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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission file number 001-41775

 

NEURAXIS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   45-5079684

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

 

11550 N. Meridian Street, Suite 325

Carmel, IN

 

 

46032

(Address of principal executive offices)   (Zip Code)

 

(812) 689-0791

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   NRXS   NYSE American LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No

 

The number of shares of the registrant’s common stock outstanding as of May 17, 2024 was 6,647,960 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I   3
     
ITEM 1: FINANCIAL STATEMENTS 3
  Condensed Balance Sheets as of March 31, 2024 (Unaudited) and December 31, 2023 3
  Condensed Statements of Operations for the Three Months Ended March 31, 2024, and 2023 (Unaudited) 4
  Condensed Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 5
  Condensed Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 6
  Notes to Condensed Financial Statements (Unaudited) 7
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 24
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 27
ITEM 4: CONTROLS AND PROCEDURES 28
     
PART II   29
     
ITEM 1: LEGAL PROCEEDINGS 29
ITEM 1A: RISK FACTORS 29
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 29
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 30
ITEM 5: OTHER INFORMATION 30
ITEM 6: EXHIBITS 31
SIGNATURES 32

 

2

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

NeurAxis, Inc.

Condensed Balance Sheets

 

   March 31,     
   2024   December 31, 
   (Unaudited)   2023 
Assets          
           
Current Assets:          
Cash and cash equivalents  $81,752   $78,560 
Accounts receivable, net   90,534    73,167 
Inventories   20,194    21,220 
Prepaids and other current assets   215,354    69,663 
Total current assets   407,834    242,610 
           
Property and Equipment, at cost:   451,347    436,626 
Less - accumulated depreciation   (356,190)   (348,074)
Property and equipment, net   95,157    88,552 
           
Other Assets:          
Operating lease right of use asset, net   337,286    70,263 
Intangible assets, net   105,452    108,073 
Total Assets  $945,729   $509,498 
           
Liabilities          
           
Current Liabilities:          
Accounts payable  $1,237,040   $1,204,219 
Accrued expenses   816,480    401,088 
Current portion of operating lease payable   35,753    49,127 
Notes payable   96,456    148,062 
Notes payable - convertible notes, net of unamortized financing fees $235,281 and $0 as of March 31, 2024 and December 31, 2023, respectively   1,299,719     
Customer deposits   85,754    74,947 
Share liability   227,000     
Warrant liabilities   17,509    8,225 
Total current liabilities   3,815,711    1,885,668 
           
Non-current Liabilities:          
Operating lease payable, net of current portion   314,472    27,071 
Total non-current liabilities   314,472    27,071 
           
Total liabilities   4,130,183    1,912,739 
Commitments and contingencies (see note 12)   -     -  
           
Stockholders’ Deficit          
Convertible Series A Preferred stock, $0.001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively        
Convertible Series Seed Preferred stock, $0.001 par value; 120,000 shares authorized; 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively        
Common stock, $0.001 par value; 100,000,000 shares authorized; 6,594,897 and 6,508,897 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively   6,595    6,509 
Additional paid in capital   47,487,713    47,148,361 
Accumulated deficit   (50,678,762)   (48,558,111)
           
Total Stockholders’ Deficit   (3,184,454)   (1,403,241)
           
Total Liabilities and Stockholders’ Deficit  $945,729   $509,498 

 

Notes to condensed financial statements are an integral part of these statements.

 

3

 

 

NeurAxis, Inc.

Condensed Statements of Operations (Unaudited)

 

   2024   2023 
   For the Three Months Ended March 31, 
   2024   2023 
         
Net Sales  $646,635   $805,110 
Cost of Goods Sold   75,081    95,900 
           
Gross Profit   571,554    709,210 
           
Selling Expenses   80,030    107,932 
Research and Development   5,570    16,797 
General and Administrative   2,318,074    1,480,755 
           
Operating Loss   (1,832,120)   (896,274)
           
Other Income (Expense):          
Financing charges   (230,824)   (2,772)
Interest expense   (26,560)   (161,689)
Change in fair value of warrant liability   (9,284)   234,807 
Change in fair value of derivative liability       191,297 
Amortization of debt discount and issuance cost   (21,683)    (2,662,655)
Extinguishment of debt liabilities       1,129,498 
Other income       1,550 
Other expense   (180)   (7,172)
Total other income (expense), net   (288,531)   (1,277,136)
           
Net Loss  $(2,120,651)  $(2,173,410)
           
Per-Share Data          
Basic and diluted loss per share  $(0.32)  $(1.18)
           
Weighted Average Shares Outstanding          
Basic and diluted   6,550,567    2,003,322 

 

Notes to condensed financial statements are an integral part of these statements.

 

4

 

 

NeurAxis, Inc.

