Neuraxis, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Neuraxis, Inc. Condensed Balance Sheet September 30, 2023 (Unaudited) December 31, 2022 Assets Current Assets: Cash and cash equivalents $ 761,249 $ 253,699 Accounts receivable, net 132,382 174,399 Inventories 34,530 48,133 Prepaids and other current assets 38,693 726 Total current assets 966,854 476,957 Property and Equipment, at cost: 420,586 405,845 Less - accumulated depreciation ( 340,260 ) ( 317,834 ) Property and equipment, net 80,326 88,011 Other Assets: Deferred offering costs — 736,736 Operating lease right of use asset 78,043 101,382 Intangible assets, net 110,695 77,558 Total Assets $ 1,235,918 $ 1,480,644 Liabilities Current Liabilities: Accounts payable $ 566,649 $ 1,592,116 Accrued expenses 280,063 834,062 Notes payable 194,249 202,834 Current portion of operating lease payable 45,194 33,395 Notes payable - related party — 58,051 Notes payable — 58,051 Notes payable - convertible notes, net of unamortized discount of $ 0 and $ 3,327,213 as of September 30, 2023 and December 31, 2022 — 228,342 Customer deposits 68,972 59,174 Share liabilities 934,256 — Derivative liabilities — 1,735,700 Warrant liabilities 168,269 2,234,384 Total current liabilities 2,257,652 6,978,058 Non-current Liabilities: Operating lease payable, net of current portion 39,353 76,199 Note payable, net of current portion — — Total non-current liabilities 39,353 76,199 Total liabilities 2,297,005 7,054,257 Commitments and contingencies (see note 14) - Stockholders’ Equity (Deficit) Convertible Series A Preferred stock, $ 0.001 par value; 1,000,000 shares authorized; 0 issued and outstanding as of September 30, 2023 and 506,637 as of December 31, 2022 — 507 Convertible Series Seed Preferred Stock, $ 0.001 par value; 120,000 shares authorized; 0 issued and outstanding as of September, 2023 and 115,477 as of December 31, 2022 — 115 Preferred Stock, value - 115 Common stock, $ 0.001 par value; 100,000,000 shares authorized; 5,149,340 issued and outstanding as of September, 2023 and 1,963,322 as of December 31, 2022 5,149 1,963 Additional paid in capital 42,178,570 28,355,230 Accumulated deficit ( 43,244,806 ) ( 33,931,428 ) Total stockholders’ equity (deficit) ( 1,061,087 ) ( 5,573,613 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 1,235,918 $ 1,480,644 The accompanying notes are an integral part of these unaudited condensed financial statements. 3 Neuraxis, Inc. Condensed Statements of Operations (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Net Sales $ 477,460 $ 618,805 $ 1,928,590 $ 2,071,653 Cost of Goods Sold 67,287 67,638 231,000 221,846 Gross Profit 410,173 551,167 1,697,590 1,849,807 Selling Expenses 64,210 81,589 250,933 344,892 Research and Development 44,950 86,175 171,536 144,239 General and Administrative 3,323,352 1,586,527 6,316,411 3,746,688 Operating Loss ( 3,022,339 ) ( 1,203,124 ) ( 5,041,290 ) ( 2,386,012 ) Other Income (Expense): Financing charges — ( 601,128 ) ( 2,772 ) ( 1,473,892 ) Interest expense ( 102,628 ) ( 100,741 ) ( 453,869 ) ( 161,291 ) Interest income 2,103 — 2,103 — Change in fair value of warrant liability 592,853 ( 90,628 ) 791,610 ( 660,189 ) Change in fair value of derivative liability 6,394 ( 68,032 ) 198,551 ( 68,032 ) Amortization of debt discount and issuance cost ( 1,331,030 ) ( 16,029 ) ( 4,881,622 ) ( 28,973 ) Extinguishment of debt liabilities ( 1,058,062 ) — 71,436 — Other income 9,931 — 11,483 11,956 Other expense ( 1,578 ) — ( 9,008 ) — Total other income (expense), net ( 1,882,017 ) ( 876,558 ) ( 4,272,088 ) ( 2,380,421 ) Net Loss $ ( 4,904,356 ) $ ( 2,079,682 ) $ ( 9,313,378 ) $ ( 4,766,433 ) Per-share Data Basic and diluted loss per share $ ( 1.35 ) $ ( 1.14 ) $ ( 3.65 ) $ ( 2.70 ) Weighted Average Shares Outstanding Basic and diluted 3,625,519 1,988,758 2,552,007 1,976,380 The accompanying notes are an integral part of these unaudited condensed financial statements. 4 Neuraxis, Inc. Statements of Stockholders’ Deficit For the Three and Nine Months Ended September 30, 2022 Convertible Series A Preferred Stock Convertible Series Seed Preferred Stock Common Stock Additional Paid In Accumulated Stockholder’s Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balances, January 1, 2022 506,637 $ 507 115,477 $ 115 1,928,004 $ 1,928 $ 28,323,157 $ ( 29,151,367 ) $ ( 825,660 ) Stock based compensation — — — — — — 11,994 — 11,994 Net loss — — — — — — — ( 1,170,221 ) ( 1,170,221 ) Balances, March 31, 2022 506,637 $ 507 115,477 $ 115 1,928,004 $ 1,928 $ 28,335,151 $ ( 30,321,588 ) $ ( 1,983,887 ) Stock based compensation — — — — — — 12,127 — 12,127 Common stock issued upon signing of notes payable — — — — 14,125 14 1,034 — 1,048 Net loss — — — — — — — ( 1,516,530 ) ( 1,516,530 ) Balances, June 30, 2022 506,637 $ 507 115,477 $ 115 1,942,129 $ 1,942 $ 28,348,312 $ ( 31,838,118 ) $ ( 3,487,242 ) Stock based compensation — — — — — — 3,198 — 3,198 Common stock issued upon signing of notes payable — — — — 9,419 9 2,308 — 2,317 Net loss — — — — — — — ( 2,079,682 ) ( 2,079,682 ) Balances, September 30, 2022 506,637 $ 507 115,477 $ 115 1,951,548 $ 1,951 $ 28,353,818 $ ( 33,917,800 ) $ ( 5,561,409 ) For the Three and Nine Months Ended September 30, 2023 Convertible Series A Preferred Stock Convertible Series Seed Preferred Stock Common Stock Additional Paid In Accumulated Stockholder’s Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balance, January 1, 2023 506,637 $ 507 115,477 $ 115 1,963,322 $ 1,963 $ 28,355,230 $ ( 33,931,428 ) $ ( 5,573,613 ) Net loss — — — — — — — ( 2,173,408 ) ( 2,173,408 ) Balance, March 31, 2023 506,637 $ 507 115,477 $ 115 1,963,322 $ 1,963 $ 28,355,230 $ ( 36,104,836 ) $ ( 7,747,021 ) Net loss — — — — — — — ( 2,235,614 ) ( 2,235,614 ) Balances, June 30, 2023 506,637 $ 507 115,477 $ 115 1,963,322 $ 1,963 $ 28,355,230 $ ( 38,340,450 ) $ ( 9,982,635 ) Balances 506,637 $ 507 115,477 $ 115 1,963,322 $ 1,963 $ 28,355,230 $ ( 38,340,450 ) $ ( 9,982,635 ) Common stock issued upon initial public offering, net — — — — 1,098,667 1,099 4,859,622 — 4,860,721 Common stock issued upon preferred stock conversion ( 506,637 ) ( 507 ) ( 115,477 ) ( 115 ) 167,986 168 ( 622 ) — ( 1,076 ) Common stock issued upon debt conversion — — — — 1,494,359 1,494 8,964,765 — 8,966,259 Common stock issued from agreements — — — — 425,000 425 ( 425 ) — — Net loss — — — — — — — $ ( 4,904,356 ) $ ( 4,904,356 ) Balances, September 30, 2023 — $ — — $ — 5,149,334 $ 5,149 $ 42,178,570 $ ( 43,244,806 ) $ ( 1,061,087 ) Balances — $ — — $ — 5,149,334 $ 5,149 $ 42,178,570 $ ( 43,244,806 ) $ ( 1,061,087 ) The accompanying notes are an integral part of these unaudited condensed financial statements. 5 Neuraxis, Inc. Condensed Statement of Cash Flows (Unaudited) 2023 2022 For the Nine Months Ended September 30, 2023 2022 Cash Flows from Operating Activities Net Loss $ ( 9,313,378 ) $ ( 4,766,433 ) Adjustments to reconcile net loss to net cash used by operating activities: Adjustments to reconcile net loss to net cash used by operating activities: Amortization of debt discount and issuance cost 4,881,622 28,973 Depreciation and amortization 30,290 25,047 Provisions for losses on accounts receivable 6,380 42,795 Non-cash lease expense 23,339 19,945 Non-cash interest expense 260,777 — Stock based compensation — 27,319 Extinguishment of derivative liability ( 71,436 ) — Issuance of common stock for non-cash consideration 2,550,000 — Finance charges 2,772 1,473,892 Change in fair value of debt liabilities ( 198,551 ) 68,032 Change in fair value of warrant liabilities ( 791,610 ) 660,189 Changes in operating assets and liabilities: Accounts receivable 35,637 ( 247,738 ) Inventory 13,603 ( 18,141 ) Prepaids and other current assets ( 37,967 ) ( 481 ) Accounts payable ( 1,025,467 ) 359,652 Accrued expenses ( 415,181 ) 256,184 Customer deposits 9,798 7,762 Operating lease liability ( 25,047 ) ( 20,686 ) Net cash used by operating activities ( 4,064,419 ) ( 2,083,689 ) Cash Flows from Investing Activities Additions to property and equipment ( 14,741 ) ( 11,390 ) Additions to intangible assets ( 41,000 ) — Net cash used by investing activities ( 55,741 ) ( 11,390 ) Cash Flows from Financing Activities Proceeds from issuance of common stock, net of issuance costs 5,464,642 — Offering costs in advance of sale of common stock ( 2,417,185 ) ( 87,694 ) Principal payments on notes payable ( 3,487,578 ) ( 122,265 ) Proceeds from notes payable 159,831 122,000 Proceeds from convertible notes, net of fees 4,908,000 1,870,000 Net cash provided (used) by financing activities 4,627,710 1,782,041 Net Increase (decrease) in Cash and Cash Equivalents 507,550 ( 313,038 ) Cash and Cash Equivalents at Beginning of Period 253,699 320,858 Cash and Cash Equivalents at End of Period $ 761,249 $ 7,820 Supplemental Disclosure of Non-cash Cash Activities Cash paid for interest $ 192,015 $ 118,391 Cash paid for income taxes — — Supplemental Schedule of Non-cash Investing and Financing Activities Fair value of warrant liabilities of warrants from convertible notes $ 2,446,502 $ 1,822,435 Fair value of derivative liabilities of conversion feature from convertible notes 2,375,378 1,518,092 Relative fair value of shares issued with convertible notes — 3,365 Deferred offering costs in accounts payable — 606,830 The accompanying notes are an integral part of these unaudited condensed financial statements. 6 1. Basis of Presentation, Organization and Other Matters Neuraxis, Inc. (“we,” “us,” the “Company,” or “Neuraxis”) was established in 2011 and incorporated in the state of Indiana on April 17, 2012, under the name of Innovative Health Solutions, Inc. The name was changed to Neuraxis, Inc. in March of 2022. Additionally, the Company filed a Certificate of Conversion to become a Delaware corporation on June 23, 2022. The authorized shares were increased, and a par value established. On September 7, 2021, the Company’s board of directors authorized a 4-for-1 stock split . They also increased the number of authorized common stock shares from 2,700,000 to 10,800,000 . Furthermore, on September 9, 2021, the board authorized an increase of authorized shares of common stock from 10,800,000 to 13,400,000 in anticipation of a capital offering. Furthermore, on January 10, 2023, the Company’s board of directors authorized a 1-for-2 reverse stock split . All per share information has been adjusted for this reverse stock split. The reverse split became effective on January 12, 2023. All share and per share amounts for the common stock have been retroactively restated to give effect to the splits. As part of the conversion to a Delaware corporation, the total number of shares of all classes of stock which the Corporation shall have authority to issue is (1) 100,000,000 shares of Common Stock, par value $ 0.001 per share (“Common Stock”) and (ii) 1,120,000 shares of Preferred Stock, par value $ 0.001 per share (“Preferred Stock”), 1,000,000 of which is hereby designated as “Series A Preferred Stock” and 120,000 of which is hereby designated as “Series Seed Preferred Stock” with the rights, preferences, powers, privileges and restrictions, qualifications and limitations set forth in this Article IV of the Delaware Certificate of Incorporation. All share amounts have been retroactively restated to give effect to these changes. On August 11, 2023, the Company consummated the IPO, conducted on a firm commitment basis, pursuant to which it sold 1,098,667 shares of its