EBR SYSTEMS INC. — Annual Report 2021

Nov 22, 2021

EBR Systems, Inc. Consolidated Financial Statements For the Year Ended December 31, 2020

EBR SYSTEMS, INC.

TABLE OF CONTENTS

Independent Auditor's Report Consolidated Balance Sheet Consolidated Statement of Operations and Comprehensive Loss Consolidated Statement of Stockholders' Deficit Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements	Page
	1 - 2 3 4 5 6 7 - 24

==> picture [234 x 57] intentionally omitted <==

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Stockholders of EBR Systems, Inc.

We have audited the accompanying consolidated financial statements of EBR Systems, Inc. and Subsidiary, (collectively, “the Company”) which comprise the consolidated balance sheet as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

5300 N. Central #200 • Phoenix, Arizona 85012

602.776.6300 • 1.888.346.0072 • FAX: 602.279.4537 • WWW.PRICEKONG.COM

1

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EBR Systems, Inc. and Subsidiary as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations, which raise substantial doubt on the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

==> picture [208 x 28] intentionally omitted <==

Price, Kong, & Co., C.P.A.’s, P.A. Phoenix, Arizona September 30, 2021

2

EBR SYSTEMS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2020

==> picture [464 x 591] intentionally omitted <==

----- Start of picture text -----

ASSETS
Current assets:
Cash and cash equivalents $ 5,878,281
Non-trade receivable 273,304
Prepaid expenses 848,220
Other current assets 72,295
Total current assets 7,072,100
Property and equipment, net 887,341
Other non-current assets 439,202
Total assets $ 8,398,643
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 903,720
Accrued expenses and other liabilities 2,099,108
Interest payable 2,665,867
Current portion of notes payable, net of deferred loan costs 2,431,677
Current portion of convertible notes payable, net of discounts
and deferred loan costs 19,248,821
Total current liabilities 27,349,193
Interest payable, net of current portion 114,545
Notes payable, net of current portion and deferred loan costs 3,589,152
Convertible notes payable, net of current portion, discounts
and deferred loan costs 7,958,904
Derivative liabilities - fair value of warrants 6,852,000
Other long-term liabilities 185,428
Total liabilities 46,049,222
Commitments and contingencies (Note 8)
Stockholders' deficit
Convertible preferred stock (New Series A and New Series B),
$0.0001 par value, 198,523,428 shares authorized, 84,856,456
shares issued and outstanding 8,486
Common stock, $0.0001 par value; 240,000,000 shares authorized,
13,190,604 issued and outstanding 1,320
Additional paid-in capital 166,278,889
Accumulated deficit (203,851,437)
Accumulated other comprehensive income (87,837)
Total stockholders' deficit (37,650,579)
Total liabilities and stockholders' deficit $ 8,398,643
----- End of picture text -----

3

See accompanying notes to consolidated financial statements

EBR SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEAR ENDED DECEMBER 31, 2020

==> picture [469 x 268] intentionally omitted <==

----- Start of picture text -----

Operating expenses:
Research and development $ 8,006,044
Sales and marketing 4,799,427
Clinical and regulatory 5,440,677
General and administrative 2,334,787
Total operating expenses 20,580,935
Loss from operations (20,580,935)
Interest income 17,918
Interest expense (7,861,576)
Other income 627,151
Gain on change in fair value of derivative liability 1,381,364
Loss before income taxes (26,416,078)
Income tax benefit 697,752
Net loss $ (25,718,326)
Other comprehensive income (loss):
Foreign currency translation adjustments (87,837)
Comprehensive loss: $ (25,806,163)
----- End of picture text -----

4

See accompanying notes to consolidated financial statements

EBR SYSTEMS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT FOR THE YEAR ENDED DECEMBER 31, 2020

	Shares Convertible PreferredStock ParValue	Shares Convertible PreferredStock ParValue	Shares CommonStock ParValue	Shares CommonStock ParValue	Additional Paid-inCapital	Accumulated Deficit	Accumulated Other Comprehensive Loss Total Stockholders' Deficit
	Shares		Shares
Balance at December 31, 2019	84,856,456	$ 8,486	13,120,274	$ 1,313	$ 164,297,586	$ (178,133,111)	$ - $ (13,825,726)
Issuance of stock warrants	-	-	-	-	1,549,357	-	- 1,549,357
Exercise of stock options	-	-	70,330	7	11,246	-	- 11,253
Stock-based compensation	-	-	-	-	420,700	-	- 420,700
Net loss	-	-	-	-	-	(25,718,326)	- (25,718,326)
Foreign currency translation adjustment	-	-	-	-	-	-	(87,837) (87,837)
Balance at December 31, 2020	84,856,456	$ 8,486	13,190,604	$ 1,320	$ 166,278,889	$ (203,851,437)	$ (87,837) $ (37,650,579)

