Neuraxis, INC

1. Basis of Presentation, Organization and Other Matters

Neuraxis, Inc. (“we,” “us,” the “Company,” or “Neuraxis”) was established in 2011 and incorporated in the state of Indiana on April 17, 2012, under the name of Innovative Health Solutions, Inc. In 2022, the name was changed to Neuraxis, Inc. and the Company filed a Certificate of Conversion to become a Delaware corporation that increased the number of authorized shares and established a par value.

The Company is headquartered in Carmel, Indiana, and specializes in the development, production, and sale of medical neuromodulation devices. The Company has developed four FDA cleared products: (i) the IB-STIM (DEN180057, 2019), (ii) the Rectal Expulsion Device (“RED”) (K242304, 2024), (iii) NSS-2 Bridge (DEN170018, 2017) and (iv) the original 510(K) clearance (K140530, 2014).

On January 10, 2023, the Company’s board of directors authorized a 1-for-2 reverse stock split. All per share information has been adjusted for this reverse stock split. The reverse split became effective on January 12, 2023. All share and per share amounts for the common stock have been retroactively restated to give effect to the splits.

As part of the conversion to a Delaware corporation, the total number of shares of all classes of stock which the Corporation had authority to issue was (1)100,000,000 shares of Common Stock, par value $0.001 per share (“Common Stock”) and (ii)1,120,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”),1,000,000 shares of which was designated as “Series A Preferred Stock” and 120,000 shares of which were designated as “Series Seed Preferred Stock” with the rights, preferences, powers, privileges and restrictions, qualifications and limitations set forth in this Article IV of the Delaware Certificate of Incorporation. All share amounts have been retroactively restated to give effect to these changes.

On August 9, 2023, the Company consummated an initial public offering (“IPO”), conducted on a firm commitment basis, pursuant to which it sold 1,098,667 shares of its common stock at a price of $6.00 per share, resulting in gross proceeds to the Company of $6,592,002. Net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses paid by the Company, were $4,110,721. All shares sold in our IPO were registered pursuant to a registration statement on Form S-1 (File No. 333- 269179), as amended, declared effective by the SEC on August 9, 2023. Alexander Capital L.P. (“Alexander”) acted as sole book-running manager for the offering and Spartan Capital Securities, LLC acted as co-manager for the offering. The underwriters did not exercise their option to purchase up to an additional 164,801 shares of common stock. The Company paid the underwriters an underwriting discount of seven percent (7%) of the amount raised in the offering. In addition, we also paid the underwriters a non-accountable expense allowance in the amount of 1% (such 8% in commissions and fees amounted to a total of $527,000) at closing, as well as $175,000 for the reimbursement of certain of the underwriters’ expenses. Additionally, as partial consideration for services rendered in connection with the offering, the Company issued Alexander unregistered warrants to purchase an aggregate of 65,921 shares of Company common stock, representing 6.0% of the aggregate shares sold in the offering. The warrants had an initial exercise price of $7.20 per share (equal to 120% of the offering price per share), a term of five years from the commencement of sales in the offering, and are exercisable at any time.

On August 15, 2024, the Company’s shareholders (i) authorized 5,000,000 shares of preferred stock of which 4,000,000 were designated at $0.001 par value “Series B Preferred Stock” inclusive of cumulative dividends, due and payable quarterly at the Company’s discretion either in cash or common stock when declared, at a rate of 8.5% per annum through June 30, 2025, (ii) retired 1,000,000 shares of Series A Preferred Stock and (iii) retired 120,000 shares of Series Seed Preferred Stock. On November 11, 2024, the Company’s shareholders authorized (i) an increase in the number of designated Series B Preferred Stock to 5,000,000 shares and (ii) anextension of the 8.5% cumulative dividend period to December 31, 2026.

2. Summary of Significant Accounting Policies

The summary of significant accounting policies of Neuraxis, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to U.S. generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Use of Estimates and Critical Accounting Estimates and Assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for credit losses, stock-based compensation, income tax provisions, excess and obsolete inventory reserve, and impairment of property and equipment, and intellectual property. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company did not hold any cash equivalents as of December 31, 2024 and 2023.

Trade Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are stated at the amount management expects to collect from outstanding balances, net of an allowance for credit losses. Management evaluates many factors when determining the collectability of specific customer accounts, including, but not limited to, creditworthiness, past transaction and payment history, current economic industry trends and changes in payment terms. Management used assumptions and judgment based on the best available facts and circumstances to estimate and record an allowance. The allowance for credit losses was $5,000 and $11,993 as of December 31, 2024 and 2023, respectively. The Company recorded credit losses for the years ended December 31, 2024 and 2023 of $7,395 and $25,281, respectively.

Customer Deposits

Customer deposits consists of payments and returned devices from clients in advance of revenue recognition. The Company will recognize the customer deposits over the next year. As of December 31, 2024, and 2023, the Company had customer deposits of $32,527 and $74,947, respectively.

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined using the weighted average method. The inventory is comprised of finished medical devices on hand. Certain components within the devices have an expiration date that are removed from current inventory and expensed at the date of expiration. For the years ended December 31, 2024 and 2023, $0 and $25,008 were expensed as expired inventory, respectively. Inventory reserves totaled $4,454 and $0 as of December 31, 2024 and 2023, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

Depreciation is calculated using the following estimated useful lives:

Depreciation expense was $26,346 and $30,240 during the years ended December 31, 2024 and 2023, respectively.

Research and Development

Costs for research and development are expensed as incurred. Research and development expenses consist primarily of clinical research studies and new product development.

Intangible Assets

Intangible assets consist of software, patents, a trademark and a license. Intangible assets are stated at their historical cost and amortized on a straight-line basis over their expected useful lives. Capitalized patent costs, net of accumulated amortization, includes legal costs incurred for patent applications. In accordance with ASC 350, once a patent is granted, we amortize the capitalized patent costs over the remaining life of the patent using the straight-line method. If the patent is not granted, we write off any capitalized patent costs at that time.

The Company purchased a trademark related to the Company’s name for $50,000. The trademark does not have a determinate life and therefore the cost is not being amortized.

The Company entered into an option agreement on April 12, 2023 to bring an optionor’s invention to commercialization via a royalty-bearing licensing agreement. The agreement required an initial payment of $1,000 and was fully amortized in the year ended December 31, 2024.

We review intangible assets for impairment annually or when events or circumstances indicate that their carrying amount may not be recoverable. During the years ended December 31, 2024, and 2023, the Company recorded no impairment charges for intangible assets.

Amortization expense was $11,485 and $10,485 during the years ended December 31, 2024 and 2023, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements and tax returns. Deferred tax assets and liabilities are determined based upon the differences between the financial statement carrying amounts, and the tax bases of existing assets and liabilities for the loss and credit carryforwards using enacted tax rates expected to be in effect in the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that these assets may not be realized. The Company determines whether a tax position will be sustained upon examination. If it is more likely than not that a position will be sustained, none of the benefit attributable to the position is recognized. The tax benefit to be recognized for any tax position that meets the more likely than not recognition threshold is calculated asthe largest amount that is more than 50% likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes.

