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 $2,917,710 and $2,235,614 for the three months ended June 30, 2024 and 2023, respectively, and $5,038,361 and $4,409,022 for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, we had an accumulated deficit of $5,258,382. 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 and six months ended June 30, 2024 and 2023. Expired inventory has not been material to our results. 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 and six months ended June 30, 2024 and 2023, respectively: (Unaudited) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net sales $ 611,500 $ 646,021 $ 1,258,135 $ 1,451,131 Cost of goods sold 73,458 67,813 148,539 163,713 Gross profit 538,042 578,208 1,109,596 1,287,418 Selling expenses 62,274 78,791 142,304 186,723 Research and development 54,312 109,789 59,882 126,586 General and administrative 2,628,288 1,507,169 4,946,362 2,987,923 Operating loss (2,206,832 ) (1,117,541 ) (4,038,952 ) (2,013,814 ) Other (expense) income: Financing charges - - (230,824 ) (2,772 ) Interest expense (80,697 ) (194,690 ) (107,257 ) (356,378 ) Change in fair value of warrant liability 7,576 (36,050 ) (1,708 ) 198,757 Change in fair value of derivative financial instruments - 860 - 192,157 Amortization of debt discount and issuance costs (63,817 ) (887,937 ) (85,500 ) (3,550,592 ) Extinguishment of debt liabilities - - - 1,129,498 Other income 2,961 2 2,961 1,552 Other expense (576,901 ) (258 ) (577,081 ) (7,430 ) Total other expense, net (710,878 ) (1,118,073 ) (999,409 ) (2,395,208 ) Net loss $ (2,917,710 ) $ (2,235,614 ) $ (5,038,361 ) $ (4,409,022 ) 25 Net Sales Net sales decreased $34,521, or 5.3%, from $646,021 for the three months ended June 30, 2023, to $611,500 for the three months ended June 30, 2024. Net sales decreased $192,996, or 13.3%, from $1,451,131 for the six months ended June 30, 2023, to $1,258,135 for the six months ended June 30, 2024. The decreases were primarily 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 financial assistance programs that provide discounts to patients without insurance coverage. Gross Profit and Gross Margin Gross profit decreased $40,166, or 6.9%, from $578,208 for the three months ended June 30, 2023, to $538,042 for the three months ended June 30, 2024; gross margin was 88.0% and 89.5% for the three months ended June 30, 2024 and 2023, respectively. Gross profit decreased $177,822, or 13.8%, from $1,287,418 for the six months ended June 30, 2023, to $1,109,596 for the six months ended June 30, 2024; gross margin was 88.2% and 88.7% for the six months ended June 30, 2024 and 2023, respectively. The decreases were due to (i) lower sales volume to certain customers as they transition through the full reimbursement insurance process and (ii) lower gross margin due to growth in our financial assistance programs that are discounted to patients without insurance coverage. Selling Expenses Selling expenses decreased $16,517, or 21.0%, from $78,791 for the three months ended June 30, 2023, to $62,274 for the three months ended June 30, 2024. Selling expenses decreased $44,419, or 23.8%, from $186,723 for the six months ended in the six months ended June 30, 2023, to $142,304 for the six months ended June 30, 2024. The decreases were due to lower sales volume. Research and Development Research and development expenses decreased $55,477, or 50.5%, from $109,789 for the three months ended June 30, 2023, to $54,312 for the three months ended June 30, 2024. Research and development expenses decreased $66,704, or 52.7%, from $126,586 for the six months ended June 30, 2023 to $59,882 for the six months ended June 30, 2024. The decreases were due to more patient trials conducted in 2023 as the company prepared for more FDA submissions. General and Administrative General and administrative expenses increased $1,121,119, or 74.4%, from $1,507,169 for the three months ended June 30, 2023, to $2,628,288 for the three months ended June 30, 2024 primarily due to (i) higher legal, insurance, investor relation and board of director costs as a publicly held entity that the Company did not incur prior to its IPO, (ii) incremental headcount to build out the market access, sales and finance teams including recruiting costs, (iii) a severance charge related to the Company’s prior Chief Operating Officer, (iv) one-time non-cash advisory costs of $105,600, (v) expenses related to the introduction of an annual short-term incentive bonus program, and (vi) higher advertising costs in order to expand market awareness. General and administrative expenses increased $1,958,439, or 65.5%, from $2,987,923 for the six months ended June 30, 2023, to $4,946,362 for the six months ended June 30, 2024 