5

See accompanying notes to consolidated financial statements

EBR SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2020

==> picture [463 x 602] intentionally omitted <==

----- Start of picture text -----

Cash flows from operating activities:
Net loss $ (25,718,326)
Adjustment to reconcile net loss to cash used in operating activities:
Depreciation and amortization 246,403
Amortization of discount on notes 4,891,852
Amortization of deferred financing costs 125,944
Change in fair value of derivative (1,381,364)
Stock-based compensation 420,700
Convertible notes payable issued for services 64,432
Loss on disposal of property and equipment 5,674
Remeasurement of monetary assets and liabilities (92,126)
Changes in operating assets and liabilities:
Non-trade receivable 207,715
Inventory 2,840,195
Prepaid expenses (612,691)
Other assets 163,801
Accounts payable (479,013)
Accrued expenses and other liabilities (454,991)
Interest payable 2,224,731
Net cash used in operating activities (17,547,064)
Cash flows from investing activities:
Purchase of property and equipment (265,300)
Net cash used in investing activities (265,300)
Cash flows from financing activities:
Repayment of notes payable (3,200,000)
Proceeds from notes payable 7,242,525
Proceeds from convertible notes 12,458,890
Payments of debt issuance costs (107,522)
Proceeds from exercise of stock options 11,253
Net cash provided by financing activities 16,405,146
Net decrease in cash and cash equivalents (1,407,218)
Cash and cash equivalents, beginning of the period 7,285,499
Cash and cash equivalents, end of the period $ 5,878,281
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 619,049
Cash received from income tax benefit $ 697,752
Non-cash financing activities
Issuance of warrants for deferred loan costs $ 24,499
Issuance of detachable warrants $ 1,524,858
----- End of picture text -----

6

See accompanying notes to consolidated financial statements

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Note 1 - Business and organization

Business overview

EBR Systems, Inc. (“EBR” or the “Company”) is a research and development venture pursuing novel approaches in cardiac rhythm management. In 2015, the Company received European CE Mark approval for the world’s first wireless cardiac pacing system for heart failure. In 2016, EBR announced its first commercial implants of its wireless cardiac pacing system.

The Company operates a wholly owned foreign subsidiary entity in Australia, EBR Systems (AUST) Pty. Ltd. (“EBR-AU”), which establishes clinical trials in Australia and works on intellectual property development and on Food and Drug Administration (“FDA”) approval. The subsidiary was incorporated on February 23, 2017 and is currently in clinical trials.

Liquidity, risks, and financial condition

As of December 31, 2020, the Company had an accumulated deficit of $203,851,437. The Company expects to incur substantial operating losses in future periods and will require additional capital to continue developing its products and other activities. These activities have resulted in losses from operations, which are expected to continue into future years. During the year ended December 31, 2020, the Company incurred a net loss of $25,718,326 and had negative cash flows from operating activities of $17,547,064.

The Company will require additional financing to continue its research and development activities, conduct clinical studies, obtain regulatory approvals and fund operations. Failure to complete additional financing may adversely impact the Company’s ability to achieve its intended business objectives.

Accounting standards require that management evaluate whether the Company has adequate financial resources to continue as a going concern for one year after the date that these consolidated financial statements are available to be issued. Management has determined that additional funds will be needed to continue as a going concern for the period defined in the accounting standards. Because obtaining future funding is not assured, there is substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these consolidated financial statements are available to be issued.

Note 2 - Summary of significant accounting policies

Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles(“GAAP”).

Principles of consolidation

The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiary: EBR Systems (AUST) Pty. Ltd., incorporated in Australia. All significant intercompany balances and transactions have been eliminated in consolidation.

7

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Foreign currency translation

The Company translates the foreign currency financial statements into US Dollars using the year or reporting period end or average exchange rates in accordance with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) subtopic 830-10, Foreign Currency Matters . Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within stockholders’ deficit.

In the first quarter of 2020, the Company concluded that the functional currency of EBR Systems (AUST) Pty. Ltd. changed from the U.S. dollar to the Australian dollar. The primary reason for the change in functional currency is due to a change in EBR-AU’s operations whereby the majority of its operating expenses are anticipated to be in Australian dollar. The Company believes that the change in functional currency was necessary as it reflects the primary economic environment in which EBR-AU operates. The change in functional currency is accounted for prospectively from January 1, 2020, and prior year financial statements have not been restated for the change in functional currency.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Significant estimates and assumptions made by management include the estimated lives of long-lived assets, the fair value of stock-based awards issued, clinical trial accruals, and the valuation of the derivative liability.