common stock at a price of $ 6.00 per share, resulting in gross proceeds to the Company of approximately $ 6.6 million. Net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses paid by the Company, were approximately $ 5.5 million. All shares sold in our IPO were registered pursuant to a registration statement on Form S-1 (File No. 333- 269179), as amended, declared effective by the SEC on August 8, 2023. Alexander Capital L.P. (“Alexander”) acted as sole book-running manager for the offering and Spartan Capital Securities, LLC acted as co-manager for the offering. The underwriters did not exercise their option to purchase up to an additional 164,801 shares of common stock. The Company paid the underwriters an underwriting discount of seven percent ( 7 %) of the amount raised in the offering. In addition, we also paid the underwriters a non-accountable expense allowance in the amount of 1 % (such 8 % in commissions and fees amounted to a total of $ 527 thousand) at closing, as well as $ 175 thousand for the reimbursement of certain of the underwriters’ expenses. Additionally, as partial consideration for services rendered in connection with the offering, the Company issued Alexander unregistered warrants to purchase an aggregate of 65,921 shares of Company common stock, representing 6.0 % of the aggregate shares sold in the offering. The warrants have an initial exercise price of $ 7.20 per share (equal to 120 % of the offering price per share), have a term of five years from the commencement of sales in the offering, and are exercisable at any time. The Company is headquartered in Carmel, Indiana. The Company specializes in the development, production, and sale of medical neuromodulation devices. The Company has developed three FDA cleared products, the IB-STIM (DEN180057, 2019), the NSS-2 Bridge (DEN170018, 2017), and the original 510(K) clearance (K140530, 2014). ● The IB-STIM is a percutaneous electrical nerve field stimulator (PENFS) device that is indicated in patients 11-18 years of age with functional abdominal pain associated with irritable bowel syndrome. The IB-STIM currently is the only product marketed and sold by the Company. ● The NSS-2 Bridge is a percutaneous nerve field stimulator (PNFS) device indicated for use in the reduction of the symptoms of opioid withdrawal. The NSS-2 Bridge device was licensed to Masimo Corporation in April 2020, and the Company received a one-time licensing fee of $ 250,000 from Masimo. Masimo markets and sells this product as its Masimo Bridge, and the Company will not receive any further licensing payments or other revenue from this product. ● The original 510(K) device was the EAD, an electroacupuncture device, now called NeuroStim. The EAD is no longer being manufactured, sold or distributed but reserved only for research purposes. 2. Summary of Significant Accounting Policies The summary of significant accounting policies of Neuraxis, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to U.S. generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 7 Basis of Presentation The Company’s condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2023, or any other interim period or for any other future year. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2022. Use of Estimates and Critical Accounting Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve, and impairment of intellectual property. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company did not hold any cash equivalents as of September 30, 2023 and December 31, 2022. Trade Accounts Receivable Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at year-end. Management considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, it has concluded that realization losses on balances outstanding at year-end will be immaterial. Interest is not charged on past due customer accounts. Allowance for Credit Losses Trade accounts receivable are stated net of an allowance for credit losses. We estimate allowance for credit losses by evaluating specific accounts where information indicates our customers may have an inability to meet financial obligations, such as customer payment history, credit worthiness and receivable amounts outstanding for an extended period beyond contractual terms. We use assumptions and judgment, based on the best available facts and circumstances, to record an allowance to reduce the receivable to the amount expected to be collected. The allowance for doubtful accounts was $ 24,895 and $ 31,275 at September 30, 2023 and December 31, 2022, respectively. The Company recorded credit losses for the three and nine months ended September 30, 2023 of $ 9,996 and $ 13,923 , respectively, and for the three and nine months ended September 30, 2022 of $ 13,216 and $ 42,795 , respectively. 8 Customer Deposits Customer deposits consists of billings, payments, and returned devices from clients in advance of revenue recognition. The Company will recognize the customer deposits over the next year. As of September 30, 2023, and December 31, 2022, the Company had customer deposits of $ 68,972 and $ 59,174 , respectively. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the weighted average method. The inventory is comprised of finished medical devices on hand. Certain components within the devices have an expiration date that are removed from current inventory and expensed at the date of expiration. There was no expired inventory for the three and nine months ended September 30, 2023 and September 30, 2022 . Deferred Offering Costs Deferred offering costs consist of costs incurred in connection with the preparation of an initial public offering. These costs, together with the underwriting discounts and commissions, will be charged to additional paid in capital upon completion of the proposed public offering. As of September 30, 2023, and December 31, 2022, the Company had deferred offering costs of $ 0 and $ 736,736 , respectively. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation is calculated using the following estimated useful lives: Schedule of Estimated Useful Lives Classification Years Leasehold Improvements 10 - 20 Machinery and Equipment 7 - 10 Furniture and Fixtures 5 - 10 Depreciation expense was $ 7,609 and $ 22,426 during the three and nine months ended September 30, 2023, respectively, and was $ 7,868 and $ 23,592 during the three and nine months ended September 30, 2022, respectively. Research and Development Costs for research and development are expensed as incurred. Research and development expenses consist primarily of clinical research studies, and new product development. Intangible Assets Intangible assets consist of patents and a trademark. Patents are stated at their historical cost and amortized on a straight-line basis over their expected useful lives. Capitalized patent costs, net of accumulated amortization, includes legal costs incurred for patent applications. In accordance with ASC 350, once a patent is granted, we amortize the capitalized patent costs over the remaining life of the patent using the straight-line method. If the patent is not granted, we write-off any capitalized patent costs at that time. The Company entered into an agreement for a trademark related to the Company’s name on July 11, 2022. The agreement called for an initial payment of $ 10,000 upon execution of the agreement. A second and final payment of $ 40,000 was contingent upon the completion of the Company’s planned initial public offering. The second payment has been accrued and is recorded in accounts payable and intangible assets on the balance sheet. The trademark does not have a determinate life and therefore the cost is not being amortized. 9 The Company entered into an option agreement on April 12, 2023 to enter into a royalty-bearing licensing agreement to bring the optionor’s invention to commercialization. The agreement required an initial payment of $ 1,000 upon execution of the agreement. The agreement does not have a determinate life and therefore the cost is not being amortized. We review intangible assets for impairment annually or when events or circumstances indicate that their carrying amount may not be recoverable. During the three and nine months ended September 30, 2023 and 2022, the Company recorded no impairment charges for intangible assets. Amortization expense was $ 2,621 and $ 7,864 during the three and nine months ended September 30, 2023, respectively, and was $ 485 and $ 1,455 during the three and nine months ended September 30, 2022, respectively. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements and tax returns. Deferred tax assets and liabilities are determined based upon the differences between the financial statement carrying amounts, and the tax bases of existing assets and liabilities for the loss and credit carryforwards using enacted tax rates expected to be in effect in the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that these assets may not be realized. The Company determines whether a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, none of the benefit attributable to the position is recognized. The tax benefit to be recognized for any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Based on the results of management’s evaluation, adoption of the rules did not have a material effect on the Company’s financial statements. Further, no interest or penalties have been accrued or charged to expense as of September 30, 2023 and 2022 and for the nine months then ended. The Company’s income tax returns are subject to examination by the taxing authorities until the expiration of the related statutes of limitations on those tax returns. In general, the federal and state income tax return have a three-year statute of limitations. As of September 30, 2023, the following tax years are subject to examination: Jurisdiction Open Years for Filed Returns Federal 2020 – 2022 Various States 2020 – 2022 Advertising Cost Advertising costs are expensed as incurred and amounted to $ 21,730 and $ 54,716 for the three and nine months ended September 30, 2023, respectively, and $ 3,300 and $ 14,900 for the three and nine months ended September 30, 2022, respectively. Derivative Liabilities The Company accounts for derivative financial instruments as either equity or liabilities in accordance with ASC Topic 815, Derivatives and Hedging , or ASC 815, based on the characteristics and provisions of each instrument. Embedded derivatives are required to be bifurcated from the host instruments and recorded at fair value if the derivatives are not clearly and closely related to the host instruments on the date of issuance. Derivative instrument liabilities are classified in the balance sheets as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. 10 Warrant Liabilities Management evaluates all of the Company’s financial instruments, including issued Warrants to purchase its Class A common stock, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. The Company utilizes a Monte Carlo simulation model for warrants that have an option to convert at a variable number of shares to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the Monte Carlo model included a starting stock price, an expected remaining term of each warrant as of the valuation date, estimated volatility, drift, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the statements of operations. Fair Value Measurements The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below: Level 1 – Quoted prices (unadjusted) for identical unrestricted assets or liabilities in active markets that the reporting entity has the ability to access as of the measurement date. Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities: quoted prices in markets that are not active; or financial instruments for which all significant inputs are observable or can be corroborated by observable market date, either directly or indirectly. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These unobservable inputs reflect that reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value require significant management judgment or estimation. The Company’s Level 1 assets/liabilities include cash, accounts receivable, accounts payable, prepaids, and other current assets. Management believes the estimated fair value of these accounts on September 30, 2023 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments. The Company’s Level 3 assets/liabilities include derivative and warrant liabilities. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. 11 The following tables provides a summary of the relevant assets and liabilities that are measured at fair value on recurring basis: Fair Value Measurements as of September 30, 2023 Schedule of Fair Value On a Recurring Basis Assets and Liability Total (Level 1) (Level 2) (Level 3) Liabilities: Warrant liabilities $ 168,269 $ — $ — $ 168,269 Derivative liabilities $ — $ — $ — $ — Total Liabilities $ 168,269 $ — $ — $ 168,269 Fair Value Measurements as of December 31, 2022 Total (Level 1) (Level 2) (Level 3) Liabilities: Warrant liabilities $ 2,234,384 $ — $ — $ 2,234,384 Derivative liabilities $ 1,735,700 $ — $ — $ 1,735,700 Total Liabilities $ 3,970,084 $ — $ — $ 3,970,084 The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on recurring basis as of September 30, 2023 and December 31, 2022: Schedule of Unobservable Inputs for Level 3 Assets and Liabilities As of Fair Value As of Fair Value Valuation Unobservable September 30 2023 December 31 2022 Methodology Inputs Warrant liabilities $ 168,269 $ 2,234,384 Monte Carlo model Project simulated cash flows Derivative liabilities $ — $ 1,735,700 Monte Carlo model Project simulated cash flows There were no transfers between any of the levels during the three and nine months ended September 30, 2023 and year ended December 31, 2022. In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company’s assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. Basic and Diluted Net Income (Loss) per Share Earnings or loss per share (“EPS”) is computed by dividing net income (loss), net of preferred stock dividends, by the weighted average number of shares of common stock outstanding during the period. Basic weighted average shares for the quarter ended September 30, 2023 includes 40,000 vested warrants to purchase common shares. As the shares underlying these warrants can be purchased for little to no consideration ($ 0.01 per share exercise price), they are included in the computation of basic earnings per share. Diluted EPS is computed by dividing net income (loss) by the weighted average of all potentially dilutive shares of common stock that were outstanding during the periods presented. Preferred stock dividends (not declared or paid) were $ 0 and $ 2,190,102 as of September 30, 2023 and December 31, 2022, respectively. Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for September 30, 2023 and 2022 presented in these financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. 12 The Company had the following potentially dilutive common stock equivalents at September 30, 2023 and 2022: Schedule of Dilutive Common Stock Equivalents 2023 2022 Convertible Series A Preferred Stock — 1,013,270 Convertible Series Seed Preferred Stock — 230,954 Options 1,319,394 1,319,394 Pre-Funded Warrants for Convertible Series A Preferred Stock — 289,779 Warrants 1,788,012 496,516 Totals 3,107,406 3,349,913 The following table shows the calculation of the basic and diluted net loss per share and the effect of preferred stock dividends. Schedule of Basic and Diluted Net Loss Per Share 2023 2022 2023 2022 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Numerator Net loss $ ( 4,904,356 ) ( 2,079,682 ) $ ( 9,313,378 ) ( 4,766,433 ) Preferred stock dividends — ( 192,794 ) — ( 572,098 ) Net income (loss) available to common stockholders ( 4,904,356 ) ( 2,272,476 ) ( 9,313,378 ) ( 5,338,531 ) Denominator Weighted-average shares of common stock outstanding - basic and diluted 3,625,519 1,988,758 2,552,007 1,976,380 Basic and diluted net loss per share $ ( 1.35 ) $ ( 1.14 ) $ ( 3.65 ) $ ( 2.70 ) Stock-Based Compensation The Company accounts for all stock-based payments and awards under the fair value-based method. The Company recognizes its stock-based compensation expense using the straight-line method. Compensation cost is not adjusted for estimated forfeitures, but instead is adjusted upon an actual forfeiture of a stock option. The Company accounts for the granting of stock options to employees and non-employees using the fair value method whereby all awards are measured at fair value on the date of the grant. The fair value of all employee stock options is expensed over the requisite service period with a corresponding increase to additional paid-in capital. Upon exercise of stock options, the consideration paid by the option holder is recorded in additional paid-in capital, while the par value of the shares received is reclassified from additional paid in capital to common stock. Stock-based payments to non-employees are measured based on the fair value of the equity instrument issued. Compensation expense for non-employee stock awards is recognized over the requisite service period following the measurement of the fair value on the grant date. The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected term of the option, risk-free interest rates, the value of the common stock and expected dividend yield of the common stock. Changes in these assumptions can materially affect the fair value estimate. 13 Revenue Recognition Neuraxis, Inc. specializes in the development, production, and sale of medical neuromodulation devices to healthcare providers primarily located in the United States. Patented and trademarked neuromodulation devices is the Company’s major product line. Products are generally transferred at a point in time (rather than over time). Essentially all the Company’s revenue is generated from purchase order contracts. In accordance with FASB’s ASC 606, Revenue from Contracts with Customers, (“ASC 606”), the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts when it determines that it is probable it will collect substantially all of the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price, after consideration of variability and constraints, if any, that is allocated to the respective performance obligation when the performance obligation is satisfied. The Company estimates credit losses on accounts receivable by estimating expected credit losses over the contractual term of the receivable using a discounted cash flow method. When developing this estimate of expected credit losses, the Company considers all available information (past, current, and future) relevant to assessing the collectability of cash flows. The Company offers a Patient Assistance Program for patients without insurance coverage for IB-Stim. This program extends potential self-pay discounts for IB-Stim devices, based upon household income and size. Also, the Company offers providers an opt-in program to address adequate insurance claim payments on IB-Stim devices. This program may extend a rebate or invoice credit where the insurance payment and patient responsibility (i.e., deductible, co-payment, and/or co-insurance amounts required by the Payer) are less than the acquisition cost of the IB-Stim device. The Company recognizes revenue at such a time that collection of the amount due is assured. The following table disaggregates the Company’s revenue based on the customer’s location by state for the three months ended September 30: Schedule of Disaggregation of Revenue 2023 2022 California $ 138,075 Wisconsin $ 126,725 Ohio 129,200 Ohio 122,400 Florida 37,810 California 76,900 Wisconsin 24,700 Florida 71,700 Illinois 21,510 Missouri 62,140 All other states 126,165 All other states 158,940 $ 477,460 $ 618,805 The following table disaggregates the Company’s revenue based on the customer’s location by state for the nine months ended September 30: 2023 2022 California $ 513,395 Wisconsin $ 560,345 Ohio 278,500 Ohio 374,670 Wisconsin 223,340 California 269,805 Florida 135,410 Florida 179,075 Missouri 95,030 Missouri 143,400 All other states 682,915 All other states 544,358 $ 1,928,590 $ 2,071,653 14 The following economic factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows as indicated: Type of customer: Based on dollar amounts of revenue, essentially all of the goods sold by the Company are sold to healthcare customers including hospitals and clinics. Sales to healthcare customers lack seasonality and have a mild correlation with economic cycles. Geographical location of customers: Sales to customers located within the United States represent essentially all of the Company’s sales. Type of contract: Sales contracts consist of purchase order contracts that tend to be short-term (i.e., less than or equal to one year in duration). The opening and closing balances of trade receivables, contract assets, and contract liabilities from contracts with customers are as follows: Schedule of Trade Receivables Contract Assets and Contract Liabilities Trade Receivables Contract Assets Contract Liabilities Balance 1/1/2022 $ 115,301 $ 0 $ 0 Balance 12/31/22 and 1/1/2023 $ 174,399 $ 0 $ 0 Balance 9/30/2023 $ 132,382 $ 0 $ 0 Company’s Performance Obligations with Customers: Timing of Satisfaction The Company typically satisfies its performance obligations as the goods are delivered. Goods that are shipped to customers are typically shipped FOB shipping point with freight prepaid by the Company. As such, ownership of goods in transit transfer to the customer when shipped and the customer bears the associated risks (e.g., loss, damage, delay). In some cases, a customer will take delivery directly from the Company’s inventory (i.e., consigned inventory), at which point ownership and the associated risks pass to the customer at that time. Shipping and handling costs are recorded as general and administrative expenses in the Statement of Operations. Significant Payment Terms Payment for goods sold by the Company is typically due after an invoice is sent to the customer, within 30 days. However, other payment terms are frequently negotiated with customers ranging from due upon receipt to due within 90 days. Some payment terms may call for payment only after the healthcare provider receives their insurance reimbursement. Invoices for goods are typically sent to customers within three calendar days of shipment. The Company does not offer discounts if the customer pays some or all of an invoiced amount prior to the due date. None of the Company’s contracts have a significant financing component. Nature Medical devices that the Company contracts to sell and transfer to customers are manufactured by one specific third-party manufacturer. The manufacturer is located within the state of Indiana. In no case does the Company act as an agent (i.e., the Company does not provide a service of arranging for another party to transfer goods to the customer). 