Neuraxis, INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a growth stage company focused on developing neuromodulation therapies to address chronic and debilitating conditions in children. Our mission is to provide solutions that create value and provide better and safer patient outcomes. Our IB-Stim device is a PENFS system intended to be used in patients 11-18 years of age with functional abdominal pain associated with IBS. Our device already has market clearance from FDA for functional abdominal pain associated with IBS in children. Other indications in our pipeline are comprised of functional nausea in children, post-concussion syndrome in children, and cyclic vomiting syndrome in children. For more information, see “ Business—Our Pipeline ” and “—Products .” Since our inception, we have incurred significant operating losses. Our net loss was $14,626,683 and $4,780,061 million for the years ended December 31, 2023 and 2022, respectively. Our auditors have expressed substantial doubt about our ability to continue as a going concern in their audit opinion. We expect to incur significant expenses and operating losses for the foreseeable future as we continue to pursue widespread insurance coverage of our IB-Stim device and seek FDA clearance of our device for other indications. There are a number of milestones and conditions that we must satisfy before we will be able to generate sufficient revenue to fund our operations, including FDA clearance of our IB-Stim device to treat future indications. Factors Affecting our Business and Results of Operations Revenue Our revenue is derived from the sale of our IB-Stim device to healthcare companies, primarily hospitals and clinics. Sales generally are not seasonal and only mildly correlated with economic cycles. Our IB-Stim device sells for $1,195 per device, and each child being treated for functional abdominal pain associated with IBS will use three to four devices. Potential patients with future indications are expected to use six or more devices per patient. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments. We enter into sales agreements with customers for IB-Stim devices based on purchase orders and standard terms, which vary slightly based on the customer’s form, and conditions of sale. Standard payment terms generally are that payment is due within 30 days. Our largest sales were to three hospitals representing approximately 45% and 52% of total sales for the years ended December 31, 2023 and 2022, respectively. Inflation did not have a material impact on our operations for any applicable period, and we do not expect inflation to have a material impact on our operations for the foreseeable future. Expenses We have four categories of expenses: cost of goods sold, selling expenses, research and development (“R&D”), and general and administrative (“G&A”). Costs of goods sold consist of costs paid for the IB-Stim device to our contract manufacturer along with periodic inventory adjustments and expired inventory write-offs. We ramped up production in 2018 and 2019 to meet expected demand and avoid any inventory shortages. This resulted in some excess inventory that did expire. The costs of expired inventory were $25,008 and $10,026 for the years ended December 31, 2023 and 2022, respectively, representing 8.2% and 3.4% of our costs of goods sold, respectively. Expired inventory expense is related to our FDA clearance for our device in the treatment of functional abdominal pain associated with IBS in children. Specifically, a certain component of our IB-Stim device is cleared for a two-year period after the date the device is manufactured, and if the device is not sold in such period, we must take the device out of inventory and write it off. Expired inventory has not been material to our results, averaging 1% or less of revenue over the past five years. We have a fixed-price contract with the manufacturer of our IB-Stim device to produce the device. We expect production costs to remain relatively constant and only nominal inventory expirations in the foreseeable future. 64 Our core selling expenses primarily consist of commissions and shipping costs. These expense items are generally correlated with sales. Research and development expense is attributable to our clinical trials and related efforts to have our IB-Stim device cleared by the FDA for other indications. General and administrative expense primarily consists of wages and benefits, professional fees including legal and audit, insurance, investor relations, advertising, facility costs, utilities and travel. Gross Profit and Gross Margin Our management uses gross profit and gross margin to evaluate the efficiency of operations and as a key component to determining the effectiveness and allocation of resources. We calculate gross profit as revenue less cost of goods sold, and gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily the average selling price of our IB-Stim device, production volume, order flows, change in mix of customers, third-party manufacturing costs related to components of our IB-Stim device, and cost-reduction strategies. We expect our gross profit to increase for the foreseeable future as our revenue grows, both through broader insurer acceptance of our IB-Stim device in the near term and approval of our technology for the treatment of other indications over the longer term. Our gross margin may fluctuate from quarter to quarter due to changes in average selling prices, particularly as we introduce enhancements to our IB-Stim device and new products to address other indications, and as we adopt new manufacturing processes and technologies. Results of Operations Comparison of Year Ended December 31, 2023 and Year Ended December 31, 2022 The following table presents our statements of operations for the years ended December 31, 2023 and 2022: Years Ended December 31, 2023 2022 Net sales $ 2,460,049 $ 2,684,735 Cost of goods sold 303,345 297,060 Gross profit 2,156,704 2,387,675 Selling expenses 323,569 410,883 Research and development 169,315 225,610 