Fair value of financial instruments

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our financial instruments include cash equivalents, non-trade receivables, other assets, accounts payable and accrued expenses. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. The carrying amount of cash equivalents, non-trade receivables, other

8

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

assets, accounts payable and accrued expenses are generally considered to be representative of their respective values because of the short-term nature of those instruments. The fair value of the Company’s embedded derivative liability was valued using the Monte Carlo Simulation (Level 3).

Derivative liability

The Company’s 2019 convertible notes payable issued contain certain features that meet the definition of being embedded derivatives requiring bifurcation from the 2019 convertible notes payable as a separate compound financial instrument. The derivative liability is initially measured at fair value on issuance and is subject to remeasurement at each reporting period with changes in fair value recognized in other income (expense) in the consolidated statements of operations and comprehensive loss.

Beneficial conversion feature

From time to time, the Company may issue convertible notes that may have conversion prices that create an embedded beneficial conversion feature pursuant to FASB ASC Subtopic 470-20, Debt with Conversion and Other Options . A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible is in excess of the conversion price. In accordance with this guidance, the intrinsic value of the BCF is recorded as a debt discount with a corresponding amount to common stock. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash and cash equivalents are primarily held at one U.S. financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits.

Cash and cash equivalents

EBR considers all highly liquid instruments with an initial maturity date of 90 days or less when purchased to be cash equivalents. All investments are considered cash equivalents.

Non-trade receivables

Non-trade receivables are recorded for amounts due to the Company related to reimbursements of clinical trials expenses. These receivables are evaluated to determine if any reserve or allowance should be established at each reporting date. As of December 31, 2020, the Company had $273,304 outstanding, all of which is deemed collectable.

Property and equipment

Property and equipment is carried at acquisition cost less accumulated depreciation. The cost of normal, recurring, or periodic repairs and maintenance activities related to property and equipment are expensed as incurred.

9

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives by asset classification are generally as follows:

Software/Licenses	3 years
Office Equipment	5 years
Computer Equipment	5 years
Lab Equipment	7 years
Leasehold Improvements	Lesser of 15 years or the remainder of the lease

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for potential impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that carrying value exceeds fair value. Fair value is determined using various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, depending on the nature of the asset. For the year ended December 31, 2020, the Company did not recognize any impairment charges associated with long-lived assets.

Revenue Recognition

To date the Company’s sole product is in the late stages of FDA approval, as such no revenue has been recorded from the sale of products. Once the Company receives FDA approval, revenue from product sales will be recognized upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract. Provisions for discounts, rebates and sales incentives to customers, and returns and other adjustments will be provided for in the period the related sale is recorded.

Research and development

Research and development costs are expensed when incurred. Research and development costs include costs of other research, engineering, and technical activities to develop a new product or service or make significant improvement to an existing product or manufacturing process. Research and development costs also include pre-approval regulatory and clinical trial expenses.

Stock-based compensation

The Company recognizes stock-based compensation expense in the accompanying consolidated statement of operations and comprehensive loss for all stock-based payments to employees, non-employees and directors. The Company records compensation expense over an award’s requisite service period, or vesting period, based on the award’s fair value at the date of grant. Awards generally vest over four years for employees. The Company generally uses the Black-Scholes option-pricing model to determine the fair value of each option grant as of the date of grant. The Black-Scholes option pricing model requires inputs for risk-free interest rate, dividend yield, expected stock price volatility and expected term of the options. The fair value of

10

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

the options is recognized as expense on a straight-line basis over the requisite service period. The Company recognizes the impact of forfeitures on stock-based compensation expense as forfeitures occur. The Company applies the straight-line method of expense recognition to all awards with only service-based vesting conditions. See Note 7, “Stock-Based Compensation” for additional details.

Other Income

The Company periodically receives reimbursements of clinical trial expenses, which are recorded as other income in the accompanying consolidated statement of operations and comprehensive loss. During the year ended December 31, 2020, the Company recorded reimbursements of $624,361.

Income taxes

The asset and liability approach is used for the financial reporting for income taxes. Deferred income balances reflect the effects of temporary differences between the financial reporting and income tax bases of the Company’s assets and liabilities and are measured using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses, or NOLs, and research and development credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse.

A valuation allowance is provided against deferred tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such determination, the Company considers all available positive and negative evidence, including taxable income in available carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards.

Recently adopted accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted this guidance using the modified retrospective method in the first quarter of fiscal year 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Recent accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU 2016-02, Leas es (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the consolidated balance

11

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

sheet for all leases longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the accompanying consolidated statement of operations and comprehensive loss. The new standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Management is currently evaluating the new standard and its possible impacts on the Company’s financial statements.

