increase in cost related to SEC. And we had some lower absorption volatility and demand led to volatility and production and then lower production overall. But we're not seeing supply chain disruption. We have purchased some components and materials earlier than we might otherwise to mitigate any potential risk that could develop in the future. But we're not seeing supply chain disruptions. So really, it's just the factors that we mentioned, nothing really unusual that stands out for the quarter.

And then a follow-up just on the commercial investments. It sounds like it's on track, but I'd be curious to get an update on your progress, in terms of hiring and forming some new territories, bringing new centers online. I mean it's a difficult environment, 1Q, especially difficult for providers. How has that played out so far this year? And any strains or successes in ramping the commercial org to call out? Thank you so much for taking the questions.

Thanks, Mike. We're quite pleased with the progress that we've been able to make here over the first part of the year in the commercial initiatives. So just as a reminder, there's two primary areas where we're making an investments in the organization – on the commercial part of the organization. One of those is an acceleration of the expansion of our field team. We're targeting to get to around 56 people in the field organization by the end of the year. That's a net increase on the order of 14 people compared to where we were back at the time of the IPO with most of those hires scheduled to be happening here in the first half of 2022. And pleased to say that we're well on track for that. So the progress that we've been making at expanding the field team is going per plan with the – with some really great people that we've been able to identify and start them through the training process. The other key area of initiative is around patient education and patient awareness. And so with that, we have increased the amount of work that we're doing to get information about the RNS System, the benefits of the RNS System out to a broader number of patients that are working their way through the diagnostic process. So to help influence them and help to – on the system as they're moving through that process. So we've made some good initiatives there, brought some people into the organization and that have expertise in that area. And are doing what we would expect to do, what we had expected to do as we ramp up in that area. The other comment that I would make is part of the reason that we've expanded or accelerated the hiring of the field team is that, it allows us to continue to grow the number of centers that are implanting the device as we have in the past and expect that we continue to do that here in 2022. It also enables us to go out to a larger number of epilepsy specialists that are practicing outside of the Level 4 centers. That's been a trend in recent years that there's more epilepsy specialists that are setting up practices outside of these level 4 CECs and the larger field organization will allow us to call on those. So they're treating a large number of drug-resistant epilepsy patients. I'm working with them to create a referral dynamic into a comprehensive epilepsy center for the implementation of our device of the RNS System, and then having those patients go back on to the epilepsy specialists in the community for their ongoing care. And so that accelerated hiring is a key part of that strategy of expanding the number of epilepsy specialists that we're going on.

Our next question comes from Danielle Antalffy with SVB Securities. Your line is open.

Hey, good afternoon, everyone. Thanks so much for taking the question, and congrats on a great start to the year. I guess – and you kind of already addressed this, Mike, but just a quick question for you on the guidance, and why you did put up a pretty decent top line be it in the quarter from – relative to us, both on initial implants and well, I guess, just on initial implants? And so just curious about why not take the guidance up, is that just conservatism? Or do you anticipate something transpiring a little bit differently for the rest of the year then maybe you had thought back in, what was it March or whatever when you provided the guidance?

So thanks, Danielle. The guidance for the year, we – as we've talked about reiterating the guidance for the year, we are coming off of a first quarter that we feel very good about. And again, part of that is that we recovered the patients that were delayed out of the first part of the quarter rather quickly, faster than we anticipated that we would. So we had anticipated that we would recover those patients from the guidance that we provided. The timing of it happened a little bit faster than what we had anticipated, and which contributed to the beat in Q1. And so with that, just wanting to keep the guidance where it is, knowing that the remainder of the year is really being driven by new patients that are coming through the process and our ability to turn those into RNS System implants. And so there's some timing effect and then really feeling overall like the trend that we expected to be on is where we continue to be operating to.

Okay. That's totally fair. And then just as we think about going beyond the Level 4 centers, and I know it's very early in this. But I guess as we think about the investment there and building out the sales force, et cetera, et cetera. When should we think about that really starting to contribute to top line growth and getting patients through the system? And I guess, is there an opportunity as well – sorry, this is like a two part question, so that's the first part. And then the second part, is there an opportunity to shorten the time line from a patient sort of getting to, I guess, from a – for patient getting through the process to getting an implant? Or is six months like what is always going to be? And we just have to – that just is what it is. Thanks so much.

