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 advance drug-free neuromodulation therapies that improve patient outcomes and reduce medication burden in complex disorders, while expanding access to effective care for populations with significant unmet needs. Our IB-Stim device is a PENFS system with FDA indications for patients 8 years and older with functional abdominal pain associated with IBS, functional dyspepsia (FD), and associated FD nausea symptoms. Our RED device is an easy-to-use, office-based, point-of-care test that identifies patients with chronic constipation due to pelvic floor dyssnergia and has FDA for adults. Other indications in our pipeline are comprised of post-concussion syndrome, cyclic vomiting syndrome, post-operative pain and fibromyalgia pain. Since our inception, we have incurred significant operating losses. Our net loss was $7,800,555 and $8,241,501 for the years ended December 31, 2025 and 2024, respectively. Although we had stockholders’ equity of $3,399,372, 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 IB-Stim to treat future indications. Factors Affecting our Business and Results of Operations Revenue Our revenue is derived from the sale of IB-Stim to healthcare companies, primarily hospitals and clinics. Sales generally are not seasonal and only mildly correlated with economic cycles. IB-Stim sells for $1,195 per device, and each patient being treated for functional abdominal pain associated with IBS, functional dyspepsia (FD), and/or associated FD nausea symptoms will use four devices. 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 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 net 30 days. Our largest sales were to two customers representing approximately 28% and 35% of total sales for the years ended December 31, 2025 and 2024, 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 IB-Stim, production volume, order flows, change in mix of customers, third-party manufacturing costs related to components of our devices and cost-reduction strategies. We expect our gross profit to increase in the foreseeable future as our net sales grows, both through broader insurer acceptance of IB-Stim 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 and the mix of patient healthcare coverage (e.g., discounts are provided to lower income patients without healthcare insurance), particularly as we introduce enhancements to IB-Stim 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 and RED devices to our contract manufacturers along with shipping and handling costs and expired inventory charges. Expired inventory expense is related to the FDA clearance period from the date our devices are manufactured, and if the device is not sold in such period, a reserve is recorded. Expired inventory charges totaled $19,973 and $0 for the years ended December 31, 2025 and 2024. We have fixed-price contracts with the manufacturers of our devices. 65 Our selling expenses primarily consist of advertising, marketing and promotion of the Company’s products including salaries, commissions and other related personnel costs including travel expenses. The Company reclassified $1,144,176 of general and administrative expenses to selling expenses in the Consolidated Statements of Operations for the year ended December 31, 2024, to conform to current year presentation. Research and development expenses consist primarily of clinical research studies, new product development, costs of materials and supplies used in research and development activities and salaries and other related personnel costs for employees engaged in research and development activities to have our IB-Stim and RED devices cleared by the FDA for other indications. The Company reclassified $227,507 of general and administrative expenses to research and development expenses in the Consolidated Statements of Operations for the year ended December 31, 2024, to conform to current year presentation. We expect future R&D expenses for other indications, such as post-concussion syndrome, cyclic vomiting syndrome, post-operative pain and fibromyalgia pain. General and administrative expense primarily consists of wages and benefits, professional fees including legal and audit, insurance, investor relations, facility costs, utilities and travel. Results of Operations Comparison of Year Ended December 31, 2025, and Year Ended December 31, 2024 The following table presents our statements of operations for the years ended December 31, 2025 and 2024: Years Ended December 31, 2025 2024 Net sales $ 3,569,282 $ 2,685,925 Cost of goods sold 562,916 362,002 Gross profit 3,006,366 2,323,923 Selling expenses 2,279,974 1,468,884 Research and development 493,611 443,614 General and administrative 8,062,689 7,578,242 Operating loss (7,829,908 ) (7,156,817 ) Other income (expense), net: Financing charges (30,240 ) (230,824 ) Interest expense (73,969 ) (174,328 ) Change in fair value of warrant liability (7,634 ) (941 ) Amortization of debt discount and issuance costs -- (126,387 ) Other income (expense), net 141,196 (552,204 ) Total other income (expense), net 29,353 (1,084,684 ) Net loss $ (7,800,555 ) $ (8,241,501 ) 66 Net Sales Net sales increased $883,357, or 32.9%, from $2,685,925 for the year ended December 31, 2024, to $3,569,282 for the year ended December 31, 2025, primarily due to volume growth from (i) both patients with health insurance coverage and those participating our financial assistance programs that provide discounts to patients without health insurance coverage and (ii) device sales from the Company’s launch of the RED product in 2025. Although unit growth