Note 3 – Consolidated balance sheet components

Property and equipment, net

Property and equipment consisted of the following as of December 31, 2020:

Tools and lab equipment	$ 384,947
Furniture and fixtures	45,976
Leasehold improvements	301,060
Computer and equipment	338,294
Production equipment	1,178,764
	2,249,041
Less accumulated depreciation and amortization	(1,361,700)
Total property and equipment, net	$ 887,341

Depreciation and amortization expense on property and equipment was $246,403 for the year ended December 31, 2020.

Accrued expenses and other liabilities

Accrued expenses and other liabilities consisted of the following at December 31, 2020:

Accrued compensation and related liabilities	$ 1,098,954
Accrued development expenses	755,573
Accrued other expenses	244,581
Accrued expenses and other liabilities	$ 2,099,108

Accrued other long-term liabilities

At December 31, 2020, other long-term liabilities consisted of deferred rent of $185,428.

Note 4 - Notes payable

Paycheck Protection Program

In April 2020, the Company received loan proceeds in the amount of $1,242,525 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amount up to 2.5 times of the average monthly payroll expense of the qualifying business. The loans and accrued interest are forgivable after the earlier of (i) 24 weeks after the loan

12

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

disbursement date and (ii) December 31, 2020, as long as the borrower uses the loan proceeds for eligible purposes including payroll, benefits, rent and utilities, and it maintains its payroll levels.

The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company used the proceeds for purposes consistent with the PPP, as such, interest was not accrued for the year ended December 31, 2020.

On May 20, 2021, the entire principal balance was forgiven and will be accounted for as a gain on extinguishment of debt during the year ended December 31, 2021.

Silicon Valley Bank – 2020

In March 2020, the Company entered into a loan and security agreement with Silicon Valley Bank and other lenders party thereto. The loan agreement provides for a term loan facility that includes three tranches in a principal amount of $3,000,000, which if drawn would result in an aggregate outstanding principal amount of $9,000,000. The Company used a portion of the proceeds of the initial tranche of term loans to fully repay its outstanding term loan under the 2018 loan and security agreement with Silicon Valley Bank. As of December 31, 2020, the outstanding principal balance under the loan agreement was $4,800,000.

Interest on the term loan accrues on the principal amount outstanding at a floating per annum rate equal to the greater of 7.25% or 2.50% above the Prime Rate and is payable monthly in arrears. The Company is required to make interest only payments from April 2020 to June 2020, thereafter, 30 monthly principal payments of $200,000 per month plus interest commencing July 2020 and continuing until the maturity of the note in December 2022.

The debt is secured against substantially all of the assets of the Company, except for the Company’s intellectual property but includes all proceeds from the sale of intellectual property.

The note payable described above was issued with fully vested detachable warrants. The note has been discounted using the relative fair value approach for the fair value of the warrants and the fair value of the debt. As of December 31, 2020, the note has been shown net of the unamortized discount of $21,696 on the consolidated balance sheet. Amortization of the discount was $8,136 during 2020, which is include in interest expense on the accompanying consolidated statement of operations and comprehensive loss. See Note 7 for additional information regarding the warrants.

Silicon Valley Bank – 2018

In April 2018, the Company and Silicon Valley Bank, entered into a loan and security agreement to provide a term loan in the principal amount of $3,000,000. The term loan under the loan agreement was secured by substantially all of the Company’s assets, other than intellectual property, but included proceeds from the sale of intellectual property. During 2020, the Company used a portion of the proceeds from the 2020 Silicon Valley Bank note payable to repay the outstanding balance. In connection with the term loan, the Company issued Silicon Valley Bank fully vested detachable warrants to purchase 234,176 shares of New Series B

13

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Convertible Preferred Stock. The note was discounted using the relative fair value approach for the fair value of the warrants and the fair value of the debt. Amortization of the discount was $47,885 during 2020, which is included in interest expense in the accompanying consolidated statement of operations and comprehensive loss.

At December 31, 2020, notes payable consisted of the following:

Current portion of notes payable	$ 2,442,525
Long-term portion of notes payable	3,600,000
Less unamortized deferred loan costs	(21,696)
Notes payable, net	$ 6,020,829

The following table presents information regarding the Company’s notes payable principal repayment obligations as of December 31, 2020:

principal repayment obligations as of December 31, 2020:
Years Ended December 31,
2021	$ 2,442,525
2022	2,400,000
2023	1,200,000
Total minimum payments	$ 6,042,525

Note 5 – Convertible Notes Payable

Convertible Note Payable – 2017

In October 2017, the Company issued a convertible promissory note for a principal amount of $9,020,589, with a maturity date of April 2028. The note has a stated interest rate of 8% per annum and is convertible into 12,445,334 common shares of EBR Systems (AUST) Pty. Ltd. Interest is only due and payable in the event the Company declares a dividend on the New Series B Convertible Preferred Stock. As no such dividends have been declared to date there has been no accrued interest recorded on this convertible note. In connection with the convertible note payable, the Company issued fully vested detachable warrants to purchase 1,950,607 shares of common stock in EBR-AU. The note was discounted using the relative fair value approach for the fair value of the warrants and the fair value of the debt. As of December 31, 2020, the convertible note has been shown net of the unamortized discount of $193,833. Amortization of the discount was $54,489, which is included in interest expense in the accompanying consolidated statement of operations and comprehensive loss.