15 Returns, Refunds, etc. Orders may not be cancelled after shipment. Customers may return devices within 10 days of delivery if the goods are found to be defective, nonconforming, or otherwise do not meet the stated technical specifications. At the option of the customer, the Company shall either: ● Refund the price paid for any defective or nonconforming products ● Supply and deliver to the customer replacement conforming products ● Reimburse the customer for the cost of repairing any defective or nonconforming products At the time revenue is recognized, the Company estimates expected returns and excludes those amounts from revenue. The Company also maintains appropriate accounts to reflect the effects of expected returns on the Company’s financial position and periodically adjusts those accounts to reflect its actual return experience. Historically, returns have been immaterial, and the Company currently does not provide a provision for this liability. Warranties In most cases, goods that customers purchase from the Company are covered by manufacturers’ warranties. The Company does not sell warranties separately. The manufacturer guarantees the product for the period up to the expiration date printed on the device’s label or twelve months from the date of purchase, whichever comes first. The guarantee applies to flaws of material and workmanship. The Company’s warranties provide customers with assurance that purchased devices comply with published specifications, inspection standards, and workmanship. At the time revenue is recognized, the Company estimates the cost of expected future warranty claims but does not exclude any amounts from revenue. The Company maintains appropriate accounts to reflect the effects of expected future warranty claims on the Company’s financial position and periodically adjusts those accounts to reflect its actual warranty claim experience. Historically, warranty claims have been immaterial, and the Company currently does not provide a provision for this liability. The Company typically satisfies its performance obligations for goods at a point in time. In most cases, goods are shipped by common carrier to customers under “FOB Shipping Point” terms. As such, customers typically obtain control of the goods upon shipment. The Company’s management exercises judgment in determining when performance obligations for goods have been satisfied. In making such judgments, management typically relies on shipping information obtained from common carriers to evaluate when the customer has obtained control of the goods. The Company’s contracts with customers typically do not involve variable consideration. The information that the Company uses to determine the transaction price for a contract is similar to the information that the Company’s management uses in establishing the prices of goods to be sold. Leases Effective January 1, 2021, the Company adopted Accounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC 842”), using the full retrospective method, the cumulative effect of the accounting change is recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and current and non-current lease liabilities, as applicable. Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Prospectively, the Company will adjust the right-of-use assets for straight-line rent expense, or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date. The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. 16 Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. Entities may elect not to separate lease and non-lease components. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all the contract consideration to the lease component only. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable, we compare the carrying amount of the asset group to future undiscounted net cash flows, excluding interest costs, expected to be generated by the asset group and their ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the impairment to be recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Concentrations of Credit Risk The Company’s business activity consists of the sale of medical neuromodulation devices to doctors, clinics, and hospitals across the country. Receivables consist of unsecured amounts due from customers. As of September 30, 2023, accounts receivable from two customers with balances due in excess of 10 % of total accounts receivable were approximately 15 %, and 14 %, respectively. As of December 31, 2022, accounts receivable from three customers with balances due in excess of 10 % of total accounts receivable was 23 %, 15 %, and 12 %, respectively. The table below sets forth the Company’s customers that accounted for greater than 10 % of its revenues for the three months ended September 30, 2023 and 2022, respectively. Schedule of Customers Accounted Revenues 2023 Percentage of Sales 2022 Percentage of Sales Hospital A $ 96,820 20 % $ 60,520 10 % Hospital B 123,800 26 % 119,500 19 % Hospital C 18,450 4 % 74,425 12 % $ 239,070 50 % $ 254,445 41 % The table below sets forth the Company’s customers that accounted for greater than 10 % of its revenues for the nine months ended September 30, 2023 and 2022, respectively. 2023 Percentage of Sales 2022 Percentage of Sales Hospital A $ 388,240 20 % $ 248,725 12 % Hospital B 246,400 13 % 359,800 17 % Hospital C 193,000 10 % 441,125 22 % $ 827,640 43 % $ 1,049,650 51 % From time to time, the Company’s bank balances may exceed the FDIC limit of $ 250,000 ; however, management does not feel that this has a material impact on the financial condition. At September 30, 2023 and December 31, 2022, the Company’s uninsured cash balances totaled $ 261,239 , and $ 0 , respectively. Going Concern We have incurred losses since inception and have funded our operations primarily with a combination of sales, debt, and the sale of capital stock. As of September 30, 2023, we had a stockholders’ deficit of approximately $ 1.1 million. At September 30, 2023, we had short-term outstanding borrowings of approximately $ 194 thousand. As of September 30, 2023, we had cash of approximately $ 761 thousand and a working capital deficit of approximately $ 1.3 million. 17 On August 11, 2023, the Company consummated its initial public offering (the “IPO”), conducted on a firm commitment basis, pursuant to which it sold 1,098,667 shares of its common stock at a price of $ 6.00 per share, resulting in gross proceeds to the Company of approximately $ 6.6 million. Net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses paid by the Company, were approximately $ 6.1 million. All shares sold in our IPO were registered pursuant to a registration statement on Form S-1 (File No. 333- 269179), as amended, declared effective by the SEC on August 8, 2023. Alexander Capital L.P. acted as sole book-running manager for the offering and Spartan Capital Securities, LLC acted as co-manager for the offering. The underwriters did not exercise their option to purchase up to an additional 164,801 shares of common stock. See Note 18 Subsequent Events. Our future capital requirements will depend upon many factors, including progress with developing, manufacturing, and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products from customers currently identified in our sales pipeline and to new customers as well. The primary activity that will drive all customers and revenues is the adoption of insurance coverage by commercial insurance carriers nationally, so this is a top priority of the Company. These activities, including our planned research and development efforts, will require significant uses of working capital through the rest of 2023 and beyond. Based on our current operating plans, we believe that our existing cash at the time of this filing will only be sufficient to meet our anticipated operating needs through the first quarter of 2024. Management evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued. To date, the Company has experienced operating losses and negative cash flows from operations. Management believes that increased sales and acceptance of their product by insurance providers will allow the Company to achieve profitability in the near term. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering of its debt or equity securities, there can be no assurance that it will be able to do so on reasonable terms, or at all. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering. Neither future cash generated from operating activities, nor management’s contingency plans to mitigate the risk and extend cash resources through the evaluation period, are considered probable, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern. As we continue to incur losses, our transition to profitability is dependent upon achieving a level of revenues adequate to support its cost structure. We may never achieve profitability, and unless and until doing so, we intend to fund future operations through additional dilutive or nondilutive financing. There can be no assurances, however, that additional funding will be available on terms acceptable to us, if at all. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which amends the effective date of ASU 2016-13. Public business entities meeting the definition of an SEC filer, excluding entities eligible to be a Smaller Reporting Company (“SRC”) as defined by the SEC, are required to adopt the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are required to adopt the standard for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of an SRC and therefore the standard was effective at the beginning of 2023. The adoption of this guidance did not have a material impact on the Company’s financial statements. 18 3. Related Party Transactions The Company has two demand notes receivable from shareholders related to the sale of common stock on January 1, 2016. Both notes’ initial balances were $ 506,400 , with interest calculated monthly based on applicable federal rates. No payments have been received on the notes. Since repayment is not assured, the Company provided an allowance for the entire balance of principal and interest as of December 31, 2019. The current allowance is $ 1,141,441 as of September 30, 2023. The current loan balances are as follows: Schedule of Related Party Transactions Loan Interest Interest September 30, 2023 Receivable Receivable Income Shareholder 1 $ 506,400 $ 64,388 $ 17,317 Shareholder 2 506,400 64,253 17,317 1,012,800 128,641 34,634 Allowance for Collection Risk ( 1,012,800 ) ( 128,641 ) ( 34,634 ) Net Balance $ — $ — $ — Loan Interest Interest December 31, 2022 Receivable Receivable Income Shareholder 1 $ 506,400 $ 47,071 $ 11,523 Shareholder 2 506,400 46,936 11,523 1,012,800 94,007 23,046 Allowance for Collection Risk ( 1,012,800 ) ( 94,007 ) ( 23,046 ) Net Balance $ — $ — $ — The Company has loans payable to shareholders related to funding needs for operations. The current loan details for all related party loans are as follows: Schedule of Related Party Loans payable to shareholder Interest & Interest Loan Service Fee Interest September 30, 2023 Due Date Rate Balance Accrued Paid Shareholder 1 June, 2019 15.00 % $ — $ — $ 10,047 Shareholder 1 June, 2019 15.00 % — — 27,056 Other Convertibles Various 5.00 % — 66,648 — Total $ — $ 66,648 $ 37,103 Interest & Interest Loan Service Fee Interest December 31, 2022 Due Date Rate Balance Accrued Paid Shareholder 1 June, 2019 15.00 % $ 20,051 $ 8,161 $ — Shareholder 1 June, 2019 15.00 % 38,000 23,481 — Other Convertibles Various 5.00 % — 66,648 — Total $ 58,051 $ 98,290 $ — The Company’s Chief Financial Officer, John Seale, CPA.CITP, is contracted for services through RBSK Partners PC (RBSK). Mr. Seale is RBSK’s managing partner and majority shareholder. RBSK is engaged by the Company to provide accounting and tax services on a continuous basis. Fees paid to RBSK for services were $ 304,158 and $ 78,593 for the nine months ended September 30, 2023 and 2022, respectively. The Company owed RBSK for open invoices of $ 29,831 and $ 68,142 that are included in accounts payable as of September 30, 2023 and December 31, 2022, respectively. 