from the discounted financial assistance programs outpaced the full health insurance reimbursement programs, the Company’s overall growth was function of new customers (both hospitals and private physical practices), new insurance carrier coverage in certain locations across the United States and higher prior authorization approval rates of the Company’s Category III CPT Code. Gross Profit and Gross Margin Gross profit increased $682,443, or 29.4%, from $2,323,923 for the year ended December 31, 2024, to $3,006,366 for the year ended December 31, 2025, due to higher sales volume. Despite the increase in sales volume, the decrease in gross margin from 86.5% for the year ended December 31, 2024, to 84.2% for the year ended December 31, 2025, was due to higher discounting in the Company’s financial assistance programs provide to patients without insurance coverage, a higher unit growth rate of the discounted financial assistance programs compared to the full reimbursement health insurance programs and expired RED inventory. Selling Expenses Selling expenses increased $811,090, or 55.2%, from $1,468,884 for the year ended December 31, 2024, to $2,279,974 for the year ended December 31, 2025, due to higher commissions from higher sales volume, a higher temporary commission structure to facilitate growth and adoption in new states, incremental sales and marketing headcount and increased advertising and marketing costs focused on health insurance carriers due to the January 1, 2026 effective date of IB’Stim’s new Category I CPT Code Research and Development Research and development expenses increased $59,997, or 13.8%, from $433,614 for the year ended December 31, 2024, to $493,611 for the year ended December 31, 2025, due to costs to higher year-over-year spending on a medical research project, improved IB-Stim design features and costs to develop the RED device. General and Administrative General and administrative expenses increased $484,447, or 6.4%, from $7,578,242 for the year ended December 31, 2024, to $8,062,689 for the year ended December 31, 2025, primarily due to a $630,568 one-time, non-recurring charge to settle a lawsuit, headcount and related costs incurred to improve and enhance the Company’s internal control environment and the introduction of annual short-term and long-term incentive plans in 2024 that were not outstanding for the full fiscal year, partially offset by the absence of certain one-time non-recurring severance, hiring, consulting and advisory costs incurred in 2024 and lower legal, accounting and insurance costs as new hires in 2024 have internally absorbed certain services. Operating Loss Our operating loss increased $673,091, or 9.4%, from $7,156,817 for the year ended December 31, 2024, to $7,829,908 for the year ended December 31, 2025, primarily due to higher selling and general and administrative expenses partially offset by higher gross profit from sales volume. 67 Other Income (Expense) Other income increased $1,114,037, or 102.7%, from $1,084,684 of expense for the year ended December 31, 2024, to $29,353 of income for the year ended December 31, 2025, due to the absence of one-time, non-recurring 2024 settlements relating to a 2023 convertible note dispute and certain pre-IPO Series A Preferred Stock shareholder claims and the conversion of convertible notes into Series B Preferred Stock in 2024 which eliminated any related debt discount and interest charges. Net Loss Our net loss decreased $440,946, or 5.4%, from $8,241,501 for the year ended December 31, 2024, to $7,800,555 for the year ended December 31, 2025, primarily due to higher sales volume and the absence of one-time, non-recurring 2024 settlements relating to a 2023 convertible note dispute and certain pre-IPO Series A Preferred Stock shareholder claims, partially offset by higher selling expenses and the one-time non-recurring settlement of a lawsuit in 2025. Liquidity and Capital Resources We had cash on hand of $4,965,072 and $3,696,870 as of December 31, 2025 and 2024, respectively. We maintained a working capital surplus of $2,941,091 and $1,832,858 as of December 31, 2025 and 2024, respectively. The increase in working capital was primarily due to the sale and issuance of 3,108,170 shares of common stock pursuant to the shelf registration statement and warrant exercises for gross proceeds of $8,826,615 offset by cash used in operations of $6,432,843 for the year ended December 31, 2025 which improved the Company’s liquidity position. We have incurred losses since inception and have funded our operations primarily with a combination of sales, debt, the exercises of warrants and the sale of capital stock. As of December 31, 2025, we had stockholders’ equity of $3,399,372, short-term outstanding borrowings of $148,293 and long-term debt of $9,999. 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 2026 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 2026. 