primarily due to (i) higher legal, insurance, investor relation and board of director costs as a publicly held entity that the Company did not incur prior to its IPO, (ii) incremental headcount to build out the market access, sales and finance teams including recruiting costs, (iii) a severance charge related to the Company’s prior Chief Operating Officer, (iv) one-time non-cash advisory costs of $155,600, (v) a one-time non-cash stock compensation charge of $227,000 for a hiring grant of stock, (vi) expenses related to the introduction of an annual short-term incentive bonus program, and (vii) higher advertising costs in order to expand market awareness. Operating Loss Our operating loss increased $1,089,291, or 97.5%, from $1,117,541 for the three months ended June 30, 2023, to $2,206,832 for the three months ended June 30, 2024. Our operating loss increased $2,025,138, or 100.6%, from $2,013,814 for the six months ended June 30, 2023, to $4,038,952 for the six months ended June 30, 2024. The increases were primarily due to lower sales volume, lower gross margin as the Company’s discounted financial assistance program grows and higher general and administrative expenses. Other (Expense) Income, Net Other expense decreased $407,195, or 36.4%, from $1,118,073 for the three months ended June 30, 2023, to $710,878 for the three months ended June 30, 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 and fair value derivative valuation net charges and (ii) lower interest expense and issuance cost amortization from a lower debt burden, partially offset the settlement of certain claims of pre-IPO Series A Preferred Stock shareholders. Other expense decreased $1,395,799, or 58.3%, from $2,395,208 for the six months ended June 30, 2023, to $999,409 for the six months ended June 30, 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 fair value derivative valuation net charges and (ii) lower interest expense and issuance cost amortization from a lower debt burden, partially offset by finance charges incurred to settle a 2023 convertible note dispute and other expense to settle certain claims of pre-IPO Series A Preferred Stock shareholders. Net Loss Our net loss increased $682,096, or 30.5%, from $2,235,614 for the three months ended June 30, 2023, to $2,917,710 for the three months ended June 30, 2024. Our net loss increased $629,339, or 14.3%, from $4,409,022 for the six months ended June 30, 2023, to $5,038,361 for the six months ended June 30, 2024. The increases were primarily due to (i) higher general and administrative expenses and (ii) the settlements of a 2023 convertible note dispute and certain pre-IPO Series A Preferred Stock shareholders claims, partially offset by the elimination of debt discount, issuance costs, debt extinguishment and derivative fair valuation net charges. 26 Liquidity and Capital Resources We had cash on hand of $1,765,274 and $51,440 as June 30, 2024 and 2023, respectively. We maintained a working capital deficit of $5,482,316 and $1,643,058 as of June 30, 2024 and December 31, 2023, respectively. The decrease in working capital was primarily due to the issuance of $4,935,000 of convertible notes during the six months ended June 30, 2024, net of cash on hand as of June 30, 2024. 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 June 30, 2024, we had a stockholders’ deficit of $5,258,382 and short-term borrowings of $4,767,335, net of financing fees. 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 six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 Net cash used in operating activities $ (2,947,295 ) $ (1,248,137 ) Net cash used in investing activities (23,408 ) (13,067 ) Net cash provided by financing activities 4,657,417 1,058,945 Net increase (decrease) in cash and cash equivalents 1,686,714 (202,259 ) Cash and cash equivalents at beginning of period 78,560 253,699 Cash and cash equivalents at end of period $ 1,765,274 $ 51,440 Operating Activities – Net cash used in operating activities increased $1,699,158, or 136.1% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due to lower sales volume, higher general and administrative expenses and payments of past due vendors. Investing Activities – Net cash used in investing activities increased $10,341, or 79.1%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to purchases of equipment. Financing Activities – Net cash provided by financing activities increased $3,598,472, or 339.8%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due to proceeds from the issuance of convertible notes whereas the proceeds from convertible notes issued during the six months ended June 30, 2023 were used to repay previously issued notes payable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 27