A beneficial conversion feature discount of $1,240,800 was recorded at the issuance of the convertible promissory note. The beneficial conversion feature is being amortized as interest expense over the term of the convertible note payable. Amortization of the beneficial conversion feature was $118,738 during 2020, which is included in interest expense in the accompanying consolidated statement of operations and comprehensive loss. As of December 31, 2020, the unamortized beneficial conversion feature amounted to $864,851.

14

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Convertible Notes Payable – 2019

In August 2019, the Company issued the first of three tranches (“tranche one”) of convertible notes payable in the amount of $12,500,000. In March 2020, the Company issued the second of three tranches (“tranche two”) of convertible notes payable in the amount of $12,458,890. The convertible notes payable has a maturity date of December 2021. The notes have a stated rate of 10% per annum.

As part of the agreement, the Company issued fully vested detachable warrants to the tranche one and tranche two convertible note payable holders to purchase 4,438,437 shares and 4,423,389 shares, respectively, of the New Series B Convertible Preferred stock at $0.8245 per share. The warrants have an exercise period of 10 years. The Company has classified the warrants as equity. The convertible notes have been discounted using the relative fair value approach for the fair value of the warrants and the fair value of the debt. Accordingly, the fair value of the tranche one warrants at the time of issuance was $1,329,621 and the tranche two warrants was $1,526,399. As of December 31, 2020, the note has been shown net of the aggregate unamortized discount of $1,417,397 on the consolidated balance sheet. Amortization of the discount was $1,248,137 during 2020, which is included in interest expense on the accompanying consolidated statement of operations and comprehensive loss. See Note 7 for additional information regarding the warrants.

In the event the Company raises $20,000,00 of equity financing, not including the conversion of the notes, then the entire principal amount and accrued interest shall be converted into the qualified financing shares at 80% of the lowest price per share paid by a third party. If a qualified financing event is not triggered, the principal amount and accrued interest shall be converted into the New Series B Convertible Preferred stock at a price per share of $0.8245. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under FASB ASC Subtopic 815, Derivatives and Hedging, and determined that the embedded conversion features should be classified as a derivative liability because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment, as such, the Company has bifurcated the conversion feature of the note and recorded a derivative liability. See Note 6 for additional information regarding the derivative liability.

The embedded derivative for the note is carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company measures the fair value of the embedded derivative using the Monte Carlo simulation. The aggregate fair value of the derivative at the issuance date of tranche one and tranche two was $3,027,459 and $5,105,000, respectively, which was recorded as a derivative liability and debt discount at the time of issuance. At December 31, 2020, the unamortized debt discount was $4,173,443. Amortization of the debt discount was $3,526,522 during 2020 and is recorded as

15

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

interest expense on the accompanying consolidated statement of operations and comprehensive loss.

In February 2021, the Company issued the third and final tranche (“tranche 3”) of the convertible notes payable for $5,000,000. At that time, the Company also issued fully vested detachable warrants to purchase 1,732,123 shares of the New Series B Convertible Preferred stock at $0.8245 per share. The warrants have an exercise period of 10 years. The Company has classified the warrants as equity. The convertible notes have been discounted using the relative fair value approach for the fair value of the warrants and the fair value of the debt. Accordingly, the fair value of the tranche three warrants at the time of issuance was $624,981.

In May 2021, the convertible note holders elected to convert the aggregate principal balance and accrued interest from the tranche one, tranche two and tranche three convertible notes payable. The principal balance of $29,958,890 and accrued interest of $3,860,764 converted into 41,018,323 shares of the New Series B Convertible Preferred stock.

At December 31, 2020, convertible notes payable consisted of the following:

Current portion of convertible notes payable	$ 24,924,955
Long-term portion of convertible notes payable	9,020,589
Less unamortized discounts	(6,456,232)
Less unamortized deferredloancosts	(281,587)
Convertible notes payable, net	$ 27,207,725

The following table presents information regarding the Company’s convertible notes payable principal repayment obligation as of December 31, 2020:

payable principal repayment obligation as of December 31, 2020:
Years Ended December 31,	$ 24,924,955 - - - - 9,020,589
2021
2022
2023
2024
2025
Thereafter
Total minimum payments	$ 33,945,544

Note 6 – Derivative liabilities

The Company determined the conversion feature of the convertible notes, which contain a variable conversion rate, represented an embedded derivative since the notes were convertible into a variable number of shares upon conversion. Accordingly, the convertible notes are not considered to be conventional debt under FASB ASC Topic 815, Derivatives and Hedging, and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.