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, 2025 and 2024: Years Ended December 31, 2025 2024 Net cash used in operating activities $ (6,432,843 ) $ (6,098,264 ) Net cash used in investing activities (131,150 ) (27,776 ) Net cash provided by financing activities 7,832,195 9,744,350 Net increase in cash and cash equivalents 1,268,202 3,618,310 Cash and cash equivalents at beginning of period 3,696,870 78,560 Cash and cash equivalents at end of period $ 4,965,072 $ 3,696,870 Operating Activities – Net cash used in operating activities increased $334,579, or 5.5% from $6,098,264 for the year ended December 31, 2024, to $6,432,843 for the year ended December 31, 2025, primarily due to the payment of the 2024 short-term incentive program in 2025 (no program existed previously) and higher inventory purchases as the Company prepared for the January 1, 2026 effective date of the Category I CPT code for the IB-Stim device, partially offset by better receivable collections. Investing Activities – Net cash used in investing activities increased $103,374, or 372.2%, from $27,776 for the year ended December 31, 2024, to $131,150 for the year ended December 31, 2025, primarily due to the $100,000 installment payment to Masimo pursuant to the July 1, 2025 NSS-2 Bridge license termination agreement that allowed the Company to recapture the rights to a trademark and two patent applications. Financing Activities – Net cash provided by financing activities decreased $1,912,155, or 19.6%, from $9,744,350 for the year ended December 31, 2024, to $7,832,195 for the year ended December 31, 2025, primarily due to (i) gross financing proceeds of $10,214,846 for the year ended December 31, 2024 from the issuance of Series B preferred stock and convertible notes in addition to the exercise of warrants compared to gross financing proceeds of $8,826,615 for the year ended December 31, 2025 through the issuance of common stock and the exercise of warrants and (ii) higher financing fees, offering costs and legal fees paid in 2025 versus 2024. Critical Accounting Estimates Management considers its allowance for credit losses, reserve for sales returns and reserve for excess and expired inventory to be the most critical accounting estimates and assumptions in understanding our financial statements because they involve significant judgments and uncertainties. Actual results could differ from management’s estimates. See Note 2 for further information on our most significant accounting policies. Allowance for Credit Losses The Company sells its IB-Stim and RED devices primarily to hospitals and private physician practices with payment generally due within 30 days. The Company does not offer discounts if the customer pays some or all of an invoiced amount prior to the due date. We maintain an allowance for credit losses to reflect our estimate of expected losses on accounts receivable from the sale of our medical devices. The estimate of expected credit losses is a considered a critical accounting estimate because it requires significant judgment and the use of assumptions about future customer payment behavior and economic conditions. In estimating the allowance for credit losses, management regularly reviews its past due account receivable balances and evaluates many factors including, but not limited to, creditworthiness, past transaction and payment history, historical loss experience, current economic industry trends and payment terms. The Company performs that review by utilizing an aging schedule to assess the collectability of accounts. Actual credit losses may differ from estimated amounts. Differences between estimated and actual credit losses are recognized in earnings in the period in which such changes are identified. A change in the past due account balance by 10 percentage points as of December 31, 2025, would increase or decrease the allowance for credit losses by $558. 69 Allowance for Sales Returns We recognize revenue net of estimated product returns upon customer receipt under FOB destination terms. Customers may return devices if the goods are found to be defective, nonconforming or otherwise do not meet the technical specifications. Historically, the Company has also allowed returns at the request of physicians, on a case-by-case basis, as long as the devices are returned in their original, unopened packaging. As a result, we record an allowance for sales returns which is considered a critical accounting estimate because it requires significant judgment and is sensitive to changes in assumptions. In establishing the allowance for sales returns, management evaluates historical return rates by product and adjusts those rates to reflect current trends and conditions. Estimates are reassessed each reporting period based on actual return activity and updated information. Actual product returns may differ from estimated amounts. Differences between estimated and actual returns are recognized as adjustments to revenue in the period in which they become known. A change in the return rate of one percentage point as of December 31, 2025, would have increased or decreased the allowance by $5,593. Allowance for Excess and Expired Inventory Inventories are valued at the lower of cost or net realizable value. An allowance for excess and expired inventory is recorded to reflect inventory quantities that are not expected to be sold or that are expected to be sold below cost. The determination of this allowance is considered a critical accounting estimate because it requires significant judgment regarding future product demand and the timing of orders. In estimating the allowance for excess and expired inventory, management considered a number of factors including, but not limited to, historical sales trends, product shelf life and expiration dates, regulatory and clinical requirements, backlog and anticipated demand and future orders. Actual inventory usage and obsolescence may differ from management’s estimates. Differences between estimated and actual inventory usage are recognized as adjustments to earnings in the period in which they become known. A change in the forecasted demand of 20 percentage points as of December 31, 2025, would have increased or decreased the allowance by $758. 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.