Management’s evaluation of the Company’s deferred tax assets and liabilities did not have a material effect on the Company’s financial statements. Furthermore, no interest or penalties have been accrued or charged to expense as of December 31, 2024 and 2023 and for the years then ended.

Advertising Cost

Advertising costs are expensed as incurred and amounted to $232,125 and $192,400 for the years ended December 31, 2024 and 2023, respectively, and are classified as general and administrative expenses in the statements of operations.

Warrant Liabilities

Management evaluates all of the Company’s financial instruments, including issued warrants to purchase its common stock, to determine if such instruments are liabilities pursuant to ASC 480 and ASC 815-15. The classification of derivative financial instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.

The Company utilizes a Black-Scholes option-pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the Black-Scholes option-pricing model included an exercise price, the stock price as of the valuation date, an expected remaining term of each warrant as of the valuation date, estimated volatility, a dividend yield, and a risk-free rate. The Company records the change in the fair value of the warrant as other income or expense in the statements of operations.

Fair Value Measurements

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Quoted prices (unadjusted) for identical unrestricted assets or liabilities in active markets that the reporting entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities: quoted prices in markets that are not active; or financial instruments for which all significant inputs are observable or can be corroborated by observable market date, either directly or indirectly.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These unobservable inputs reflect that reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value require significant management judgment or estimation.

The Company’s Level 1 assets/liabilities include cash, accounts receivable, accounts payable, prepaids, and other current assets. Management believes the estimated fair value of these accounts on December 31, 2024 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments.

The Company’s Level 3 assets/liabilities include warrant liabilities. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. The valuation techniques involve management’s estimates and judgment based on unobservable inputs. The fair value estimates may not be indicative of the amounts that would be realized in a market exchange. Additionally, there may be inherent uncertainties or changes in the underlying assumptions used, which could significantly affect the current or future fair value estimates. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis:

There were no transfers between any of the levels during the years ended December 31, 2024 and 2023. In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company’s assets and liabilities are also subject to recurring fair value measurements. As of December 31, 2024 and 2023, the Company had no assets that were measured on a recurring basis.

Basic and Diluted Net Income (Loss) per Share

Basic earnings or loss per share (“EPS”) is computed by dividing net income (loss), net of preferred stock dividends, by the weighted average number of common shares outstanding during the period. Diluted EPS is determined using the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents that were outstanding for the periods presented. In periods when losses are reported, which is the case for December 31, 2024 and 2023 presented in these financial statements, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. Preferred stock dividends (neither declared nor paid) were $211,268 and $0 as of December 31, 2024 and 2023, respectively.

The Company had the following potentially dilutive common stock equivalents at December 31, 2024 and 2023:

The following table shows the calculation of the basic and diluted net loss per share and the effect of preferred stock dividends.

Stock-Based Compensation

The Company accounts for all stock-based awards at fair value. The Company recognizes its stock-based compensation expense using the straight-line method. Compensation cost is not adjusted for estimated forfeitures, but instead is adjusted upon an actual forfeiture.

The Company accounts for the granting of stock options and restricted stock units to employees and non-employees using the fair value method whereby all awards are measured at fair value on the date of the grant. The fair value of all employee stock options and restricted stock units is expensed over the requisite service period with a corresponding increase to additional paid-in capital. Upon exercise of stock options, the consideration paid by the option holder is recorded in additional paid-in capital, while the par value of the shares received is reclassified from additional paid-in-capital to common stock. Upon vesting of restricted stock units, the par value of the shares issued are reclassified from additional paid-in-capital to common stock.

Stock-based awards to non-employees are measured based on the fair value of the equity instrument issued. Compensation expense for non-employee stock awards is recognized over the requisite service period following the measurement of the fair value on the grant date.

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected term of the option, risk-free interest rates, the value of the common stock and expected dividend yield of the common stock. Changes in these assumptions can materially affect the fair value estimate.

Revenue Recognition

In accordance with FASB’s ASC 606,Revenue from Contracts with Customers, (“ASC 606”), the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:

The Company applies the five-step model to contracts when it determines that it is probable it will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price, after consideration of variability and constraints, if any, that is allocated to the respective performance obligation when the performance obligation is satisfied.

The Company estimates credit losses on accounts receivable by utilizing an aging schedule.

The Company offers a Patient Assistance Program for patients without insurance coverage for IB-Stim. This program offers potential self-pay discounts for IB-Stim devices, based upon household income and size.

Also, the Company offers providers an opt-in program to address adequate insurance claim payments on IB-Stim devices. This program may extend a rebate or invoice credit where the insurance payment and patient responsibility (i.e., deductible, co-payment, and/or co-insurance amounts required by the Payer) are less than the acquisition cost of the IB-Stim device. The Company recognizes revenue at such a time that collection of the amount due is assured.

The following table disaggregates the Company’s revenue based on the customer’s location by state for the years ended December 31:

Certain economic factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows. All of the Company’s products are sold to healthcare customers including hospitals and clinics. Sales to healthcare customers lack seasonality and have a mild correlation with economic cycles. All of the Company’s sales are to customers located within the United States. Sales contracts consist of purchase orders that are short-term (i.e., less than or equal to one year).

The Company typically satisfies its performance obligations for goods at a point in time as they are received at the customer’s destination (rather than over time). Goods are shipped by common carrier to customers under FOB destination terms. As such, ownership of goods in transit is transferred to the customer upon receipt as the Company bears the associated risks (e.g., loss, damage, delay). Management typically relies on shipping information from common carriers to evaluate when the customer has obtained control of the goods. Shipping and handling costs are recorded as Cost of Goods Sold in the Statements of Operations.

The Company’s contracts with customers typically do not involve variable consideration. The information that the Company uses to determine the transaction price for a contract is similar to the information that the Company’s management uses in establishing the prices of goods to be sold.

Orders may not be cancelled after shipment. Customers may return devices within 10 days of delivery if the goods are found to be defective, nonconforming, or otherwise do not meet the stated technical specifications. At the option of the customer, the Company shall either:

At the time revenue is recognized, the Company estimates expected returns and excludes those amounts from revenue. The Company also maintains appropriate accounts to reflect the effects of expected returns on the Company’s financial position and periodically adjusts those accounts to reflect its actual return experience. Estimated returns totaled $5,000 and $0 as of December 31, 2024 and 2023, respectively.

Payment for goods sold by the Company is typically due after an invoice is sent to the customer, 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. None of the Company’s contracts have a significant financing component.

Medical devices that the Company contracts to sell and transfer to customers are manufactured by one specific third-party manufacturer located within the state of Indiana. In no case does the Company act as an agent (i.e., the Company does not provide a service of arranging for another party to transfer goods to the customer).

Leases

In accordance with Accounting Standards Updated (“ASU”) No. 2016-02,Leases (Topic 842) (“ASU 2016-02” or “ASC 842”), at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and current and non-current lease liabilities, as applicable.

Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Prospectively, the Company will adjust the right-of-use assets for straight-line rent expense, or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date. The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.

Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.