The Company valued the derivative liability at December 31, 2020, at $6,852,000. The Company used the Monte Carlo simulation valuation model with the following assumptions as of December 31, 2020, risk-free interest rate of 0.10% and volatility of 63.0%. The

16

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

initial derivative liabilities for convertible notes issued during the year ended December 31, 2020, used the following assumptions: risk-free interest rates of 0.38% and volatility of 64.0%.

A summary of the activity related to derivative liabilities for the years ended December 31, 2020, is as follows:

Balance at January 1, 2020	$ 3,128,364
Issued during the year	5,105,000
Change in fair value recognized in operations	(1,381,364)
Balance at December 31, 2020	$ 6,852,000

Note 7 – Warrants

The Company follows FASB ASC Subtopic 815-40 , Contract in an Entity’s Own Equity, as it relates to outstanding warrants.

In connection with the Silicon Valley Bank note payable as discussed in Note 4, which occurred in March 2020, the Company issued a warrant to purchase 441,500 shares of common stock at an exercise price of $0.14 per share. These warrants are exercisable, in whole or in part at any time up until the expiration of the warrant agreement at March 24, 2030. The aggregate fair value attributed to these warrants was $29,831 at the grant date. These warrants are classified as equity in the accompanying consolidated balance sheet.

The fair value for the warrants issued was calculated using the Black-Scholes model with the following assumptions:

Dividend yield	0.00%
Volatility	47.28%
Risk free interest rate	0.77%
Expected life	7 yrs.

In connection with the Tranche 2 of the 2019 convertible note payable as discussed in Note 5, which occurred in March 2020, the Company issued a warrant to purchase 4,423,389 shares of New Series B Convertible Preferred stock at an exercise price of $0.8245 per share. These warrants are exercisable, in whole or in part at any time up until the expiration of the warrant agreement on March 13, 2030. The aggregate fair value attributed to these warrants was $1,526,399 at the grant date. These warrants are classified as equity in the accompanying consolidated balance sheet.

The fair value for the warrants issued was calculated using the Black-Scholes model with the following assumptions:

Dividend yield	0.00%
Volatility	46.35%
Risk free interest rate	0.89%
Expected life	7 yrs.

17

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Below is a summary of warrants outstanding at December 31, 2020:

	Number of Shares	Weighted average exercise price	Weighted average remaining contractual term
Balance at January 1, 2020	4,850,327	$ 0.74	7.88
Issued	3,849,537	0.76	9.20
Exercised	-	0.00	-
Expired/Forfeited	-	0.00	-
Balance at December 31, 2020	8,699,864	$ 0.75	8.42

Note 8 – Commitments and Contingencies

In July 2017, the Company entered a new facilities lease with an 84-month operating lease, which expires on June 30, 2024. The lease includes provisions for escalating rent payments. Rent expense is recognized straight-line over the term of the lease. The lease included an allowance for tenant improvements of $228,555, which was recorded as a lease obligation and is being amortized over the term of the lease as a reduction to rent expense. As of December 31, 2020, the related unamortized lease incentive obligation was $115,654.

The minimum annual operating lease commitments and future minimum payments under this lease is as follows:

this lease is as follows:
Years Ended December 31,
2021	$ 352,735
2022	396,882
2023	408,786
2024	207,414
Total minimum payments	$ 1,365,817

Rental expense under operating lease agreements for the year ended December 31, 2020, was $346,564.

Note 9 – Convertible Preferred Stock

As of December 31, 2020, Convertible Preferred Stock consisted of the following:

Convertible Preferred Stock	Convertible Preferred Stock	Preferred Shares Authorized	Preferred Shares Authorized	Preferred Shares Issued and Outstanding	Carrying Value & Liquidation Preferences	Shares of Common Stock Issuable Upon Conversion
New Series A		3,523,428		3,488,010	$ 2,875,864	3,488,010
New SeriesB		195,000,000		81,368,446	67,088,284	81,368,446
Total convertible preferred stock		198,523,428		84,856,456	$ 69,964,148	84,856,456

18

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the New Series B Convertible Preferred Stock (“New Series B”) shall be entitled to receive, on a pari passu basis, prior and in preference to any distribution of any of the assets of the Company to the holders of the New Series A Convertible Preferred Stock (“New Series A”) or the Common Stock by reason of their ownership of such stock, an amount equal to the sum of i) the original issue price of $0.8245 per share and ii) all declared but unpaid dividends (if any). If upon the liquidation, dissolution or winding up of the Company, the assets of the Company legally available for distribution to the holders of the New Series B stock are insufficient to permit the payment to such holders of the full amounts specified above, then the entire assets of the Company legally available for distribution shall be distributed among the holders of the New Series B stock in the full amounts they would otherwise be entitled to receive.