General and administrative 8,328,315 5,123,420 Operating loss (6,664,495 ) (3,372,238 ) Other (expense) income, net: Financing charges (2,772 ) (2,322,216 ) Interest expense (476,416 ) (318,666 ) Change in fair value of warrant liability 844,854 606,049 Change in fair value of derivative financial instruments 198,551 713,989 Amortization of debt discount and issuance cost (4,881,622 ) (98,935 ) Extinguishment of debt liabilities (3,649,561 ) - Other income 4,778 11,956 Total other (expense) income, net (7,962,188 ) (1,407,823 ) Net loss $ (14,626,683 ) $ (4,780,061 ) 65 Net Sales Net sales declined $224,686, or 8.4%, to $2,460,049 in the year ended December 31, 2023 due to (i) management’s focus on gaining further insurance coverage for our products, funding and the initial public offering and (ii) fewer shipments to certain customers as they manage through the insurance reimbursement process. Gross Profit and Gross Margin Gross profit declined $230,971, or 9.7%, to $2,156,704 in the year ended December 31, 2023 due to (i) lower sales volume and (ii) gross margin declining 120 bps from 88.9% to 87.7% in the years ended December 31, 2023 and 2022, respectively, due to growth in our patient assistance program that provides discounts to patients without insurance coverage. Selling Expenses Selling expenses declined $87,314, or 21.3%, to $323,569 in the year ended December 31, 2023 due to (i) lower sales volume and (ii) a reduction in the commission rate paid to the sales team in the middle of the year ended December 31, 2022. Research and Development Research and development expense declined $56,295, or 25.0%, to $169,315 in the year ended December 31, 2023 due to more patient trials conducted in the year ended December 31, 2023 as the Company prepared for more FDA submissions. General and Administrative General and administrative expense increased $3,204,895, or 62.6%, to $8,328,315 in the year ended December 31, 2023 due to (i) incremental headcount to build out market access and patient assistance teams including recruiting costs, (ii) higher insurance, investor relations and board of director costs post-IPO, (iii) one-time IPO advisory costs and (iv) higher advertising costs in order to expand market awareness. Operating Loss Our operating loss increased $3,292,257, or 97.6%, to $6,664,495 in the year ended December 31, 2023 primarily due to lower sales volume and higher general and administrative expenses. 66 Other (Expense) Income Other expense increased $6,554,365, or 465.6%, to $7,962,188 in the year ended December 31, 2023 due to the full amortization of the unamortized debt discount upon the IPO, a loss on the extinguishment of debt upon the IPO, higher interest expense and a lower year-over-year change in the fair value of the derivative financial instrument liability partially offset by the absence of convertible note financing fees in the year ended December 31, 2023 and a larger year-over-year change in the fair value of the warrant liability. Net Loss Our net loss increased $9,846,622, or 206.0%, to $14,626,683 in the year ended December 31, 2023 primarily due to lower sales volume, higher general and administrative expenses, the full amortization of the debt discount upon the IPO and the loss on the extinguishment of debt upon the IPO. Liquidity and Capital Resources We had cash on hand of $78,560 and $253,699 as of December 31, 2023 and 2022, respectively. We maintained negative working capital of $1,643,058 and $6,501,101 as of December 31, 2023 and 2022, respectively. The increase in working capital was primarily due to the conversion of notes payable upon the IPO along with the corresponding elimination or reduction of the fair value liability of warrants and derivatives and payments of employee bonuses and to vendors with proceeds from the IPO. 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 December 31, 2023, we had an stockholders’ deficit of $1,403,241 with no outstanding long-term debt. 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 2024 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 end of 2024. Additionally, we will have to meet all the financial disclosure and reporting requirements associated with being a publicly reporting company. Our management will have to spend additional time on policies and procedures to make sure it is compliant with various regulatory requirements, especially that of Section 404 of the Sarbanes-Oxley Act. This additional corporate governance time required of management could limit the amount of time our management has to implement our business plan and may delay our anticipated growth plans. 67 The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2023 and 2022: Years Ended December 31, 2023 2022 Net cash used in operating activites $ (6,693,978 ) $ (2,298,004 ) Net cash used in investing activities (71,781 ) (61,205 ) Net cash provided by financing activities 6,590,620 2,292,050 Net decrease in cash and cash equivalents (175,139 ) (67,159 ) Cash and cash equivalents at beginning of period 253,699 320,858 Cash and cash equivalents at end of period $ 78,560 $ 253,699 Operating Activities – Net cash used in operating activities increased $4,395,974, or 191.3%, in the year ended December 31, 2023 primarily due to higher general and administrative expenses and the payment of vendors and employee bonuses, partially offset by the issuance of common stock for non-cash consideration of IPO services. Investing Activities – Net cash used in investing activities increased $10,576, or 17.3%, in the year ended December 31, 2023 due to purchases of equipment, trademarks and licenses. Financing Activities – Net cash provided by financing activities increased $4,298,570, or 187.5%, in the year ended December 31, 2023 due to proceeds from the issuance of common stock via an IPO and convertible notes partially offset by repayments of notes payable and the payment of IPO costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules from page F-1 of this annual report on Form 10-K, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.