Entities may elect not to separate lease and non-lease components. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all the contract consideration to the lease component only.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable, we compare the carrying amount of the asset group to future undiscounted net cash flows, excluding interest costs, expected to be generated by the asset group and their ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the impairment to be recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

Concentrations of Credit Risk

The Company’s business activity consists of the sale of medical neuromodulation devices to doctors, clinics, and hospitals across the country. Receivables consist of unsecured amounts due from customers. The table below sets forth the Company’s customers that accounted for greater than 10% of its net accounts receivable for the years ended December 31, 2024 and 2023, respectively.

The table below sets forth the Company’s customers that accounted for greater than 10% of its net sales for the years ended December 31, 2024 and 2023, respectively.

From time to time, the Company’s bank balances may exceed the FDIC limit of $250,000. As of December 31, 2024 and 2023, the Company had $3,263,618 and $0 of its cash balance uninsured, respectively.

Going Concern

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, cash of $3,696,870 and a working capital surplus of $1,832,858.

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 which 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.

Management evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.

To date, the Company has experienced operating losses and negative cash flows from operations. Management believes that increased sales and acceptance of their product by insurance providers will allow the Company to achieve profitability in the future.

While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering of its debt or equity securities, there can be no assurance that it will be able to do so on reasonable terms, or at all. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering. Neither future cash generated from operating activities, nor management’s contingency plans to mitigate the risk and extend cash resources through the evaluation period, are considered probable. As a result, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern. As we continue to incur losses, our transition to profitability is dependent upon achieving a level of revenues adequate to support its cost structure. We may never achieve profitability, and unless and until doing so, we intend to fund future operations through additional dilutive or nondilutive financing. There can be no assurances, however, that additional funding will be available on terms acceptable to us, if at all.

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Recently Adopted Accounting Pronouncements

In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of (i) significant segment expenses, (ii) other segment items and (iii) the title and position of the Chief Operating Decision Maker (“CODM”) on an annual and interim basis. Additionally, ASU 2023-07 requires that a public entity that has a single reportable segment provide all the disclosures required by Topic 280. Public business entities are required to adopt the standard for fiscal years beginning after December 15, 2023 and interim periods withing fiscal year beginning after December 15, 2024. Disclosures are required for all prior periods presented in the financial statements. The Company adopted the disclosure provisions of ASU 2023-07 as of December 31, 2024 as operations are managed through one reportable segment.

In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held and enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which amended the effective date of ASU 2016-13. Public business entities meeting the definition of an SEC filer, excluding entities eligible to be a Smaller Reporting Company (“SRC”) as defined by the SEC, are required to adopt the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are required to adopt the standard for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of an SRC and therefore the standard was adopted as of January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements

In November 2024, the FASB issued ASU 2024-03,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic (220-40): Disaggregation of Income Statement Expenses, which requires disclosures that disaggregate, in a tabular presentation, each relevant expense caption on the face of the income statement that includes inventory purchases, employee compensation, depreciation and intangible amortization expense. Additional disclosures are also required to provide a qualitative description of the amounts in an expense caption that are not separately disaggregated quantitatively and the total amount of selling expenses including a definition. Public business entities are required to adopt the standard for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Disclosures are required for all prior periods presented in the financial statements. Although the standard requires enhanced disclosures, the adoption is not expected to have a material impact on the Company’s financial statements.

In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires the enhancement of income tax disclosures to provide better insight into how an entity’s operations and related tax risks, planning and opportunities affect its tax rate and prospects for future cash flows. The enhanced disclosures require (i) specific categories in a tabular rate reconciliation including both amounts and percentages and (ii) additional information for reconciling items and income tax paid that meet a quantitative threshold. Public business entities are required to adopt the standard for annual periods beginning after December 15, 2024. All other entities are required to adopt the standard for annual periods beginning after December 15, 2025. The adoption of the standard is not expected to have a material impact on the Company’s financial statements.

3. Related Party Transactions

The Company has two demand notes receivable from shareholders related to the sale of common stock on January 1, 2016. Both notes’ initial balances were $506,400, with interest calculated monthly based on applicable federal rates. No payments have been received on the notes. Since repayment is not assured, the Company has fully reserved for the entire balance of principal and interest. The current allowance is $1,201,367 as of December 31, 2024. The current loan balances are as follows:

The Company has loans payable to shareholders related to funding needs for operations. The current loan details for all related party loans are as follows:

The Company was granted an exclusive, worldwide non-transferable, royalty-free license for the auricular portion of certain patents owned by a limited liability company in which the Company’s President and Chief Executive Officer and Chief Regulatory, Compliance and Privacy Officer both maintain an ownership interest. The license allows for the development, marketing and sales of electro-therapy treatments by stimulation of cranial nerves, cranial nerve branches, auricular nerves, auricular nerve branches, auricular nerve bundles and auricular anatomical structures in human patient. The exclusive license agreement expires on October 18, 2037, may be terminated by either party upon 60 days prior written notice and requires the Company to pay costs associated with the maintenance, prosecution and continuation of patent filings. For the year ended December 31, 2024, the Company paid the limited liability company $4,973. No costs were incurred during the year ended December 31, 2023. No amounts were owed to the limited liability company as of December 31, 2024 and 2023.

Mr. Bradley Mitch Watkins, Director, provided certain sales, marketing and commercialization consulting services to the Company prior to his appointment to the Board of Directors. For the years ended December 31, 2024 and 2023, the Company paid Mr. Watkins $0 and $11,083, respectively. No amounts were owed to Mr. Watkins as of December 31, 2024 and 2023.

The Company’s former Chief Financial Officer provides certain accounting and tax services on a continuous basis through a third-party public accounting firm. He is the third-party public accounting firm’s managing partner and majority shareholder. Fees paid for services were $207,103 and $312,803 for the years ended December 31, 2024 and 2023, respectively. The Company owed the third-party accounting firm for open invoices of $4,173 and $84,279 that are included in accounts payable as of December 31, 2024 and 2023, respectively. On June 28, 2024, the Company also issued 20,000 common shares with a fair value $55,600 to the former Chief Financial Officer for services rendered during the IPO process.

4. Property and Equipment

Property and equipment, net consists of the following:

Depreciation expense was $26,346 and $30,240 for the years ended December 31, 2024 and 2023, respectively. The Company expects to record future depreciation expense totaling $13,438, $12,344, $11,977, $9,753, $6,259 and $14,111 for the years ending December 31, 2025, 2026, 2027, 2028, 2029 and thereafter, respectively.

5. Intangible Assets

Intangible assets, net consists of the following:

Amortization expense was $11,485 and $10,485 for the years ended December 31, 2024 and 2023, respectively. The Company expect to record future amortization expense totaling $10,485, $10,485, $10,485, $4,760, $1,941 and $8,432 for the years ending December 31, 2025, 2026, 2027, 2028, 2029 and thereafter, respectively. The Company’s trademark does not have a determinate life and therefore the cost is not being amortized.