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the New Series A stock shall be entitled to receive, on a pari passu basis, prior and in preference to any distribution of any of the assets of the Company to the holders of the Common Stock by reason of their ownership of such stock, an amount equal to the sum of i) the original issue price of $0.8245 per share and ii) all declared but unpaid dividends (if any). If upon the liquidation, dissolution or winding up of the Company, the assets of the Company legally available for distribution to the holders of the New Series A stock are insufficient to permit the payment to such holders of the full amounts specified above, then the entire assets of the Company legally available for distribution shall be distributed among the holders of the New Series A stock in the full amounts they would otherwise be entitled to receive.

Dividend Provisions

The holders of outstanding shares of New Series A stock and New Series B stock shall be entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available therefore, in preference and priority to any declaration or payment of any distribution on Common Stock in such calendar year at a rate of $0.06596 per share. The right to receive dividends on shares of preferred stock are not cumulative, and no right to dividends accrue to holders of preferred stock by reason of the fact that dividends on said shares are not declared or paid. As of December 31, 2020, there were no cumulative dividends owed or in arrears

Conversion Rights

Each outstanding share of New Series A stock and New Series B stock is convertible into such number of shares of common stock.

Each share of convertible preferred stock shall automatically be converted into shares of common stock immediately prior to the closing of a firm commitment underwritten public offering or upon the receipt by the Company of a written request of such conversion from twothirds of the holders of the Preferred Stock then outstanding. The conversion price of convertible preferred stock is subject to adjustments as a result of stock dividends, splits and other equity structuring transactions.

19

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Voting Rights

The holders of each share of convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such share is convertible.

Note 10 – Common Stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors. As of December 31, 2020, no dividends have been declared.

As of December 31, 2020, there were 240,000,000 shares authorized, of which 13,190,604 shares were outstanding.

Additionally, the Company has reserved the following shares of common stock for issuance as follows:

Conversion of 2017 convertible notes payable	12,445,334
Conversion of 2019 convertible notes payable	32,444,847
Conversion of New Series A Preferred Stock	3,488,010
Conversion of New Series B Preferred Stock	81,368,446
Conversion of Common Stock warrants	2,392,107
Conversion of New Series A warrants	21,649
Conversion of New Series B warrants	9,441,575
2013EquityInventivePlan	32,507,483
Total shares of Common stock reserved for issuance	174,109,451

Note 11 – Stock-based Compensation

In June 2013, the Board of Directors and the stockholders of the Company adopted the 2013 Equity Incentive Plan. Under the 2013 Plan 33,433,496 shares of common stock are reserved. The Company may grant options to purchase common stock, stock appreciation rights, restricted stock awards and other forms of stock-based compensation. Stock options generally vest over four years and expire no later than 10 years from the date of grant. The Board of Directors has the authority to select the employees to whom options are granted and determine the terms of each option, including i) the number of shares of common stock subject to the option; ii) when the option becomes exercisable; iii) the option exercise price, which must be at least 100% of the fair market value of the common stock as of the date of grant and iv) the duration of the option, which may not exceed 10 years.

As of December 31, 2020, options to purchase a total of 29,946,075 shares of common stock remained outstanding and 2,561,408 remain available for grant under the 2013 Plan as of December 31, 2020.

==> picture [472 x 80] intentionally omitted <==

20

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

Stock option activity for the year ended December 31, 2020 was as follows:

	Shares	Shares	Weighted- Average Remaining Contractual Life (in years) Weighted Average Exercise Price	Weighted- Average Remaining Contractual Life (in years) Weighted Average Exercise Price
Outstanding at January 1, 2020	29,958,361		$ 0.15
Granted	6,634,660 (6,558,616) (70,330)		0.12 0.15 0.16
Cancelled
Exercised
Outstanding at December 31, 2020	29,964,075		$ 0.15	8.02
	29,964,075 24,456,445		$ 0.15 8.02 $ 0.15 7.69
Vested and expected to vest at December 31, 2020
Exercisable at December 31, 2020

The fair value of the options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of the Company’s common stock, an assumed risk-free interest rate and expected dividends. The Company uses the simplified calculation of expected life and volatility is based on an average of the historical volatilities of the common stock of several publicly traded entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company uses the straight-line method for expense attribution. The weighted-average grant-date fair values of stock options granted during the year ended December 31, 2020, was $0.06 per share.