19 4. Property and Equipment Property and equipment, net consists of the following: Schedule of Property And Equipment September 30, December 31, 2023 2022 Furniture and fixtures $ 87,148 $ 87,148 Computer hardware 30,193 15,452 Leasehold improvements 21,064 21,064 Machinery and equipment 282,181 282,181 Total property and equipment 420,586 405,845 Less: accumulated depreciation ( 340,260 ) ( 317,834 ) Property and equipment, net $ 80,326 $ 88,011 Depreciation expense was $ 7,609 and $ 7,868 for the three months ended September 30, 2023 and September 30, 2022, respectively, and was $ 22,426 and $ 23,592 for the nine months ended September 30, 2023 and September 30, 2022, respectively. 5. Intangible Assets Intangible assets, net consists of the following: Schedule of Intangible Assets September 30, December 31, 2023 2022 Software Implementation $ 49,815 $ 49,815 Patents 32,464 32,463 Trademarks 50,000 10,000 Licenses 1,000 — Total intangible assets 133,279 92,278 Less: accumulated amortization ( 22,584 ) ( 14,720 ) Intangible assets, net $ 110,695 $ 77,558 Amortization expense was $ 2,621 and $ 485 for the three months ended September 30, 2023 and September 30, 2022, respectively, and was $ 7,864 and 1,455 for the nine months ended September 30, 2023 and September 30, 2022, respectively. 6. Accrued Expenses Accrued expenses consisted of the following: Schedule of Accrued Expenses September 30, 2023 December 31, 2022 Wages $ 60,432 $ 523,003 Employee benefits 20,213 16,555 Board fees 48,345 — Commissions 86,384 — Capital raise fees ( 3,250 ) 88,259 Property taxes 1,291 777 Interest 66,648 173,826 Related party interest — 31,642 Total accrued expenses $ 280,063 $ 834,062 20 7. Notes Payable On February 15, 2023, The Company signed a promissory note with Exchange Listing, LLC in the amount of $ 52,600 . The note carries an interest rate of 1 %. The interest shall accrue on the outstanding balance until the date of repayment and shall be payable at the time and place and in the manner provided in this promissory note. The Note shall be paid on the earlier of (i) three months from the date hereof or the Company receiving a financing in the minimum of $ 3,000,000 . On August 14, 2023, The Company used proceeds from the initial public offering to pay the promissory note back in full, including interest in the amount of $ 52,858 . The Company borrowed $ 250,000 on December 16, 2021, from Channel Partners Capital. The note calls for 65 weekly payments of $ 4,923.08 with the final payment scheduled for March 16, 2023 . The note’s interest rate computes to a nominal rate of 40.856 %. The principal outstanding at December 31, 2021 was $ 244,048 . The Company borrowed $ 122,000 on September 16, 2022 to bring the principal balance back to $ 250,000 . The principal outstanding at December 31, 2022 was $ 202,834 . The Company borrowed $ 107,231 on May 24, 2023 to bring the principal balance back to $ 250,000 . The terms of the note are the same as the previous note with the final payment scheduled for August 22, 2024. The principal outstanding at September 30, 2023 was $ 194,248 . The Company believes that the advancement of additional funds is a minor modification to the terms of the existing loan since the difference in present value of the cash flows under the terms of the new loan is less than 10% of the present value of the remaining cash flows under the terms of the original loan. As a result, the modification was accounted for as a modification of debt. The lender was granted and assigned a continuing security interest in all the Company’s personal property assets including, but not limited to, business equipment, inventory, accounts, accounts receivable, intellectual property, chattel paper, instruments, deposit accounts, commercial tort claims, contract rights, licenses, claims, and general intangibles. The future minimum principal payments to be paid in 2023 and 2024 are $ 46,187 and $ 148,062 , respectively. Convertible Notes From March to July of 2023 the Company conducted multiple closings of a private placement offering to accredited investors for aggregate gross principal of $ 6,066,667 or net proceeds of $ 4,995,750 . The notes consisted of (a) a Convertible Promissory Note that accrues interest at 12 % that can be paid in cash or PIK. The notes automatically convert into common shares at a 30 % discount to the IPO. The notes mature on the sooner of the six-month anniversary date from issuance or a successful IPO on primary exchange in the U.S. (b) a five-year warrant to purchase common stock equal to fifty percent (50%) of the shares into which the 2023 Convertible Notes can be converted into at issuance . The warrants have a strike price at a 25 % premium to the Conversion Price subject to anti-dilution, issuable on a pro rata basis at each funding. As facilitators to the notes Signature Bank and Alexander Capital, L.P. have received certain fees. Signature Bank received a $ 6,000 escrow fee from the first round of funding. Alexander Capital, L.P. has received (i) a cash commission of ten percent (10%) of the proceeds raised in the offering from investors introduced to the Company by the Placement Agent; (ii) the granting to the Placement Agent of a warrant for the purchase of a number of shares of Common Stock equal to 6% of the number of Underlying Securities; and (iii) the other matters set forth in the engagement letter between the Company and the Placement Agent dated April 13, 2022. As of September 30, 2023, Alexander Capital, L.P., has received fees totaling $ 458,250 which were recorded in debt discounts and received 120,235 warrants which were recorded at fair value in warrant liability and debt discounts on the balance sheet. After the closing of the initial public offering on August 14, 2023, The Company converted the notes payable plus $ 226,391 in interest into 1,498,332 shares of common stock. The shares were to be issued at a discounted price of $ 4.20 per share resulting in a loss to the Company which is recorded in extinguishment of derivative liabilities. As of September 30, 2023, 3,973 shares of converted stock from this raise have not been issued and are recorded at fair value on the balance sheet in share liability. See Note 12 Share Liabilities During the year ended December 31, 2022, the Company conducted multiple closings of a private placement offering to accredited investors for aggregate gross amount of $ 3,555,556 and net proceeds of $ 3,070,000 . The 2022 Convertible Notes signed from June 3, 2022 to November 30, 2022 have aggregate gross amounts of $ 3,333,333 and net proceeds of $ 2,870,000 and consisted of (a) a Convertible Promissory Note that accrues interest at the greater of Prime rate plus 8.5% or 12% . The notes convert into common shares at the lower of $ 9.44 or 30 % discount to the price per share of any subsequent offering. The notes mature on the one -year anniversary date from issuance. (b) a five-year warrant to purchase common stock equal to one hundred percent (100%) of the shares into which the 2022 Convertible Notes can be converted into at issuance . The warrants have an exercise price at the lower of $ 11.80 per share or a 12.5 % discount to the price per share of any subsequent offering. (c) shares of the Company’s common stock equal to 10 % of the principal amount of these notes, at a value per share equal to the conversion price. The 35,318 shares of common stock issued to inves tors had a relative fair value of $ 4,789 . Due to the second prong of the conversion equation after the IPO an additional 44,048 commitment shares are to be issued. The shares are to be issued at a discounted price of $ 4.20 per share resulting in a loss to the Company which is recorded in extinguishment of derivative liabilities. As of September 30, 2023, these shares have not been issued and are recorded at fair value on the balance sheet in share liability. See Note 12 Share Liabilities 21 As an additional incentive for entering into the convertible note offering, the Company offered an original issue discount equal to 10 % of the principal amount of the notes. The Company also paid $ 130,000 to law firms related to the convertible note offering. In March of 2023, the Company used borrowings from the 2023 convertible notes to pay the principal balance of some of the notes totaling, $ 2.65 million. Upon payment, the terms for the remaining balance of those notes were also updated. The remaining balance accrued interest at 8 % per annum without maturity or default rights. The new balance shall also automatically convert into shares of common stock at a 27.5 % discount to the per share offering price in the Company’s initial public offering or $ 4.35 per share. After the closing of the initial public offering on August 14, 2023, the Company converted the notes payable plus $ 173,205 in interest into 107,509 shares of common stock. The shares are to be issued at a discounted price of $ 4.35 per share resulting in a loss to the Company which is recorded in extinguishment of derivative liabilities. As of September 30, 2023, 107,509 shares of converted stock from this raise have not been issued and are recorded at fair value on the balance sheet in share liability. See Note 12 Share Liabilities The remaining investors did not convert their notes and, as such the Company used proceeds from the initial public offering to pay the remaining promissory notes back in full, including interest in the amount of $ 445,554 . The 2022 Convertible Notes signed on December 19, 2022 have aggregate gross proceeds of $ 200,000 or net proceeds of $ 222,222 and consisted of an original issue discount of 10 % of the principal amount and have an interest rate of 12 % per annum. The notes will mature at the earlier of (i) twelve (12) months from the issue date or (ii) the date upon which the Company completes a registered public offering of shares of the Company, which encompasses the closing of the IPO. The notes are convertible into shares of common stock at the higher of (i) $ 9.44 per share, or (ii) the price per share of common stock issued pursuant to the next registered public offering of shares of the Company made prior to the conversion of any portion of the note. Interest accrues on the aggregate principal amount (which includes original issue discount) and is payable on the maturity date, at the Company’s election, in cash or in-kind. The holders of the notes are entitled to piggyback registration rights on any registration statement filed by the Company, other than any registration statement filed on Form S-4 or Form S-8. The warrants and conversion shares are subject to anti-dilution adjustments outlined in the Agreement. The Company has applied ASC 815 and ASC 480, due to the potential for settlement in a variable quantity of shares. Since these convertible notes and warrants have the option to convert or be exercised at a variable amount, they are subject to derivative liability treatment. The conversion feature has been measured at fair value using a Monte Carlo model at the date of issuance and is adjusted to fair value at each reporting period. The fair value of the embedded derivative and the warrant liability at date of issuance was $ 4,825,067 and $ 5,254,834 , respectively. See Notes 12 and 13. The value of the incentives given to investors totaled $ 11,728,912 . Since the value of the incentives given to certain investors was in excess of the principal value of the notes, the Company recognized $ 9,403,924 as debt discount and expensed the remaining $ 2,324,988 as financing fees. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost. On August 14, 2023, The Company amortized the remaining debt discount as the notes were all either paid off or converted pursuant to the initial public offering. As of September 30, 2023, 1,231,772 shares of converted stock have not been issued and are recorded at fair value on the balance sheet in share liability. See Note 12 Share Liabilities During the periods ended September 30, 2023 and December 31, 2022, the Company accrued interest to these convertible notes of $ 399,597 and $ 107,544 , respectively, which was paid or converted into common stock as mentioned above. 8. Leases The Company’s leases are comprised of operating leases for office space. At the inception of the lease, the Company determines whether the lease contract conveys the right to control the use of identified property for a period of time in exchange for consideration. Leases are classified as operating or finance leases at the commencement date of the lease. Operating leases are recorded as operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the Balance Sheets. The Company did not have any finance leases at September 30, 2023 and December 31, 2022. The Company had three leases primarily consisting of office space in Versailles and Carmel Indiana. Two of the leases in Versailles started January 1, 2017. Both have an initial term of five years with an option for an additional five-year term. The monthly lease payments for these leases are $ 550 and $ 1,600 with a 3 % per annum increase starting with the optional five-year term. The lease in Carmel started March 1, 2016. The initial term is five years and three months with an option for an additional three-year term. The monthly lease payment started at $ 1,472 with an annual increase of approximately 2.7 %. On December 16, 2020, the Company entered into an amendment of the Carmel lease that extended the initial term by two years . 22 Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the implicit interest rate is generally not readily determinable, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar economic environment. Lease expense for the operating lease is recognized on a straight-line basis over the lease term. Leases may include renewal options, and the renewal option is included in the lease term if the Company concludes that it is reasonably certain that the option will be exercised. Certain leases may contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the calculation of lease payments to the extent they are fixed and determinable at lease inception. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as expenses when incurred. For the periods ended September 30, 2023 and December 31, 2022, the Company recognized $ 35,678 and $ 47,571 of operating lease expense, including short-term lease expense and variable lease costs, which are immaterial. The following table presents information related to the Company’s operating leases: Schedule of Operating Leases September 30, 2023 December 31, 2022 Operating lease right-of-use assets $ 78,043 $ 101,382 Other current liabilities 45,194 33,395 Operating lease liabilities 39,353 76,199 Total $ 84,547 $ 109,594 Weighted-average remaining lease term (in years) 3.75 4.00 Weighted-average discount rate 15.0 % 15.0 % As of September 30, 2023, the maturities of the Company’s operating lease liabilities were as follows: Schedule of Maturities Operating Lease Liabilities 2023 $ 9,986 2024 27,072 2025 22,316 2026 26,810 2027 — Total lease payments 86,184 Less: imputed interest 1,637 Total present value of lease payments $ 84,547 9. Common Stock and Warrants On September 7, 2021, the Company’s board of directors authorized a 4-for-1 stock split . They also increased the number of authorized common stock shares from 2,700,000 to 10,800,000 . Furthermore, on September 9, 2021, the board authorized an increase of authorized shares of common stock from 10,800,000 to 13,400,000 in anticipation of a capital offering. As part of the conversion to a Delaware Corporation in June of 2022, the total number of common stock shares authorized was increased to 100,000,000. All share and per share amounts for the common stock have been retroactively restated to give effect to the split. Furthermore, on January 10, 2023, the Company’s board of directors authorized a 2-for-1 reverse stock split . All share information in these financial statements has been adjusted for this reverse stock split. 23 In connection with a bridge loan, the Company issued a warrant to a shareholder, Brian Hannasch, on September 18, 2018. The warrant allows the holder to purchase common stock from the Company at a share price of $ 4.38 per share. The number of shares was based on a formula tied to the final amount of loans made by the holder of $ 375,000 , multiplied by 150 %, and divided by $ 70.03 . The number of shares based on this formula is 12,852 . The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. If the fair market value of one share is greater than the warrant price, the holder may elect to receive a number of shares equal to the value of the warrant. If the exercise is in connection with the sale of the Company, the holder may, at its option, condition its exercise of the warrant upon the consummation of such transaction. The warrant expires on September 18, 2028 and can be exercisable either in whole or from time to time in part prior to the expiration date. The Company issued a second warrant to Brian Hannasch on September 6, 2019, under similar terms. This is a penny warrant that allows the holder to purchase 40,000 shares of common stock and is subject to adjustment for certain equity events. The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. The warrant expires on September 6, 2029 . The Company issued a third warrant to Masimo Corporation on April 9, 2020. This warrant was pre-funded in the amount of $ 2,734,340 . The warrant allows the holder to purchase 289,779 shares of Series A Preferred Stock at $ 9.44 per share and is subject to adjustment for certain equity events. The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. There will be no additional purchase price for the Warrants. In the event that all outstanding shares of Series A Preferred Stock are converted, automatically or by action of the holders thereof, into Common Stock, including, without limitation, in connection with the Company’s initial, underwritten public offering and sale of its Common Stock pursuant to an effective registration statement under the Act, then from and after the date on which all outstanding shares of Series A Preferred Stock have been so converted, this Warrant shall be exercisable for such number of shares of Common Stock into which the Warrant Shares would have been converted had the Warrant Shares been outstanding on the date of such conversion, and the Exercise Price shall equal the Exercise Price in effect as of immediately prior to such conversion divided by the number of shares of Common Stock into which one share of Series A Preferred Stock would have been converted, all subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. On August 14, 2023 the warrant was converted to be exercisable for 289,779 shares of common stock as described above. During 2022, the Company issued 793,655 five-year warrants to purchase common stock equal to one hundred percent (100%) of the shares into which the 2022 convertible notes can be converted into at issuance. The warrants have an exercise price of $ 5.25 per share. From March to June of 2023, the Company issued 625,805 one-year warrants to purchase common stock equal to fifty percent (50%) of the shares into which the 2023 convertible notes can be converted into at issuance. The warrants have an exercise price of $ 5.25 per share. On August 14, 2023, the Company issued 65,921 five-year warrants to purchase common stock pursuant to the agreement with underwriter upon closing of the Company’s initial public offering. The warrants have an exercise price of $ 7.20 per share. 24 The following is a summary of warrant activity for common stock during the periods ended September 30, 2023 and December 31, 2022: Schedule of Warrant Activity for Common Stock Number of Weighted-Avg. Weighted-Avg. Warrants for Exercise Remaining Common Stock Price Contractual Life Outstanding as of December 31, 2021 52,852 $ 2.13 7.45 Granted 793,655 5.25 4.62 Cancelled/Expired — — — Exercised — — — Outstanding as of December 31, 2022 846,507 $ 5.06 4.70 Granted 691,726 $ 3.83 4.59 Converted Prefunded Warrants 289,779 0.0001 — Cancelled/Expired — — — Exercised — — — Outstanding as of September 30, 2023 1,828,012 $ 4.40 4.25 The following is a summary of warrant activity for preferred stock during the periods ended September 30, 2023 and December 31, 2022: Schedule of Warrant Activity for Preferred Stock Number of Weighted-Avg. Warrants for Exercise Preferred Stock Price Outstanding as of December 31, 2021 — $ — Granted 144,890 0.0001 Cancelled/Expired — — Exercised — — Outstanding as of December 31, 2022 144,890 $ 0.0001 Granted — $ — Cancelled/Expired — — Converted to Common Stock Warrant ( 144,890 ) ( 0.0001 ) Outstanding as of September 30, 2023 — $ — The following table summarizes the Company’s warrants outstanding and exercisable as of September 30, 2023. Schedule of Warrants outstanding and Exercisable Number of Warrants Exercise Expiration Outstanding Price Date Brian Hannasch W-01 12,852 $ 8.7600 September 18, 2028 Brian Hannasch W-02 40,000 $ 0.0050 September 6, 2029 Masimo Corporation PSA-01 289,779 $ 0.0001 None 2022 Convertible Notes 793,655 $ 5.2500 Various 2023 Convertible Notes 625,805 $ 5.2500 Various Underwriter’s Warrants 65,921 $ 7.2000 August 8, 2028 1,828,012 The Company is a party to two investment banking and advisory agreements with a consulting firm engaged in connection with listing our common stock for trading on NYSE. Pursuant to the first advisory agreement, dated March 3, 2022, the Company agreed to pay the consulting firm a monthly consulting fee of $ 5,000 and a final payment of $ 50,000 upon a successful NYSE listing, and, also upon such listing, to issue the consulting firm shares of our common stock representing 1.5 % of our outstanding shares after giving effect to the initial public offering and to issue the consulting firm five-year warrants to purchase shares of our common stock representing 2.0 % of our outstanding shares, after giving effect to the initial public offering, on a fully-diluted basis with an exercise price per share representing the public offering price per share. Pursuant to the second advisory agreement with consulting firm, dated June 20, 2022, and amended December 20, 2022, the Company agreed to pay fees in the aggregate of up to $ 136,166 for advice in connection with communication and other related matters leading up to, and in connection with, the initial public offering and to issue the consulting firm 125,000 shares of common stock upon a successful NYSE listing. The Company agreed to piggyback registration rights with respect to all shares issued to the consulting firm under both advisory agreements, including shares issuable upon exercise of the warrants. The Company evaluated the agreements and determined that the shares will not be recorded and valued until the performance condition is satisfied. 