6. Accrued Expenses

Accrued expenses consisted of the following:

7. Notes Payable

Promissory Notes

The Company borrowed $250,000 on December 16, 2021, from Channel Partners Capital (the “2021 Promissory Note”). The 2021 Promissory Note called for 65 weekly payments of $4,923 with the final payment scheduled for March 16, 2023. The principal outstanding at January 1, 2022 was $244,048. The Company borrowed $122,000 on September 16, 2022, to bring the 2021 Promissory Note’s principal balance back to $250,000. After making scheduled payments, the Company borrowed another $107,231 on May 24, 2023, to bring the 2021 Promissory Note’s principal balance back to $250,000 once again. The terms of the incremental borrowings were the same as the 2021 Promissory Note with the final payment made on August 22, 2024. The principal outstanding as of December 31, 2024 and 2023 was $0 and $148,062, respectively, with an effective interest rate of 55.9%. The Company believes that the advancement of additional funds is a minor modification to the terms of the existing promissory note since the difference in present value of the cash flows under the terms of the new loan is less than 10% of the present value of the remaining cash flows under the terms of the original loan. As a result, the modification was accounted for as a modification of debt.

The lender was granted and assigned a continuing security interest in all the Company’s personal property assets including, but not limited to, business equipment, inventory, accounts, accounts receivable, intellectual property, chattel paper, instruments, deposit accounts, commercial tort claims, contract rights, licenses, claims, and general intangibles.

On February 15, 2023, The Company signed a note with Exchange Listing, LLC in the amount of $52,600 (the “2023 Promissory Note”). The 2023 Promissory Note carried an interest rate of 1% and was to be paid on the earlier of (i) three months or (ii) the Company receiving financing at the minimum of $3,000,000. In August 2023, the Company used proceeds from the IPO to pay the 2023 Promissory Note back in full, including interest, in the amount of $52,858.

On August 9, 2024, the Company entered into a $210,000 promissory note to finance the premiums of its annual directors and officers insurance policy, bearing interest at a rate of 7.40% per annum and maturing on June 9, 2025. On November 1, 2024, the Company entered into a second promissory note with a principal balance of $64,328 to finance premiums of its annual business insurance policies, bearing interest at a rate of 7.65% per annum and maturing on September 1, 2025 (collectively referred to as the “2024 Promissory Notes”). The principal outstanding on 2024 Promissory Notes was $154,152 and $0 as of December 31, 2024 and 2023, respectively.

2022 Convertible Notes

In 2022, the Company issued multiple convertible notes with aggregate gross principal amounts totaling $3,333,333 and net proceeds of $2,870,000 (the “2022 Convertible Notes”). The 2022 Convertible Notes consisted of anoriginal issue discount of 10% with an interest rate of the greater of (i) Prime rate plus 8.5% or (ii) 12% resulting in an effective interest rate of 24.2%. The 2022 Convertible Notes converted into common shares at the lower of (i) $9.44 or (ii) a 30% discount to the price per share of any subsequent offering. The 2022 Convertible Notes matured on the one-year anniversary date from issuance and containeda five-year warrant to purchase common stock equal to one hundred percent (100%) of the shares into which the 2022 Convertible Notes could be converted into at issuance. The warrants had an exercise price at the lower of (i) $11.80 per share or (ii) a 12.5% discount to the price per share of any subsequent offering.

The convertible notes signed on December 19, 2022 had aggregate gross principal amounts totaling $222,222 and net proceeds of $200,000 and consisted of an original issue discount of 10% of the principal amount with an interest rate of 12% per annum. The notes matured at the earlier of (i) twelve (12) months from the issue date or (ii) the date upon which the Company completes a registered public offering of shares of the Company, which encompasses the closing of the IPO. The notes are convertible into shares of common stock at the higher of (i) $9.44 per share or (ii) the price per share of common stock issued pursuant to the next registered public offering of shares of the Company made prior to the conversion of any portion of the note. Interest accrues on the aggregate principal amount (which includes original issue discount) and is payable on the maturity date, at the Company’s election, in cash or in-kind. The holders of the notes are entitled to piggyback registration rights on any registration statement filed by the Company, other than any registration statement filed on Form S-4 or Form S-8. The warrants and conversion shares are subject to anti-dilution provisions.

The investors of the notes signed on December 19, 2022 above did not convert their notes and, as such the Company used proceeds from the initial public offering to pay the remaining promissory notes back in full, including interest in the amount of $239,104.

2023 Convertible Notes

In 2023, the Company conducted multiple closings of a private placement offering to accredited investors for aggregate gross principal amounts of $6,066,667 and net proceeds of $4,908,000 (the “2023 Convertible Notes”). The offering consisted of a convertible promissory note that accrued interest at 12% that could be paid in cash or PIK and had an original issue discount of 10% resulting in an effective interest rate of 27.5%. The 2023 Convertible Notes automatically converted into common shares at a 30% discount to the IPO. The 2023 Convertible Notes matured on the sooner of the six-month anniversary date from issuance or a successful IPO on primary exchange in the U.S. and includeda five-year warrant to purchase common stock equal to fifty percent (50%) of the shares into which the 2032 Convertible Notes could be converted into at issuance. The warrants had a strike price at a 25% premium to the conversion price subject to anti-dilution, issuable on a pro rata basis at each funding.

The Company used proceeds from the 2023 Convertible Notes to pay a portion of the principal balance of the 2022 Convertible Notes totaling $2,650,000 which resulted in a $1,129,653 gain recorded as a benefit to Extinguishment of Debt Liabilities in the Statements of Operations. Upon partial repayment, the terms of the remaining 2022 Convertible Notes were amended to accrue interest at 8% per annum without maturity or default rights. The remaining principal balance also automatically converted into shares of common stock at a 27.5% discount to the per share offering price in the Company’s IPO, or $4.35 per share. After the closing of the IPO on August 9, 2023, the Company converted some of the remaining balance of the 2022 Convertible Notes and $173,205 of accrued interest into 107,509 shares of common stock. The shares were issued at a discounted price of $4.35 per share resulting in a $663,991 loss to the Company recorded as a charge to Extinguishment of Debt Liabilities in the Statements of Operations. As the remaining holders of the 2022 Convertible Notes did not convert, the Company used proceeds from the IPO to pay the remaining balance in full, including interest in the amount of $445,544.

As facilitators to the 2023 Convertible Notes, Signature Bank received a $6,000 escrow fee and Alexander Capital, L.P. received (i) a $546,000 cash commission representing nine percent (9%) of the proceeds raised in the offering from investors introduced to the Company and (ii)120,235 warrants for the purchase of a number of shares of Common Stock equal to 6% of the number of underlying securities.

After the closing of the IPO on August 9, 2023, the Company converted the 2023 Convertible Notes and $226,391 of accrued interest into 1,498,332 shares of common stock. The shares were issued at a discounted price of $4.20 per share that resulted in a $4,115,223 loss to the Company which was recorded as a charge to Extinguishment of Debt Liabilities in the Statements of Operations.