The following assumptions were used to calculate the grant-date fair value of employee stock options granted during the year ended December 31, 2020:

Expected Term (in years) 7.00	Expected Term (in years) 7.00
Expected Volatility 46.62% - 48.73%
Expected Dividend Yield 0.00%
Risk-Free Interest Rate 0.56% - 1.48% The following table presents classification of stock-based compensation expense within the accompanying consolidated statement of income and comprehensive loss:
the accompanying consolidated statement of income and comprehensive loss:
Research and development	$ 80,657
Sales and marketing	56,547
Clinical and regulatory	53,073
General andAdministrative	230,423
Total	$ 420,700

21

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

At December 31, 2020, there was $1,560,460 of unamortized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 2.55 years.

Note 12 – Income Taxes

The Company did not record any income tax expense for the year ended December 31, 2020. The Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets.

The Company’s effective tax rate of 0% for the year ended December 31, 2020, differs from the statutory U.S. federal rate as follows:

Statutory tax rate	$ (5,400,848) (148,597) (733,859) 1,301,124 4,982,180
R&D credit generation
State and foreign tax benefit
Other non-deductible expenses
Change in valuation allowance
Effective tax rate $ - The tax effects of temporary differences that give rise to significant components of the deferred tax assets are as follows:	$ -
deferred tax assets are as follows:
Net operating loss carryovers	$ 32,647,000
Other accruals	212,000
Stock based compensation	126,000
Tax credit carryover	1,445,000
Fixed assets	14,654,000
Gross deferred tax assets	49,084,000
Less valuation allowance	(49,084,000)
Net deferred tax assets	$ -

As of December 31, 2020, the Company recorded the portion of its deferred tax assets that was determined to meet the more likely than not threshold. Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets and evaluating the Company’s uncertain tax positions. Due to net losses since inception and the uncertainty of realizing the deferred tax assets, the Company has a full valuation allowance against its net deferred tax assets. To the extent that the Company generates positive income and expects, with reasonable certainty, to continue to generate positive income, the Company may release all, or a portion of, the valuation allowance in a future period. This release would result in the recognition of all, or a portion of, the Company’s deferred tax assets, resulting in a decrease to income tax expense for the period such release is made. As of December 31, 2020, the Company’s valuation allowance was $49,084,000 which increased by approximately $4,983,000 for the year ended December 31, 2020.

Net operating loss (“NOL”) carryforwards and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to annual limitation due to ownership changes that have occurred previously or that could occur in the future under Section 382 of the Internal Revenue Code, as amended and similar state

22

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

provisions. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed, and any limitation is known, no amounts are being presented as an uncertain tax position.

As of December 31, 2020, the Company had federal NOL carryforwards of $113,534,722, available to reduce taxable income, of which $45,825,483 expire beginning 2023 and $67,709,289 do not expire. The Company had state NOL carryforwards of $84,105,676 available to reduce future state taxable income, as of December 31, 2020, which expire beginning 2028.

As of December 31, 2020, the Company also had federal and state research and development credit carryforwards of $1,522,018 and $685,852 respectively. The federal research and development credit carryforwards expire beginning in 2030 and the state credit carryforwards do not expire.

Note 14 – Related Party Transactions

In October 2017, the Company entered into a services agreement with a stockholder of the Company. Under the terms of the agreement the stockholder of the Company agreed to provide services including a) advising on the Australian regulatory, business and healthcare environment; b) advising on the establishment of operation in Australia; c) assisting in the recruitment of key employees; and d) supporting clinical trial operations. In lieu of payment for services received, the Company will remit 10% of the gross Australian R&D Incentive Proceeds, net of accounting fees, to the stockholder of the Company. As of December 31, 2020, there was no outstanding liability for amounts due to the stockholder of the Company.

Note 15 – Subsequent Events

The Company has evaluated subsequent events that have occurred through September 30, 2021, which is the date that the financial statements were available to be issued and determined that there were no subsequent events or transactions that required recognition or disclosure in the financial statements except as discussed in Note 4 and Note 5 and below.

On June 25, 2021, the Company entered into a Note and Warrant Purchase agreement and issued the first of three tranches of convertible notes payable totaling $8,712,277. The Company also issued fully vested detachable warrants to purchase 3,111,787 shares of New Series B Convertible Preferred stock at $0.8245 per share. The warrants have an exercise period of 10 years. In September 2021, the Company issued a call on the second tranche of the convertible

23

EBR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020

notes. The Company expects to issue convertible notes payable totaling $8,712,277 in early October 2021. As part of the second tranche the Company will issue fully vested detachable warrants to purchase 3,111,787 shares of New Series B Convertible Preferred Stock at $0.8245 per share.

24