25 10. Preferred Stock The Company has authorized 1,120,000 shares of preferred stock of which 1,000,000 has been designated Series A Preferred and 120,000 has been designated Series Seed Preferred, of which 0 and 506,637 shares of Series A Preferred and 0 and 115,477 shares of Series Seed Preferred are issued and outstanding as of September 30, 2023 and December 31, 2022, respectively. The aggregate purchase price of the Series A Preferred Stock was $ 9,321,165 , of which $ 7,692,664 was comprised of cash and the remaining $ 1,628,501 was comprised of converted debt and common stock. The aggregate purchase price of the Series Seed Preferred shares was $ 0 , as all the Series Seed shares were converted from common stock as an incentive to reinvest in Series A Preferred Stock. The following is a summary of Preferred Stock terms: Voting Rights - The Series A Preferred and Series Seed Preferred shall vote together with the Common Stock on an as-converted basis, and not as separate classes. Conversion - The Series A Preferred and Series Seed initially convert 1:1 to Common Stock at any time at option of holder, subject to adjustments for stock dividends, splits, combinations, and similar events and as described below under “Anti-dilution Provisions.” Dividends - The Series A Preferred will carry an annual 8 % cumulative dividend, payable upon any liquidation, dissolution or winding up of the Company (the “Accruing Dividend”). For any other dividends or distributions, participation with Common Stock on an as-converted basis. Liquidation - In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid in the following priority: First, to the Series A Preferred in proportion to each holder’s respective pro rata Series A Original Purchase Price, plus any pro rata share of the Accruing Dividend until the entire Series A Original Purchase Price and Accruing Dividend are paid; Second, to the Series Seed Preferred in proportion to each holder’s respective pro rata Series Seed Original Purchase Price until the entire amount of the Series Seed Original Purchase Price is paid; and Thereafter, the Series A Preferred and Series Seed Preferred participate with the Common Stock pro rata on an as-converted basis. A merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) and a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company will be treated as a liquidation event (a “Deemed Liquidation Event”), thereby triggering payment of the liquidation preferences described. Anti-dilution Provisions - The Series A Preferred have full-ratchet anti-dilution protection so that the conversion price will be reduced to 80 % of the price at which any future shares are issued, if less than the Series A Original Purchase Price. In consideration for shareholders to make an additional investment in the Company, upon the purchase of the Series A Preferred stock by the shareholder, the Company converted the existing common shares held by shareholders to Series Seed Preferred Stock at a $ 100 million valuation and at a 120 % share premium. As of September 30, 2023 and December 31, 2022, there were 97,702 common shares converted into 115,477 shares of Series Seed Preferred shares that have no par value and are outstanding. Preferred stock has all converted pursuant to the initial public offering. As of September 30, 2023, 1,076,242 shares of converted preferred stockhave not been issued and are recorded at fair value on the balance sheet in share liability. See Note 12 Share Liabilities 26 11. Stock Options and Awards The following is a summary of stock option activity for the periods ended September 30, 2023 and December 31, 2022: Schedule of Stock Option Activity Weighted Avg. Remaining Number of Contractual Life Weighted Avg. Aggregate Options (in years) Exercise Price Intrinsic Value Outstanding as of December 31, 2021 1,319,394 7.69 $ 6.94 $ — Granted — Forfeited — Cancelled/Expired — Exercised — Outstanding as of December 31, 2022 1,319,394 6.69 $ 6.94 $ — Granted — Forfeited — Cancelled/Expired — Exercised — Outstanding as of September 30, 2023 1,319,394 6.03 $ 6.94 $ — Vested and Exercisable as of September 30, 2023 1,319,394 6.03 $ 6.94 $ — Stock-based compensation expense is classified in the Company’s statements of operations as general and administrative expense. The amounts were $ 0 and $ 27,319 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was no unrecognized compensation expense related to unvested options granted under the Company’s share-based compensation plans. 12. Share Liabilities As of September 30, 2023, the Company had not issued 1,231,772 shares of its common stock, representing a total amount of $ 934,256 , due to administrative delays related to the initial public offering (IPO) that took place on August 11, 2023. These shares are classified as share liabilities as they have been authorized but not yet issued as of the reporting date. The Company expects to issue these shares to the respective shareholders as soon as the administrative delays are resolved. These shares will be recorded as issued and outstanding upon their issuance, and the corresponding share liability will be reclassified to shareholders’ equity. The administrative delays are not expected to have any material impact on the financial position or results of operations of the Company. Management’s best estimate is that the administrative delays will be resolved within the next fiscal quarter, at which point the share liabilities will be eliminated, and the shares will be issued. However, the timing of resolution is subject to various factors, and actual timing may vary. Share liability consists of the following: Schedule of Share Liability September 30, December 31, 2023 2022 Preferred Series A Shares Unissued 904,222 — Preferred Series Seed Shares Unissued 172,020 — Commitment Shares Unissued 44,048 — Converted Shares Unissued 111,482 — Share Liability 1,231,772 — 13. Warrant Liabilities The Company has evaluated financial instruments arising from an adjustable exercise price for warrants that are issued and outstanding as of September 30, 2023 and December 31, 2022. The Company utilizes a Monte Carlo simulation model for warrants that have an option to convert at a variable number of shares to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the Monte Carlo model included a starting stock price of $ 7.91 per share, an expected remaining term of each warrant as of the valuation date, estimated volatility of 75 %, drift, and a risk-free rate ranging from 3.46 % to 59.01 %. Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the Black-Scholes option-pricing model. Dividend yield: The Company uses a 0 % expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future. Volatility: The Company calculates the expected volatility based on comparable company’s historical stock prices with a look back period commensurate with the period to maturity. Expected term: The Company’s remaining term is based on the remaining contractual maturity of the warrants. 27 The following are the changes in the warrant liabilities during the quarter ended September 30, 2023 and year ended December 31, 2022. Schedule of Changes in Warrant Liabilities Level 1 Level 2 Level 3 Warrant liabilities as of January 1, 2022 $ — $ — $ 32,102 Addition — — 2,808,331 Changes in fair value of Warrant liabilities — — ( 606,049 ) Warrant liabilities as of January 1, 2023 — — 2,234,384 Addition — — 1,541,955 Changes in fair value of Warrant liabilities — — ( 234,807 ) Warrant liabilities as of March 31, 2023 — — 3,541,532 Addition — — 339,302 Changes in fair value of Warrant liabilities — — 36,050 Warrant liabilities as of June 30, 2023 — — 3,916,884 Addition — — 565,245 Changes in fair value of Warrant liabilities — — ( 592,853 ) Extinguishment of Warrant liabilities — — ( 3,721,007 ) Warrant liabilities as of September 30, 2023 $ — $ — $ 168,269 14. Derivative Liabilities The Company has identified derivative instruments arising from the conversion shares discussed in the Convertible Notes section of Note 7 as of September 30, 2023 and December 31, 2022. The Company utilizes a Monte Carlo simulation model for commitment shares that have an option to convert at a variable number of shares to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the Monte Carlo model included a starting stock price of $ 7.91 per share, an expected remaining term of each warrant as of the valuation date, estimated volatility of 70 %, drift, and a risk-free rate ranging from 3.46 % to 5.47 %. Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the Black-Scholes option-pricing model. Dividend yield: The Company uses a 0 % expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future. Volatility: The Company calculates the expected volatility based on comparable company’s historical stock prices with a look back period commensurate with the period to maturity. Expected term: The Company’s remaining term is based on the remaining contractual maturity of the warrants. The following are the changes in the warrant liabilities during the quarter ended September 30, 2023 and year ended December 31, 2022. Schedule of Changes in Derivative Liabilities Level 1 Level 2 Level 3 Derivative liabilities as of January 1, 2022 $ — $ — $ — Addition — — 2,449,689 Changes in fair value of Derivative liabilities — — ( 713,989 ) Derivative liabilities as of January 1, 2023 — — 1,735,700 Addition — — 1,532,725 Changes in fair value of Derivative liabilities — — ( 191,297 ) Extinguishment of Derivative liabilities — — ( 1,129,498 ) Derivative liabilities as of March 31, 2023 — — 1,947,630 Addition — — 328,259 Changes in fair value of Derivative liabilities — — ( 860 ) Derivative liabilities as of June 30, 2023 — — 2,275,029 Addition — — 514,394 Changes in fair value of Derivative liabilities — — ( 6,394 ) Extinguishment of Derivative liabilities - - ( 2,783,029 ) Derivative liabilities as of September 30, 2023 $ — $ — $ — 28 15. Retirement Plan The Company sponsors a 401(k)-retirement plan for its employees. Employees are eligible to participate in the elective deferral portion of the plan after twelve months and 1,000 hours of service. The Company matches the employee’s contribution up to 3 %. The Company can also make an optional profit-sharing contribution to the employee accounts on an annual basis. There was an expense of $ 3,657 and $ 13,058 for nine months ended September 30, 2023 and 2022, respectively. 