2024 Convertible Notes

On November 8, 2023, the Company entered into a Securities Purchase Agreement (“SPA”) with a shareholder for the issuance 1,260,504 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), for an aggregate purchase price of $3,000,000 paid in 15 monthly installments of $200,000 each, commencing on the later of January 10, 2024 or a date after stockholder approval of an amendment to the Company’s Certificate of Incorporation to authorize the creation of the Series B Preferred Stock. The Series B Preferred Stock was convertible at any time into shares of common stock of the Company without any further consideration. Following the issuance of the Series B Preferred Stock, it would rank senior to the common stock with respect to payments upon the liquidation, dissolution and winding up of the Company. Due to a delay in the stockholder approval, the Company amended the SPA on February 12, 2024 to issue a promissory note, due and payable on the earlier of 15 months or 12 months if the Series B Preferred Stock has not been authorized, convertible into Series B Convertible Preferred Stock with identical funding amounts and terms (the “$3,000,000 Convertible Promissory Note”). The shareholder funded $800,000 of the $3,000,000 commitment in 2024.

The Company then proceeded to enter into a series of incremental convertible promissory notes with other investors totaling $1,135,000 with terms identical to the $3,000,000 Convertible Promissory Note (collectively referred to as the “Original 2024 Convertible Promissory Notes”) for an aggregate principal amount of $1,935,000.

The 2024 Original Convertible Promissory Notes earned interest at 8.5% per annum payable quarterly in either cash or common stock at the election of the Company. At any time following the date of shareholder approval to authorize the creation of Series B Preferred Stock prior to the maturity date, the investor may elect to convert all or part of the principal into the Company’s Series B Preferred Stock at a conversion price per share equal to $2.38. Without limiting the forgoing, all principal amounts outstanding on the maturity date will automatically convert into the Company’s Series B Preferred Stock. The Series B Preferred Stock is entitled to cumulative dividends at 8.5% per annum (whether or not declared) payable quarterly in either cash or common stock at the $2.38 conversion price at the election of the Company. Upon conversion to Series B Preferred Stock, the investor may elect, at its option at any time, to convert all or part of the Series B Preferred Stock plus accrued but unpaid dividends into an equivalent amount of common stock at the $2.38 conversion price.

Subsequently, the Company entered into three convertible promissory notes with related institutional accredited investors with terms similar to the Original 2024 Convertible Promissory Notes (collectively referred to as the “Amended 2024 Convertible Promissory Notes”) for an additional principal amount of $3,000,000. Certain provisions to the SPA and Certificate of Designation previously issued on February 12, 2024 changed, including (i) the number of shares of preferred stock to be designated as Series B Preferred Stock was increased to 4,000,000 shares, (ii) the stated value of the Series B Preferred Stock was changed to $2.38 per share, (iii) the right to receive dividends will expire automatically on June 30, 2025, (iv) the liquidation rights will automatically expire on June 30, 2025, and (v) the number of shares of the common stock that a holder of Series B preferred stock is entitled to receive shall not exceed the maximum percentage chosen by the holder, which is initially set at between 4.99% and 19.99% until shareholder approval is obtained, of the number of outstanding shares of the common stock at the time of the conversion of the Series B Preferred Stock shares.

The maturity date was on the earlier of (i) June 21, 2025, (ii) upon written demand occurring on or after March 21, 2025 in the event that the Series B Preferred Stock has not been duly authorized on or before such date, or (iii) immediately upon the occurrence of an event of default. Automatic conversion into shares of Series B preferred stock (at a conversion price of $2.38 per share) would occur following the date of shareholder approval. In the event the Company failed to obtain shareholder approval before August 15, 2024, rights existed to convert the outstanding amount into shares of the common stock, at a price per share of $2.38.

As of August 15, 2024, the Company received $4,935,000 of the principal amount of the Amended 2024 Convertible Notes with the remainder due in monthly installments through March of 2025 resulting in an effective interest rate of 12.5%. On August 15, 2024, the Company’s shareholders authorized 5,000,000 shares of preferred stock of which 4,000,000 shares were designated as $0.001 par value Series B preferred stock. Pursuant to the terms of the Amended 2024 Convertible Promissory Notes, the outstanding principal balance of $4,935,000 was mandatorily converted into 2,073,524 Series B Preferred Shares at a conversion price of $2.38. Upon the mandatory conversion, the unamortized debt discount of $165,577 was reclassified to Additional Paid-In-Capital in the Statements of Stockholders’ Equity (Deficit).

Interest expense totaled $174,328 and $476,416 for the years ended December 31, 2024 and 2023, respectively. The Company’s accrued interest total $66,648 as of December 31, 2024 and 2023.

8. Leases

The Company’s leases are comprised of operating leases for office space. At the inception of the lease, the Company determines whether the lease contract conveys the right to control the use of identified property for a period of time in exchange for consideration. Leases are classified as operating or finance leases at the commencement date of the lease. Operating leases are recorded as operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the Balance Sheets. The Company did not have any finance leases at December 31, 2024 and 2023.

The Company has two leases primarily consisting of office space in Versailles and Carmel, Indiana. The lease in Versailles, Indiana started January 1, 2022 and had a term of one year, with automatic one year renewal options, unless 60 day notice of vacating is given. The current monthly lease payment for this lease is $1,800 with a 4% per annum increase. A new lease in Carmel, Indiana commenced January 1, 2024. The initial term is five years and five months. The monthly lease payment started at $6,721 with an annual increase of 2.5%. As long as the Company is not in default, it is only obligated to pay an amount equal to 50% of the monthly base rent for months 1-10.

Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the implicit interest rate is generally not readily determinable, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar economic environment. Lease expense for the operating lease is recognized on a straight-line basis over the lease term.

Leases may include renewal options, and the renewal option is included in the lease term if the Company concludes that it is reasonably certain that the option will be exercised. Certain leases may contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the calculation of lease payments to the extent they are fixed and determinable at lease inception. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as expenses when incurred.

For the years ended December 31, 2024 and 2023, the Company recognized $96,177 and $49,051 of operating lease expense, including short-term lease expense and variable lease costs, which are immaterial.

The following table presents information related to the Company’s operating leases:

As of December 31, 2024, the maturities of the Company’s operating lease liabilities were as follows:

9. Common Stock and Warrants

The Company authorized 100,000,000 shares of common stock, of which 6,990,227 and 6,508,897 shares were issued and outstanding as of December 31, 2024 and 2023, respectively. On January 10, 2023, the Company’s board of directors authorized a 2-for-1 reverse stock split. All share information in these financial statements has been adjusted for this reverse stock split.

During the year ended December 31, 2023, the Company issued (i)1,098,667 common shares issued upon the completion of the IPO on August 9, 2023 at a price of $6.00 per share resulting in net proceeds of $4,110,677, (ii)1,244,228 common shares upon conversion of 506,637 shares of Convertible Series A Preferred Stock and 115,477 shares of Convertible Series Seed Preferred Stock, (iii)1,649,900 common shares upon conversion of the 2022 and 2023 Convertible Notes, (iv)425,000 common shares as payment to vendors for services and (v)127,780 common shares upon the exercise of warrants.

During the year ended December 31, 2024, the Company issued (i)245,955 common shares to settle 2022 Convertible Note and Series A Preferred Stock holder disputes, (ii)11,000 common shares upon the exercise of warrants, (iii)115,145 common shares as payment to vendors for services, (iv)59,055 common shares in lieu of interest on the 2024 Convertible Notes, (v)25,832 shares pursuant to the severance provisions of an employment agreement and (vi)24,343 common shares for board service.

