Neuraxis INC

Previous wording

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 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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

We have four categories of expenses: cost of goods sold, selling expenses, research and development, and general and administrative.

Current wording

We have four categories of expenses: cost of goods sold, selling, research and development, and general and administrative.

Previous wording

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.

Current wording

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.

Previous wording

Our core selling expenses primarily consist of commissions and shipping costs. These expense items are generally correlated with sales.

Current wording

Our core selling expenses primarily consist of commissions.

Previous wording

The following table presents our statements of operations for the three and six months ended June 30, 2024 and 2023, respectively:

Current wording

The following table presents our statements of operations for the three and nine months ended September 30, 2024 and 2023, respectively:

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

The following table summarizes our cash flow from operating, investing and financing activities for the six months ended June 30, 2024 and 2023:

Current wording

The following table summarizes our cash flow from operating, investing and financing activities for the nine months ended September 30, 2024 and 2023:

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.