16 . Commitments and Contingencies Manufacturing Services Agreement On August 21, 2020, the Company entered into a Manufacturing Services Agreement (MSA) for the manufacture and supply of the Company’s IB-STIM device based upon the Company’s product specifications as set forth in the MSA. This agreement terminated any prior manufacturing agreements. The Company provides the necessary equipment to the manufacturer and retains ownership. The manufacturer bears the risk of loss of and damage to the equipment and consigned materials. Performance under the MSA is initiated by orders issued by the Company and accepted by the manufacturer. The term of the MSA is 24 months and shall automatically renew for renewal terms of twelve months unless either party provides a written termination notice to the other party within 180 days prior to the end of the then-current term. Trademark Agreement The Company entered into an agreement for a trademark related to the Company’s name on July 11, 2022. The agreement called for an initial payment of $ 10,000 upon execution of the agreement. A second and final payment of $ 40,000 was contingent upon the completion of the Company’s planned initial public offering. The second payment has been accrued and is recorded in accounts payable and intangible assets on the balance sheet. The trademark does not have a determinate life and therefore the cost is not being amortized. Executive Employment Agreements The Company, as authorized by the board of directors, entered into employment agreements with nine key employees to provide incentives to improve shareholder value and to contribute to the growth and financial success of the Company. The agreements had an employment start date of October 1, 2022, with initial terms from 2 to 5 years and optional one-year renewals . The total base salaries for the nine key employees in the agreements are $ 1.92 million per year with various provisions for annual increases. In addition to base salaries, eight of the employees have a provision for a special one-time incentive payment to be paid in a lump sum after the start date. The total amount of these special incentive payments is $ 1.11 million. The special incentive payment amount includes any accrued backpay wages for the employee. That accrued amount for backpay was $ 417,390 and has been recorded and is reflected in the financial statements at September 30, 2023. There are seven key employees that have stock options of the Company totaling 2,477,424 shares. These key employees have a provision in their agreements whereas the Company will pay a special bonus equal to the aggregate of the strike price or exercise price of all their stock options plus a tax gross-up payment. The special bonus shall be paid in twenty percent ( 20 %) installments starting January 2, 2024, and the same date each of the next four years. As a condition of the payment, the key employee must exercise at least 20 % of their stated number of stock options. There are additional provisions to cover termination and change of control events. In April 2023, the Company amended the employee agreements to, among other things, clarify that the special one-time incentive payment and the deferred bonus are contingent upon the effective date of the planned initial public offering. The amendment also sets forth a process for executives to exercise the stock options in accordance with the terms of the stock option agreement in effect as of the date of the employment agreement and to clarify that there is no modification to the stock option agreements. The Company has recorded the backpay portion of the incentive bonus noted above. The balance of the incentive bonuses of $ 694,056 and the special options bonuses of $ 14.82 million were contingent upon a successful initial public offering. The incentive bonuses have been paid in full while the special options bonuses will be recorded when paid. 29 Litigation From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial condition as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend such litigation may be significant and may require a significant diversion of our resources, and there is no guarantee that we will be able to successfully defend against any such litigation regardless of particular merits. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available on favorable terms, at all, or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business, financial condition and the results of our operations. On February 6, 2019, plaintiff Ritu Bhambhani, M.D., initiated a lawsuit against Innovative Health Solutions, Inc. and others in the United States District Court for the District of Maryland. Plaintiffs Bhambhani and Sudhir Rao subsequently amended the complaint, with the Third Amended Complaint (“Complaint”) containing the most recent set of allegations. The Complaint asserted claims under the RICO Act, as well as of fraudulent misrepresentation, intentional misrepresentation by concealment, and civil conspiracy and sought compensatory damages in excess of $ 5 million, pre-judgment interest, punitive damages, attorney’s fees, court costs and designation of the case as a class action. The Complaint states that the Company, distributors of the Company’s product, and medical billing and coding consultants allegedly made misrepresentations to the plaintiffs that the Company’s NeuroStim device and related procedures could be billed to, and reimbursed by, Medicare and other insurance payors as a surgically implantable neurostimulator. Plaintiffs claim to have suffered damages when Medicare administrative contractors declined to pay plaintiffs for their use of the device. On February 11, 2022, the Company filed a motion for summary judgment based upon the plaintiffs not being proper parties to assert claims against the Company. On June 14, 2022, the Court granted the Company’s motion for summary judgment and dismissed the Complaint. On July 14, 2022, plaintiffs Ritu Bhambhani and Sudhir Rao filed a notice of appeal with the Fourth Circuit Court of Appeals. The Company filed a motion to dismiss. On January 4, 2023, the Court issued an order that stated it was deferring a ruling on the motion to dismiss the appeal and that it would address those arguments at the same time that it addressed the substantive merits of the case. As of April 3, 2023, the parties had submitted their appellate briefs to the Fourth Circuit. No date has been set for either oral argument or for issuance of a decision by the court. While it is too early to predict the ultimate outcome of this matter, we continue to believe we have meritorious defenses, that the dismissal of the Complaint should be upheld, and intend to continue to defend this matter vigorously. On July 14, 2022, plaintiffs Ritu Bhambhani, LLC; Box Hill Surgery Center, LLC; Pain and Spine Specialists of Maryland, LLC; and SimCare ASC, LLC initiated a lawsuit against the Company and others in the United States District Court for the District of Maryland. The plaintiffs in this lawsuit are business entities owned or partially owned by the plaintiffs that initiated the litigation described above. The Complaint asserted claims under the RICO Act, as well as fraudulent misrepresentation, intentional misrepresentation by concealment, and civil conspiracy and seeks compensatory damages in excess of $75,000, pre-judgment interest, punitive damages, attorney’s fees, and court costs. The Complaint states that the Company, distributors of the Company’s product, and medical billing and coding consultants allegedly made misrepresentations to the plaintiffs that the Company’s NeuroStim device and related procedures could be billed to, and reimbursed by, Medicare and other insurance payors as a surgically implantable neurostimulator. Plaintiffs claim to have suffered damages when Medicare administrative contractors declined to pay plaintiffs for their use of the device. On September 28, 2022, the Company has filed a motion to dismiss all claims. On May 25, 2023, the Court issued an Order and a Memorandum Opinion which dismissed the plaintiffs’ claims related to the RICO Act. The remining claims are still pending and no trial date has been set for the case. While it is too early to predict the ultimate outcome of this matter, we believe the Company has meritorious defenses and intend to defend this matter vigorously. On July 25, 2023, the court entered a scheduling order that set the deadline to file dispositive motions as March 11, 2024. No trial date has been scheduled. Counsel for NeurAxis and counsel for the Plaintiffs in both of the above-described cases have agreed to try to resolve the disputes in both cases through an independent third-party mediator. No date has been set yet for that mediation. 30 17. Health Benefit Plan The Company entered into a self-funded program employer agreement in 2018 in conjunction with a group health plan for the benefit of eligible employees. This plan is a level funded plan, and the services and products include: ● A self-funded employer health benefit plan. ● Stop loss insurance purchased from a stop loss insurance company. ● Third party administrator to provide administrative services with regard to the plan. The Company maintains a stop loss contract that reimburses the Company for claims paid under the plan if they exceed a predetermined level. The Company makes contributions for health care costs and associated expenses that are expected during the plan year. The amount of contributions is determined annually based on the Company’s maximum liability for expected claims, administrative expenses, and premiums for the stop loss policy. The Company paid premiums of $ 175,616 and $ 136,428 for the nine months ended September 30, 2023 and 2022, respectively. The Company is responsible for the monthly premiums, as established, and nothing further. The stop loss policy covers the claims if they exceed the claims funds. After a certain time, and if there is a surplus in the claims fund, the Company may be entitled to receive a 48.5 % refund from the fund. This amount is recognized by the Company when received. 18. Subsequent Events The Company evaluated subsequent events through the date of issuance. The following changes occurred subsequent to September 30, 2023: Series B Preferred Stock – The Company signed an agreement on November 8, 2023 with an investor to sell shares of Series B Preferred Stock. The aggregate purchase price of $ 3,000,000 for 1,260,504 shares is payable by the investor to the Company in fifteen equal monthly installments of $ 200,000 each. The first installment is due on January 10, 2024, with subsequent installments payable on or before the tenth day of each succeeding month. All payments are to be made by wire transfer of immediately available funds to an account of the Company as designated in writing by the Company to the Investor. The Company shall use the proceeds from the issuance of the Series B Preferred Stock solely for the Company’s working capital and general corporate purposes. The Company shall not use any of such proceeds to pay any dividends or distributions or to pay or advance any funds to any of its officers, directors, or affiliates. The Company is using the investment to support and accelerate the Company’s sales and marketing efforts. Between October 1, 2023 and November 20, 2023, the Company issued 113,693 of the previously unissued shares recorded in share liability. The remaining 1,118,079 shares will be issued during the fourth quarter of 2023. See Note 12 Share Liability. 31