During the year ended December 31, 2023, the Company issued (i)505,570 five-year warrants to purchase common stock equal to fifty percent (50%) of the shares into which the 2023 Convertible Promissory Notes could be converted at issuance at an exercise price of $5.25 per share, (ii)122,202 five year warrants to purchase common stock pursuant an advisory agreement with a consulting firm upon closing of the Company’s IPO at an exercise price of $5.25 per share and (iii)186,156 five-year warrants to purchase common stock pursuant to an underwriting agreement upon closing of the Company’s IPO at an exercise price of $5.25 per share. Additionally, investors converted (i) 87,856 warrants into an equivalent number of common shares at an exercise price of $2.38 in exchange for $209,097 in cash proceeds and (ii) 40,000 warrants into 39,924 common shares in a cashless exercise transaction.

During the year ended December 31, 2024, the Company issued (i)38,697 five-year warrants to purchase common stock equal to six percent (6%) of the aggregate number of Original 2024 Convertible Promissory Note common stock equivalents pursuant to an underwriting agreement at an exercise price of $2.38 per share, (ii)68,067 five-year warrants to purchase common stock pursuant to an advisory agreement at an exercise price of $2.38 per share. The Common Stock Purchase Warrant Agreements attached to the 2023 Convertible Promissory Notes contained anti-dilution provisions on both the exercise price and the number of warrants. These anti-dilution features were triggered when the Company issued the Original 2024 Convertible Promissory Notes that contained a conversion price of $2.38 per share as compared to the $5.25 per share exercise price in the 2023 Convertible Promissory Note Common Stock Purchase Warrant Agreements. As a result, the Company issued 754,660 additional warrants in 2024 to the holders of the 2023 Convertible Promissory Note Common Stock Purchase Warrant Agreements. Additionally, investors converted 11,000 warrants into an equivalent number of common shares at an exercise price of $2.38 in exchange for $26,180 in cash proceeds. The Company also canceled 30,252 warrants for no consideration in conjunction with an amendment to an advisory agreement.

The following is a summary of warrant activity for common stock during the years ended December 31, 2024 and 2023:

The following is a summary of warrant activity for preferred stock during the year ended December 31, 2023:

There was no preferred stock warrant activity during the year ended December 31, 2024.

The following table summarizes the Company’s warrants outstanding and exercisable as of December 31, 2024:

10. Preferred Stock

As of December 31, 2023, the Company had 1,000,000 and 120,000 shares authorized as Series A and Series Seed Preferred Stock, respectively, of which zero shares are issued and outstanding for both classes of preferred stock. The Series A and Series Seed Preferred Stock (i) voted together with common stock on an as-converted basis, and not as separate classes and (ii) converted 1:1 to common stock at any time at option of holder, subject to adjustments for stock dividends, splits, combinations, and similar events. The Series A Preferred Stock carried an annual 8% cumulative dividend, payable upon any liquidation, dissolution or winding up of the Company. For any other dividends or distributions, the Series A Preferred Stock participated with common stock on an as-converted basis. The Company’s 1,000,000 shares of Series A Preferred Stock and 120,000 shares of Series Seed Preferred Stock were retired on August 15, 2024.

On August 15, 2024, the Company’s shareholders authorized 5,000,000 shares of preferred stock of which 4,000,000 shares were designated as $0.001 par value Series B Preferred Stock. Series B Preferred Stock shareholders vote with Common Stock shareholders on an as-converted basis and not as a separate class. Cumulative dividends accrue at 8.5% per annum and are due and payable in either cash for common shares as the Company’s discretion on a quarterly basis through June 30, 2025. Series B Preferred Stock converts to common stock on a 1:1 basis, subject to adjustments for stock dividends, splits, combinations and similar events as well as unpaid dividends thereon, solely at the election of the holder at any time.

Pursuant to the terms of the Amended 2024 Convertible Notes, the principal balance of $4,935,000 on August 15, 2024 was mandatorily converted into 2,073,524 Series B Preferred Shares at a conversion price of $2.38. Subsequently, the Company then proceeded to issue 64,913 shares of Series B Preferred Stock to various investors for $154,500.

On November 11, 2024, the Company’s shareholders authorized (i) an increase in the number of designated Series B Preferred Stock to 5,000,000 shares and (ii) an extension of the 8.5% per annum cumulative dividend period to December 31, 2026. Subsequently, the Company issued 2,100,840 shares of Series B Preferred Stock to a dedicated life sciences fund for $5,000,000 and 41,662 shares of Series B Preferred Stock to various investors for $99,164.

Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the Series B Preferred Stock shareholders maintain priority preference over all other classes of capital stock. A merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) and a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company will be treated as a liquidation event, thereby triggering payment of the liquidation preferences.

As of December 31, 2024, there were 4,280,939 shares of Series B Preferred Stock issued and outstanding. As of December 31, 2024 and 2023, there wereno preferred stock dividends declared or paid. Series B Preferred Stock undeclared cumulative dividends totaled $211,268, or $0.05 per share, as of December 31, 2024. Series B Preferred Stock did not exist during the year ended December 31, 2023.

11. Stock-Based Compensation

On October 12, 2017, the Company adopted the 2017 Stock Compensation Plan authorizing the issuance of 1,435,652 shares of common stock. On September 13, 2019 the Company entered into a Stock Option Cancellation agreement with all holders of these stock options effective on that date.

This plan was then amended on September 13, 2019, to increase the share amount to 2,638,788. This plan was enacted to enable the Company to retain the services of certain key employees, officers, and directors of the Company. The Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs and restricted stock, and they were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The following is a summary of the outstanding stock options as of December 31, 2024 and 2023:

Total stock-based compensation expense is classified in the Company’s statements of operations as general and administrative expense totaling $227,000 and $0 for the years ended December 31, 2024 and 2023, respectively. The stock compensation incurred during the year ended December 31, 2024 related to a hiring grant of 100,000 common shares to the Company’s Chief Financial Officer at a fair value of $2.27 per share.

12. Warrant Liabilities

The Company has evaluated financial instruments arising from warrants that are issued and outstanding as of December 31, 2024 and 2023. The Company utilizes a Black-Scholes option-pricing model to compute the fair value of the liability and to mark to market the fair value of the warrant at each balance sheet date. The inputs utilized in the application of the Black-Scholes option-pricing model included (i) an exercise price of $8.76 per share, (ii) an expected remaining term of each warrant based on the remaining contractual maturity of the each warrant, (iii) estimated volatility ranging from 75.0% to 84.5% based on historical stock prices of comparable companies with a look back period commensurate with the period to maturity, (iv) a risk-free interest rate ranging from 3.84% to 4.38% based on the interest rates of U.S. Treasury Notes consistent with the expected remaining contract term and (v) a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

The following are the changes in the warrant liabilities during the years ended December 31, 2024 and 2023.

