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 our Form 10-K for the period ended December 31, 2023 (the “2023 Annual Report”) 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 $1,755,234 and $8,625,363 for the three months ended September 30, 2024 and 2023, respectively, and $6,793,596 and $13,034,385 for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $1,793,932. 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. 27 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 net sales less cost of goods sold, and gross margin as gross profit divided by net sales. 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 net sales 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, 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 shipping and handling costs and expired inventory charges. 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 nine months ended September 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. 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 nine months ended September 30, 2024 and 2023, respectively: (Unaudited) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net sales $ 666,625 $ 477,460 $ 1,924,760 $ 1,928,590 Cost of goods sold 97,050 67,287 256,949 231,000 Gross profit 569,575 410,173 1,667,811 1,697,590 Selling expenses 95,430 64,210 226,374 250,933 Research and development 72,422 44,950 132,304 171,536 General and administrative 2,052,996 3,323,352 6,999,358 6,316,411 Operating loss (1,651,273 ) (3,022,339 ) (5,690,225 ) (5,041,290 ) Other (expense) income: Financing charges - - (230,824 ) (2,772 ) Interest expense, net (64,676 ) (100,525 ) (171,934 ) (451,766 ) Change in fair value of warrant liability (6,726 ) 592,853 (8,434 ) 791,610 Change in fair value of derivative financial instruments - 6,394 - 198,551 Amortization of debt discount and issuance costs (40,888 ) (1,331,030 ) (126,387 ) (4,881,622 ) Extinguishment of debt liabilities - (4,779,069 ) - (3,649,571 ) Other income 17,072 9,931 20,032 11,483 Other expense (8,743 ) (1,578 ) (585,824 ) (9,008 ) Total other (expense) income, net (103,961 ) (5,603,024 ) (1,103,371 ) (7,993,095 ) Net loss $ (1,755,234 ) $ (8,625,363 ) $ (6,793,596 ) $ (13,034,385 ) 28 Net Sales Net sales increased $189,165, or 39.6%, from $477,460 for the three months ended September 30, 2023, to $666,625 for the three months ended September 30, 2024. Net sales decreased $3,830, or 0.2%, from $1,928,590 for the nine months ended September 30, 2023, to $1,924,760 for the nine months ended September 30, 2024. The increase for the three months ended September 30, 2024 was primarily due to volume growth from new and existing full insurance reimbursement customers as well as growth in our financial assistance programs that provide discounts to patients without insurance coverage. Gross Profit and Gross Margin Gross profit increased $159,402, or 38.9%, from $410,173 for the three months ended September 30, 2023, to $569,575 for the three months ended September 30, 2024 due to higher sales volume. Despite the increase in sales volume, the decrease in gross margin from 85.9% for the three months ended September 30, 2023 to 85.4% for the three months ended September 30, 2024 was due to higher growth in the Company’s financial assistance programs that are discounted to patients without insurance coverage compared to the Company’s undiscounted full reimbursement customers. Gross profit decreased $29,779, or 1.8%, from $1,697,590 for the nine months ended September 30, 2023, to $1,667,811 for the nine months ended September 30, 2024 due to gross margin. The decrease in gross margin from 88.0% for the nine months ended September 30, 2023 to 86.7% for the nine months ended September, 2024 was due to growth in our financial assistance programs that are discounted to patients without insurance coverage despite higher sales volume. Selling Expenses Selling expenses increased $31,220, or 48.6%, from $64,210 for the three months ended September 30, 2023, to $95,430 for the three months ended September 30, 2024 due to higher sales volume. Selling expenses decreased $24,559, or 9.8%, from $250,933 for the nine months ended September 30, 2023, to $226,374 for the nine months ended September 30, 2024 due to lower sales volume. Research and Development Research and development expenses increased $27,472, or 61.1%, from $44,950 for the three months ended September 30, 2023, to $72,422 for the three months ended September 30, 2024 due to higher quarter-to-date spending in 2024 on a medical research project. Research and development expenses decreased $39,232, or 22.9%, from $171,536 for the nine months ended September 30, 2023 to $132,304 for the nine months ended September 30, 2024 due to higher year-to-date spending in 2023 on a medical research project. General and Administrative General and administrative expenses decreased $1,270,356, or 38.2%, from $3,323,352 for the three months ended September 30, 2023, to $2,052,996 for the three months ended September 30, 2024 primarily due to 2023 post-IPO consulting and recruiting services and the payment of incentive bonuses relating to the 2023 IPO that did not recur in 2024, partially offset by (i) incremental headcount to build out the market access, sales and finance teams including, (ii) 2024 one-time non-cash