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 8-21 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. Since our inception, we have incurred significant operating losses. Our net loss was $8,241,501 and $14,626,683 for the years ended December 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 and RED devices 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 four. 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 customers representing approximately 40% and 45% of total sales for the years ended December 31, 2024 and 2023, 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. 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 (“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 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. The cost of expired inventory was $25,008 for the year ended December 31, 2023, representing 8.2% of our costs of goods sold. The Company did not have any expired inventory in the year ended December 31, 2024. 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. 65 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 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 Comparison of Year Ended December 31, 2024, and Year Ended December 31, 2023 The following table presents our statements of operations for the years ended December 31, 2024 and 2023: Years Ended December 31, 2024 2023 Net sales $ 2,685,925 $ 2,460,049 Cost of goods sold 362,002 303,345 Gross profit 2,323,923 2,156,704 Selling expenses 324,708 323,569 Research and development 206,107 169,315 General and administrative 8,949,925 8,328,315 Operating loss (7,156,817 ) (6,664,495 ) Other (expense) income, net: Financing charges (230,824 ) (2,772 ) Interest expense, net (174,328 ) (476,416 ) Change in fair value of warrant liability (941 ) 844,854 Change in fair value of derivative financial instruments — 198,551 Amortization of debt discount and issuance costs (126,387 ) (4,881,622 ) Extinguishment of debt liabilities — (3,649,561 ) Other (expense) income, net (552,204 ) 4,778 Total other (expense) income, net (1,084,684 ) (7,962,188 ) Net loss $ (8,241,501 ) $ (14,626,683 ) 66 Net Sales Net sales increased $225,876, or 9.2%, from $2,460,049 for the year ended December 31, 2023, to $2,685,925 for the year ended December 31, 2024, primarily due to volume growth from our financial assistance programs that provide discounts to patients without insurance coverage. Gross Profit and Gross Margin Gross profit increased $167,219, or 7.8%, from $2,156,704 for the year ended December 31, 2023, to $2,323,923 for the year ended December 31, 2024, due to higher sales volume. Despite the increase in sales volume, the decrease in gross margin from 87.7% for the year ended December 31, 2023, to 86.5% for the year ended December 31, 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. Selling Expenses Selling expenses increased $1,139, or 0.4%, from $323,569 for the year ended December 31, 2023, to $324,708 for the year ended December 31, 2024, due to higher sales volume. Research and Development Research and development expenses increased $36,792, or 21.7%, from $169,315 for the year ended December 31, 2023, to $206,107 for the year ended December 31, 2024, due to costs to bring the RED product to market and higher costs on a medical research project. General and Administrative General and administrative expenses increased $621,610, or 7.5%, from $8,328,315 for the year ended December 31, 2023, to $8,949,925 for the year ended December 31, 2024, due to (i) higher legal, insurance, investor relations, board of directors and stock exchange listing costs as a publicly held entity that the Company did not incur prior to its 2023 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 advisory costs, (v) expenses related to the introduction of an annual short-term incentive program and (vi) higher advertising costs in order to expand market awareness, partially offset by the non-recurrence of 2023 post-IPO consulting and recruiting services and the payment of incentive bonuses contingent upon the 2023 IPO. Operating Loss Our operating loss increased $492,322, or 7.4%, from $6,664,495 for the year ended December 31, 2023, to $7,156,817 for the year ended December 31, 2024, primarily due to higher general and administrative expenses partially offset by higher sales volume. 67 Other (Expense) Income Other expense decreased $6,877,504 or 86.4%, from $7,962,188 for the year ended December 31, 2023, to $1,084,684 for the year ended December 31, 2024, 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 $6,385,182, or 43.7%, from $14,626,683 for the year ended December 31, 2023, to $8,241,501 for the year ended December 31, 2024, primarily due to (i) higher sales volume, (ii) 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 (iii) lower interest expense and issuance cost amortization from a lower debt burden in 2024, partially offset by (iv) 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 and (v) higher 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. Liquidity and Capital Resources We had cash on hand of $3,696,870 and $78,560 as of December 31, 2024 and 2023, respectively. We maintained a working capital surplus of $1,832,858 and negative working capital of $1,643,058 as of December 31, 2024 and 2023, respectively. The increase in working capital was primarily due to the issuance of $5,000,000 of Convertible Series B Preferred Stock in November 2024 that significantly improved the Company’s liquidity position. 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, 2024, we had stockholders’ equity of $2,067,748, short-term outstanding borrowings of $154,152 and no 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 2025 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 before the end of 2025. 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. 68 The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2024 and 2023: Years Ended December 31, 2024 2023 Net cash used in operating activities $ (6,098,264 ) $ (6,693,978 ) Net cash used in investing activities (27,776 ) (71,781 ) Net cash provided by financing activities 9,744,350 6,590,620 Net increase (decrease) in cash and cash equivalents 3,618,310 (175,139 ) Cash and cash equivalents at beginning of period 78,560 253,699 Cash and cash equivalents at end of period $ 3,696,870 $ 78,560 Operating Activities – Net cash used in operating activities declined 595,714, or 8.9% from $6,693,978 for the year ended December 31, 2023, to $6,098,264 for the year ended December 31, 2024, primarily due to more issuances of common stock instead of cash for certain services in 2024 than in 2023 and lower interest payments in 2024 due to the conversion of debt in the 2023 IPO, partially offset by payments to past due vendors in 2024 for 2023 services. Investing Activities – Net cash used in investing activities decreased $44,005, or 61.3%, from $71,781 for the year ended December 31, 2023, to $27,776 for the year ended December 31, 2024, primarily due to the purchase of the Company’s trademark in 2023 that did not recur in 2024. Financing Activities – Net cash provided by financing activities increased $3,153,730, or 47.9%, from $6,590,620 for the year ended December 31, 2023, to $9,744,350 for the year ended December 31, 2024, primarily due to principal repayments on notes payable in 2023 that did not recur in 2024 and the Company subsequently raised capital from the IPO in 2023 to retire the notes payable and issued Convertible Series B Preferred Stock in 2024. 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.