13. Derivative Liabilities

The Company has evaluated derivatives arising from convertible financial instruments as of December 31, 2024 and 2023. The Company utilized a Monte Carlo simulation model for commitment shares that have an option to convert at a variable number of shares to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the Monte Carlo model included a starting stock price of $7.91 per share, (ii) an expected remaining term of each derivative based on the remaining contractual maturity of the each derivative, (iii) estimated volatility of 70.0% based on historical stock prices of comparable companies with a look back period commensurate with the period to maturity, (iv) a risk-free interest rate ranging from 3.46% to 5.47% based on the interest rates of U.S. Treasury Notes consistent with the expected remaining contract term and (v) a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future and (vi) drift.

The following are the changes in the derivative liabilities during the year ended December 31, 2023:

There were no derivatives identified during the year ended December 31, 2024.

14. Retirement Plan

The Company sponsors a 401(k)-retirement plan for its employees. Employees are eligible to participate in the elective deferral portion of the plan after twelve months and 1,000 hours of service. The Company can also make a 3% discretionary profit-sharing contribution on an annual basis to employees with earnings under a certain threshold. Profit sharing expense totaled $20,868 and $6,980 for years ended December 31, 2024 and 2023, respectively.

15. Segment Information

The Company evaluates the following factors to identify its reportable segments: (i) nature of products and services, (ii) type of customer for the products and services, (iii) sales, production and distribution methods of the products and services and (iv) the nature of the regulatory environment, if applicable. Based on an evaluation of these factors, management concluded that the Company’s operations are managed through one reportable segment, IB-STIM, that derives its revenues in the United States from a PENFS device that is used to treat patients 8-21 years of age with functional abdominal pain associated with irritable bowel syndrome. IB-STIM currently is the only product marketed and sold by the Company. The accounting policies of the IB-STIM segment are the same as those described in the Summary of Significant Accounting Policies (see Footnote 2). The CODM regularly evaluates the performance of the IB-STIM segment for the purpose of allocating resources based on net sales and operating loss, both of which are reported in the Statements of Operations. The CODM uses net sales to evaluate IB-STIM’s adoption and utilization by insurance carriers and physicians. As Neuraxis is an emerging growth company, operating loss is used to monitor the Company’s cost structure in order to achieve future segment profitability. Both net sales and operating loss are measured against the budget on a periodic basis to assess achievement toward annual compensation incentive targets. The Company’s CODM is its Chief Executive Officer.

The following reconciles the reportable segment net sales and operating loss to the Company’s reported net loss:

Total segment assets for IB-STIM amounted to $4,757,572 and $509,498 as of December 31, 2024 and 2023, respectively. Total segment capital expenditures for IB-STIM amounted to $27,776 and $71,781 for the years ended December 31, 2024 and 2023, respectively. Total segment depreciation and amortization amounted to $37,831 and $40,725 for the years ended December 31, 2024 and 2023, respectively.

Significant segment non-cash charges settled in common stock include (i) consulting and advisory fees totaling $754,685 and $750,000 for the years ended December 31, 2024 and 2023, respectively, and (ii) hiring grants totaling $227,000 and $0 for the years ended December 31, 2024 and 2023, respectively.

16.Commitments and Contingencies

Manufacturing Services Agreement

The Company is party to a manufacturing services agreement for the manufacture and supply of the Company’s IB-STIM device based on the Company’s product specifications that automatically renews annually unless either party provides a written termination notice to the other party within 180 days prior to the end of the then-current term. The Company provides the necessary equipment to the manufacturer and retains ownership. The manufacturer bears the risk of loss of and damage to the equipment and consigned materials. Performance under the agreement is initiated by orders issued by the Company and accepted by the manufacturer.

Advisory Agreement

On March 18, 2024, the Company terminated its private placement services agreement and entered into an advisory agreement with a financial advisor for debt, equity and public securities market services for one year. The advisory agreement included a monthly fee of $30,000 and 7,563 common stock warrants to be issued monthly at an exercise price of $2.38 with a term of five years. On December 31, 2024, the Company and the financial advisor terminated the advisory agreement subject to the cancelation of all common stock warrants issued after July 2024 and the payment for services rendered in three equal installments of $60,000 by March 26, 2025.

Settlement Agreements

The Company issued 245,955 shares of common stock to various pre-IPO 2022 Convertible Note and Series A Preferred Stock holders to settle certain claims. The Company recorded the fair value of the settlements as $230,824 of Finance Charges and $580,250 of Other Expense in the Statements of Operations.

Furthermore, the Company authorized the issuance of 1,518 shares of its common stock to settle remaining claims with one pre-IPO Series A Preferred Stock shareholder classified as $4,220 of Other Expense for the year ended December 31, 2024 in the Statements of Operations and accrued expenses in the Balance Sheets as of December 31, 2024. These common shares have not yet been issued as of the reporting date as the Company awaits execution of the settlement agreements by the counterparties.

Executive Employment Agreements

The Company, as authorized by the board of directors, entered into employment agreements with nine key employees to provide incentives to improve shareholder value and to contribute to the growth and financial success of the Company. The agreements had an employment start date of October 1, 2022, with initial terms from 2 to 5 years andoptional one-year renewals.

The total base salaries for the nine key employees in the agreements are $1,920,000 per year with various provisions for annual increases. In addition to base salaries, eight of the employees have a provision for a special one-time incentive payment to be paid in a lump sum after the start date. The total amount of these special incentive payments is $1,100,000. The special incentive payment amount includes any accrued backpay wages for the employee. The amount for backpay of $417,390 was paid in the year ended December 31, 2023.

There are seven key employees that have stock options of the Company totaling 1,238,712 shares. These key employees have a provision in their agreements whereas the Company will pay a special bonus equal to the aggregate of the strike price or exercise price of all their stock options plus a tax gross-up payment. The special bonus shall be paid in twenty percent (20%) installments starting January 2, 2024, and the same date each of the next four years. As a condition of the payment, the key employee must exercise at least 20% of their stated number of stock options. There are additional provisions to cover termination and change of control events. None of the key employees exercised any of options as of January 2, 2025.

In April 2023, the Company amended the employee agreements to, among other things, clarify that the special one-time incentive payment and the deferred bonus are contingent upon the effective date of the planned initial public offering. The amendment also sets forth a process for executives to exercise the stock options in accordance with the terms of the stock option agreement in effect as of the date of the employment agreement and to clarify that there is no modification to the stock option agreements.

The Company recorded the backpay portion of the incentive bonus notes above. The balance of the incentive bonuses of $694,056 and the special options bonuses of $14,821,830 were contingent upon a successful IPO. The incentive bonuses have been paid in full while the special options bonuses will be recorded when paid.

On April 10, 2024, the Company terminated the employment of the Company’s Chief Operating Officer. Pursuant to the employment agreement, the Company made (i) make salary continuation payments for six months during the year ended December 31, 2024, (ii) issued 25,832 shares of common stock at a fair value of $78,788 and (iii) made a $41,980 one-time payment in lieu of the exercise of 13,764 stock options that expired on January 2, 2024. The Company is obligated to provide health care coverage through October 2025 and has accrued for that obligation totaling $21,418 classified as Accrued Expenses in the Balance Sheets as of December 31, 2024.

Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of the date of issuance, other than those described below, there were no pending or threatened legal proceedings that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest. Legal fees are expensed as incurred.

On February 6, 2019, plaintiff Ritu Bhambhani, M.D., initiated a lawsuit against Innovative Health Solutions, Inc. and others in the United States District Court for the District of Maryland. Plaintiffs Bhambhani and Sudhir Rao subsequently amended the complaint, with the Third Amended Complaint (“Complaint”) containing the most recent set of allegations. The Complaint asserted claims under the RICO Act, as well as of fraudulent misrepresentation, intentional misrepresentation by concealment, and civil conspiracy and sought compensatory damages in excess of $5 million, pre-judgment interest, punitive damages, attorney’s fees, court costs and designation of the case as a class action. The Complaint stated that the Company, distributors of the Company’s product, and medical billing and coding consultants allegedly made misrepresentations to the plaintiffs that the Company’s NeuroStim device and related procedures could be billed to, and reimbursed by, Medicare and other insurance payors as a surgically implantable neurostimulator. Plaintiffs claim to have suffered damages when Medicare administrative contractors declined to pay plaintiffs for their use of the device.

On February 11, 2022, the Company filed a motion for summary judgment based upon the plaintiffs not being proper parties to assert claims against the Company. On June 14, 2022, the Court granted the Company’s motion for summary judgment and dismissed the Complaint.

On July 14, 2022, plaintiffs Ritu Bhambhani and Sudhir Rao filed a notice of appeal with the Fourth Circuit Court of Appeals. On June 3, 2024, the Fourth Circuit denied the plaintiff’s appeal and entered judgment against the plaintiffs. On June 25, 2024, the Fourth Circuit entered its mandate declaring that its judgment against the plaintiffs took effect that day. The plaintiffs did not seek any further review or appeal of that judgment.

Also on July 14, 2022, plaintiffs Ritu Bhambhani, LLC; Box Hill Surgery Center, LLC; Pain and Spine Specialists of Maryland, LLC; and SimCare ASC, LLC initiated a lawsuit against the Company and others in the United States District Court for the District of Maryland. The plaintiffs in this lawsuit are business entities owned or partially owned by the plaintiffs that initiated the litigation described above. The Complaint asserted claims under the RICO Act, as well as fraudulent misrepresentation, intentional misrepresentation by concealment, and civil conspiracy and seeks compensatory damages in excess of $75,000, pre-judgment interest, punitive damages, attorney’s fees, and court costs. The Complaint states that the Company, distributors of the Company’s product, and medical billing and coding consultants allegedly made misrepresentations to the plaintiffs that the Company’s NeuroStim device and related procedures could be billed to, and reimbursed by, Medicare and other insurance payors as a surgically implantable neurostimulator. Plaintiffs claim to have suffered damages when Medicare administrative contractors declined to pay plaintiffs for their use of the device.

On September 28, 2022, the Company filed a motion to dismiss all claims. On May 25, 2023, the Court issued an Order and a Memorandum Opinion which dismissed the plaintiffs’ claims related to the RICO Act. The remaining claims are still pending, and no trial date has been set for the case. The Court has vacated its Scheduling Order at the parties’ request so that the parties could try to resolve the disputes in both cases through an independent third-party mediator. Mediation has not yet resulted in a resolution of the case.

In January 2024, Dr. Arturo Taca served notice to the Company that asserted an interest in its U.S. Patent No. 10,413,719 valued at $2,000,000 based on his own work in neurostimulation. The Company denied both the neurostimulation patent and compensation claims. The case remains unresolved.

While it is too early to predict the ultimate outcome of these matters, we believe the Company has meritorious defenses and intends to defend these matters vigorously.

17. Health Benefit Plan

The Company participates in a self-funded employer program in conjunction with a group health plan for the benefit of eligible employees. This plan is a level funded plan, and the services and products include:

The Company maintains a stop loss contract that reimburses the Company for claims paid under the plan if they exceed a predetermined level. The Company makes contributions for health care costs and associated expenses that are expected during the plan year. The amount of contributions is determined annually based on the Company’s maximum liability for expected claims, administrative expenses, and premiums for the stop loss policy. The Company paid premiums of $257,642 and $255,715 for the years ended December 31, 2024 and 2023, respectively.

The Company is responsible for the monthly premiums, as established, and nothing further. The stop loss policy covers the claims if they exceed the claims funds. After a certain time, and if there is a surplus in the claims fund, the Company may be entitled to receive a 48.5% refund from the fund. This amount is recognized by the Company when received.

18. Income Taxes

The income tax provision consists of:

A reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate is as follows:

The Company did not recognize an income tax provision for the years ended December 31, 2024 and 2023 due to net operating losses reported in both years.

Deferred income taxes are provided for temporary differences between the financial and tax bases of the Company’s assets and liabilities. The temporary differences that give rise to net deferred tax assets and liabilities were as follows:

Management assessed the realizability of its deferred tax assets and determined that it is more likely than not that the Company will not recognize the benefits of the net deferred tax assets due to a history of operating losses. As a result, the Company maintained a full valuation allowance and does not reflect any deferred taxes in its Balance Sheets as of December 31, 2024 and 2023.

On December 31, 2024, the Company’s federal and state net operating loss (NOL) carryforwards totaled $36,202,858 and $34,748,524 respectively. These NOL carryforwards may be offset against future taxable income. There is no limitation on the number of years to utilize the federal NOLs. The federal deduction will be limited to 80% of modified taxable income. The state NOLs are allowed up to 100% of taxable income and generally can be carried forward no longer than 20 years after the year of the taxable loss.

Federal and state tax laws impose limitations on the utilization of NOLs and credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company’s ability to utilize these carryforwards may be limited as a result of an ownership change. Such an ownership change could result in a limitation in the use of the NOLs in future years and possibly a reduction of the net operating losses available.

If not used, the state NOL carryforwards will expire as follows:

The Company believes it has made adequate provision for all income tax uncertainties. The assessment is subject to change based on the completion of audits or statute of limitation expirations.

The federal and state income tax returns have a three-year statute of limitations once filed with the appropriate jurisdiction. The Company’s income tax returns are subject to examination by the federal and state taxing authorities in the United States for the years ended 2021 through 2024 and 2021 through 2024, respectively.

19. Subsequent Events

On January 3, 2025 and March 6, 2025, the Company granted 360,902 and 373,275 restricted stock units (“RSUs”), respectively, pursuant to the Neuraxis, Inc. 2022 Omnibus Securities and Incentive Plan as amended on August 15, 2024. The RSUs cliff-vest at the end of a three year period and are payable in shares of the Company’s common stock. The RSUs fully vest upon (i) death or disability or (ii) change of control. Dividend equivalents accrue on RSUs and are paid upon vesting; there were no accrued dividends on unvested RSUs as of the report date.

On January 17, 2025, the Company issued 39,471 common shares to its independent board members for their service from April 1, 2024 through December 31, 2024 and an investor converted 502,647 warrants into 186,166 common shares in a cashless exercise transaction.

The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K and determined that there have been no other events that have occurred that would require adjustments to our disclosures in the financial statements.