Neuraxis, INC 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and the related notes appearing in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties, and assumptions. You should read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of o ur final prospectus filed with the United States Securities and Exchange Commission (the “SEC”) on August 11, 2023 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”) (filed in connection with our IPO) for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. 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 $2,120,651 and $2,173,410 for the three months ended March 31, 2024 and 2023, 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. 24 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. 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. Expenses We have four categories of expenses: cost of goods sold, selling expenses, research and development, and general and administrative. 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. 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. We had no expired inventory for the three months ended March 31, 2024 and 2023. Expired inventory has not been material to our results, averaging 1% or less of revenue over the last four 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. 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. We expect to incur future R&D expenses for other indications, such as functional nausea, post-concussion syndrome and cyclic vomiting syndrome in children. 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. Results of Operations The following table presents our statements of operations for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Net sales $ 646,635 $ 805,110 Cost of goods sold 75,081 95,900 Gross profit 571,554 709,210 Selling expenses 80,030 107,932 Research and development 5,570 16,797 General and administrative 2,318,074 1,480,755 Operating loss (1,832,120 ) (896,274 ) Other (expense) income, net: Financing charges (230,824 ) (2,772 ) Interest expense (26,560 ) (161,689 ) Change in fair value of warrant liability (9,284 ) 234,807 Change in fair value of derivative financial instruments - 191,297 Amortization of debt discount and issuance cost (21,683 ) (2,662,655 ) Extinguishment of debt liabilities - 1,129,498 Other expense, net (180 ) (5,622 ) Total other (expense) income, net (288,531 ) (1,277,136 ) Net loss $ (2,120,651 ) $ (2,173,410 ) 25 Net Sales Net sales declined $158,475, or 19.7%, to $646,635 for the three months ended March 31, 2024 due to (i) management’s focus on gaining further insurance coverage for our products and capital funding and (ii) fewer shipments to certain customers as they transition to the insurance reimbursement process which requires alignment with physician protocols, billing and coding, partially offset by growth in our patient assistance program that provides discounts to patients without insurance coverage. Gross Profit and Gross Margin Gross profit declined $137,656, or 19.4%, to $571,554 for the three months ended March 31, 2024 due to lower sales volume, partially offset by an increase in our gross margin of 30 bps to 88.4% for the three months ended March 31, 2024 from 88.1% for the three months ended March 31, 2023, due to growth in our patient assistance program at lower discounts to patients without insurance coverage. Selling Expenses Selling expenses declined $27,902, or 25.9%, to $80,030 for the three months ended March 31, 2024 due to lower sales volume. Research and Development Research and development expense declined $11,227, or 66.8%, to $5,570 for the three months ended March 31, 2024 due to more patient trials conducted in the three months ended March 31, 2023 as the Company prepared for more FDA submissions. General and Administrative General and administrative expense increased $837,319, or 56.5%, to $2,318,074 for the three months ended March 31, 2024 due to (i) incremental headcount to build out the market access, sales and finance teams including recruiting costs, (ii) higher legal, insurance, investor relations and board of director costs as a publicly-held entity that the Company did not incur previously, (iii) one-time non-cash advisory costs of $50,000, (iv) one-time non-cash stock compensation charges of $237,000 for a hiring grant of stock and (v) higher advertising costs in order to expand market awareness. Operating Loss Our operating loss increased $935,846, or 104.4%, to $1,832,120 for the three months ended March 31, 2024 primarily due to lower sales volume and higher general and administrative expenses including $287,000 of one-time non-cash charges. Other (Expense) Income Other expense decreased $988,605, or 77.4%, to $288,531 for the three months ended March 31, 2024 primarily due to (i) the full conversion of the convertible notes upon the IPO on August 9, 2023 that eliminated any further debt discount, issuance cost, debt extinguishment and derivative fair valuation net charges and (ii) lower interest expense and issuance cost amortization from a lower debt burden, partly offset by finance charges incurred to settle a 2023 convertible note dispute. Net Loss Our net loss improved $52,759, or 2.4%, to $2,120,651 for the three months ended March 31, 2024 primarily due to the elimination of debt discount, issuance cost, debt extinguishment and derivative fair valuation net charges due to conversion of the convertible notes upon the IPO on August 9, 2023, partly offset by lower sales volume, higher general and administrative expenses (inclusive of $287,000 of one-time non-cash charges) and the settlement of a 2023 convertible note dispute. 26 Liquidity and Capital Resources We had cash on hand of $81,752 and $45,463 as March 31, 2024 and 2023, respectively. We maintained a working capital deficit of $3,407,877 and $8,755,744 as of March 31, 2024 and 2023, respectively. The increase in working capital was primarily due to (i) the conversion of notes payable upon the IPO on August 9, 2023 along with the corresponding elimination or reduction of the fair value liability of warrants and derivatives and (ii) payments of employee bonuses and 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 March 31, 2024, we had a stockholders’ deficit of $3,184,454 and short-term borrowings of $1,396,175. 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. The following table summarizes our cash flow from operating, investing and financing activities for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Net cash used in operating activites $ (1,332,160 ) $ (622,912 ) Net cash used in investing activities (14,722 ) (7,608 ) Net cash provided by financing activities 1,350,074 422,284 Net decrease in cash and cash equivalents 3,192 (208,236 ) Cash and cash equivalents at beginning of period 78,560 253,699 Cash and cash equivalents at end of period $ 81,752 $ 45,463 Operating Activities – Net cash used in operating activities decreased $709,248, or 113.9% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to lower sales volume, higher general and administrative expenses and payment of past due vendors. Investing Activities – Net cash used in investing activities increased $7,114, or 93.5%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due to purchases of equipment. Financing Activities – Net cash provided by financing activities increased $927,790, or 219.7%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to proceeds from the issuance of convertible notes whereas the proceeds from convertible notes issued during the three months ended March 31, 2023 were used to repay previously issued notes payable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 27