Thanks, Danielle. So the investment that we're making in the commercial organization, both the accelerating and the hiring of the field organization, as well as the patient education awareness initiatives that we've undertaken. Those are investments that will pay off over a period of time. If you think about the sales force hiring, we hire somebody into the field organization, that allows us to have more call points, so we can go out to these referring physicians that provide additional opportunity for us. That – and then those patients that come out of that go through the epilepsy monitoring unit and the process for the work up and the – increasing the numbers that come out of that. So overall, if you think about 2022, the guidance that we provided for 2022 is really based on the execution of the strategy within the CEC. So it's about getting more of those centers to be prescribing more utilization from those centers. The initiatives that we're doing to expand the field organization to move outside of the Level 4 CECs to additional epilepsy specialists, those are really opportunities that will benefit the organization beyond 2022. In terms of your question about the six months on average that it takes to get through the epilepsy monitoring unit, from initial EMU admission to implantation of the RNS device. We are working to influence that where we can. The process of more connection earlier to patients that are working their way through that process. Where we can do that, we can help facilitate for those patients, moving through the steps that they need to go through. So there is some potential that we could – with those initiatives, specifically for those patients that we can contact earlier and be able to help them navigate through the system more quickly. That said, much of the process at the EMU is driven by the procedures of the hospital and also the capacity that the institution has. So there is, I would say, some opportunity around that, and we're definitely pushing on those areas where we can push on those areas. But I don't anticipate that there's a dramatic movement in the amount of time it takes patients to get through the EMU process.

Okay. Thank you.

Our last question comes from Drew Ranieri with Morgan Stanley. Your line is open.

Hi, Mike and Rebecca. Thanks for taking the questions. Just maybe to start, I can appreciate that the first quarter, there is still some challenges with the EMU capacity and staffing shortages there. Just as you're going through the year into the back half, I just want to be – I just want to make sure that I'm clear here. Are you saying that EMU visits normalized at 2021 levels? Or are they normalizing the pre-pandemic levels? And just as you're looking even further ahead into 2023, if you were to stay at 2021 EMU levels, would you be able to accelerate growth next year in new patient implants, just given some of the initiatives that you have in place with the sales force and some of the other training initiatives?

Great. Thanks for the question, Drew. And I appreciate the complexity of this as there is trends on top of trends and so it can be – it has the potential to be confusing. So in Q1 – in the first half of Q1, we saw that the number of patients coming through the epilepsy monitoring unit, in particular, the EMU visits that are part of that process was decreased relative to 2021. So relative to pandemic levels, if you will. Starting in March, we saw those EMU numbers recover back or move back to or at least close to the numbers that we saw in 2021. So we're now operating and getting around the levels that I would call pandemic normal 2021 kind of levels. With anticipation that over time, given improving environment around COVID, which is an uncertainty. But over time, that we anticipate those numbers could get back to the pre-pandemic levels. That's a future statement, not where the EMUs are today. We don't – we do know from talking to our customers that they're telling us that there is a backlog of patients that they have, looking to get into the EMUs, and so there's potential there. There's demand, if you will, from the patient side to be able to increase those numbers, but there's a number of factors that have to go into getting back to pre-pandemic levels and then growing from there. As we think about 2023 – and again, for 2022, our growth in 2022 isn't anticipating that a return to pre-pandemic levels of EMU visits would impact our numbers in 2022, given the time it takes for those patients to get through the process. So that return to pre-pandemic levels is more of a longer-term growth accelerator for the organization. Part of the reason that we've made the investments that we have made in the commercial part of the organization is to have influence to accelerate growth in areas that we can control. So looking at calling on more epilepsy specialists outside of the Level 4 centers tapping into that group of drug-resistant epilepsy patients that they're treating to be able to facilitate their work up through the process, getting more awareness at the patient level earlier in the process. All of those are initiatives that we believe benefit our organization and then the growth of our organization independent of the number of patients coming through the EMUs. And the growth of the EMUs provides additional opportunity with us. So the reason we're making those investments is to be able to control those aspects of growth that we have the ability to influence. So we believe we have the ability to influence.

Got it. I appreciate the answer. And maybe just to Rebecca, I guess that you've purchased more components to make sure there is a steady state of supply, just as you're kind of looking at the inflationary environment, just how are you thinking about pricing for your devices, whether in the new patient implant side or replacement side, especially, considering I think the DRG code is going up by like 3% for 2023. Just any comment would be great. Thank you.

Sure. So as we've discussed previously, we are in the process of implementing a price increase in the low-single-digits this year. That price increase will take place over the course of the year. We don't expect it will have a big impact this year, it will have more of an impact in 2023. But we are doing that on the pricing side. And of course, we are cognizant of price pressures in the marketplace and where we are aware of price increases, factoring that into our planning. So I hope that addresses your question.

It does. Thank you.

Thank you. There are no further questions. I'd like to turn the call back over to Mike Favet for any closing remarks.

All right. Thank you, everybody. I appreciate your time today, and look forward to following up with you in the coming months.

This concludes the program. You may now disconnect. Everyone have a great day.