advisory costs, (iii) expenses related to the introduction of an annual short-term incentive bonus plan in 2024 and (iv) higher advertising costs in order to expand market awareness. General and administrative expenses increased $682,947, or 10.8%, from $6,316,411 for the nine months ended September 30, 2023, to $6,999,358 for the nine months ended September 30, 2024 primarily due to (i) higher legal, insurance, investor relation, board of director and exchange listing 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, (iii) severance charges related to the Company’s prior Chief Operating Officer, (iv) one-time non-cash advisory costs, (v) a one-time non-cash stock compensation charge of $227,000 as a hiring grant, (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, partially offset by non-recurrence of 2023 post-IPO consulting and recruiting services and the payment of incentive bonuses relating to the 2023 IPO. Operating Loss Our operating loss decreased $1,371,066, or 45.4%, from $3,022,339 for the three months ended September 30, 2023, to $1,651,273 for the three months ended September 30, 2024 primarily due to the absence of 2023 post-IPO consulting and recruiting services, 2023 incentive bonuses relating to the IPO and higher sales and gross profit in 2024, partially offset by incremental headcount, advisory costs, a new annual short-term incentive bonus plan and higher advertising costs in 2024. Our operating loss increased $648,935, or 12.9%, from $5,041,290 for the nine months ended September 30, 2023, to $5,690,225 for the nine months ended September 30, 2024 primarily due to new costs as a publicly held company that were not incurred prior to the 2023 IPO. Other (Expense) Income, Net Other expense decreased $5,499,063, or 98.1%, from $5,603,024 for the three months ended September 30, 2023, to $103,961 for the three months ended September 30, 2024 primarily due to 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 lower interest expense and issuance cost amortization from a lower debt burden in 2024. Other expense decreased $6,889,724, or 86.2%, from $7,993,095 for the nine months ended September 30, 2023, to $1,103,371 for the nine months ended September 30, 2024 primarily due to 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 lower interest expense and issuance cost amortization from a lower debt burden in 2024, partially offset by financing 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 decreased $6,870,129, or 79.7%, from $8,625,363 for the three months ended September 30, 2023, to $1,755,234 for the three months ended September 30, 2024. Our net loss decreased $6,240,789, or 47.9%, from $13,034,385 for the nine months ended September 30, 2023, to $6,793,596 for the nine months ended September 30, 2024. The decreases were primarily due to (i) higher sales for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, (ii) lower general and administrative expenses due to the absence of 2023 post-IPO consulting and recruiting services and the payment of incentive bonuses relating to the 2023 IPO, (iii) the elimination of debt discount, issuance cost and fair value derivative valuation net charges as a result of the conversion of notes upon the 2023 IPO and (iv) lower interest expense and issuance cost amortization from a lower debt burden in 2024, partially offset by financing charges incurred to settle a 2023 convertible note dispute and other expense to settle certain claims of pre-IPO Series A Preferred Stock shareholders. 29 Liquidity and Capital Resources We had cash on hand of $260,885 and $761,249 as of September 30, 2024 and 2023, respectively. We maintained a working capital deficit of $2,032,284 and $1,643,058 as of September 30, 2024 and December 31, 2023, respectively. The decrease in working capital was primarily due to the unpaid severance, annual bonus and consulting fees that were not incurred in 2023. 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, 2024, we had an accumulated deficit of $1,793,932 and short-term borrowings of $147,688. 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. Additionally, we 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 nine months ended September 30, 2024 and 2023: (Unaudited) Nine Months Ended September 30, 2024 2023 Net cash used in operating activites $ (4,340,097 ) $ (4,064,419 ) Net cash used in investing activities (27,776 ) (55,741 ) Net cash provided by financing activities 4,550,198 4,627,710 Net increase in cash and cash equivalents 182,325 507,550 Cash and cash equivalents at beginning of period 78,560 253,699 Cash and cash equivalents at end of period $ 260,885 $ 761,249 Operating Activities – Net cash used in operating activities increased $275,678, or 6.8% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a higher operating loss. Investing Activities – Net cash used in investing activities decreased $27,965, or 50.2%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due to lower capital expenditures. Financing Activities – Net cash provided by financing activities decreased $77,512, or 1.7%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to lower proceeds from the issuance of convertible notes in 2024 compared to the net IPO and notes payable proceeds in 2023. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 30