Condensed Statements of Stockholders’ Deficit (Unaudited)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
  

Convertible

Series A

Preferred Stock
  

Convertible

Series Seed

Preferred Stock

   Common Stock  

Additional

Paid In

   Accumulated  

Stockholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Balances as of January 1, 2023   506,637   $507    115,477   $115    1,963,322   $1,963   $28,355,230   $(33,931,428)  $    (5,573,613)
Net loss                               (2,173,410)   (2,173,410)
Balances as of March 31, 2023   506,637   $507    115,477   $115    1,963,322   $1,963   $28,355,230   $(36,104,838)  $(7,747,023)
                                              
Balances as of January 1, 2024      $       $    6,508,897   $6,509   $47,148,361   $(48,558,111)  $(1,403,241)
Warrants exercised                   11,000    11    26,169        26,180 
Additional paid in capital from warrants issued under consulting agreement                            15,543        15,543 

Additional paid in capital from warrants issued as debt discount

                           97,465        97,465 

Common

stock issued from agreements

                   75,000    75    200,175        200,250 
Net loss                               (2,120,651)   (2,120,651)
Balances as of March 31, 2024      $       $    6,594,897   $6,595   $  47,487,713   $(50,678,762)  $(3,184,454)

 

Notes to condensed financial statements are an integral part of these statements.

 

5

 

 

NeurAxis, Inc.

Condensed Statements of Cash Flows (Unaudited)

 

   2024   2023 
   For the Three Months Ended March 31, 
   2024   2023 
Cash Flows from Operating Activities          
Net Loss  $(2,120,651)  $(2,173,410)
Adjustments to reconcile net loss to net cash used by operating activities:          
Amortization of debt discount and issuance cost   21,683    2,662,655 
Depreciation and amortization   10,737    9,849 
Provisions for losses on accounts receivable   13,634    (3,787)
Non-cash lease expense   17,316    7,780 
Stock-based compensation   227,000     
Extinguishment of derivative liability       (1,129,498)
Issuance of common stock for non-cash consideration   50,062     
Issuance of warrants for non-cash consideration   15,543     
Finance charges       2,772 
Change in fair value of derivative liabilities       (191,297)
Change in fair value of warrant liabilities   9,284    (234,807)
Changes in operating assets and liabilities:          
Accounts receivable   (31,001)   (185,299)
Inventory   1,026    (28,885)
Prepaids and other current assets   4,497   (19,035)
Accounts payable   32,821    468,672 
Accrued expenses   415,394    186,829 
Customer deposits   10,807    12,898 
Operating lease liability   (10,312)    (8,349)
Net cash used by operating activities   (1,332,160)   (622,912)
           
Cash Flows from Investing Activities          
Additions to property and equipment   (14,722)   (7,608)
Net cash used by investing activities   (14,722)   (7,608)
           
Cash Flows from Financing Activities          
Offering costs in advance of sale of common stock       (78,972)
Proceeds from exercised warrants   26,180     
Principal payments on notes payable   (51,606)   (2,695,344)
Proceeds from notes payable       52,600 
Proceeds from convertible notes, net of fees   1,375,500    3,144,000 
Net cash provided by financing activities   1,350,074    422,284 
           
Net Increase (Decrease) in Cash and Cash Equivalents   3,192    (208,236)
           
Cash and Cash Equivalents at Beginning of Period   78,560    253,699 
           
Cash and Cash Equivalents at End of Period  $81,752   $45,463 
           
Supplemental Disclosure of Non-Cash Cash Activities          
Cash paid for interest  $16,889   $35,865 
Cash paid for income taxes        
Supplemental Schedule of Non-Cash Investing and Financing Activities          
Recognition of right of use asset  $284,339   $ 
Common stock issued for consulting services  $200,250   $ 
Fair value of warrant liabilities from convertible notes  $   $1,541,955 
Fair value of derivative liabilities of conversion feature from convertible notes  $    1,532,725 
Fair value of warrants from debt discount in convertible notes classified of additional paid in capital   97,465     

 

Notes to condensed financial statements are an integral part of these statements.

 

6

 

 

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. The name was changed to NeurAxis, Inc. in March of 2022. Additionally, the Company filed a Certificate of Conversion to become a Delaware corporation on June 23, 2022. The authorized shares were increased, and a par value established.

 

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 shall have authority to issue is (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 of which is hereby designated as “Series A Preferred Stock” and 120,000 of which is hereby 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, 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, 2022 deferred offering costs totaling $736,736 and 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 have an initial exercise price of $7.20 per share (equal to 120% of the offering price per share), have a term of five years from the commencement of sales in the offering, and are exercisable at any time.

 

The Company is headquartered in Carmel, Indiana. The Company specializes in the development, production, and sale of medical neuromodulation devices.

 

The Company has developed three FDA cleared products, the IB-STIM (DEN180057, 2019), the NSS-2 Bridge (DEN170018, 2017), and the original 510(K) clearance (K140530, 2014).

 

  The IB-STIM is a percutaneous electrical nerve field stimulator (PENFS) device that is indicated in patients 11-18 years of age with functional abdominal pain associated with irritable bowel syndrome. The IB-STIM currently is the only product marketed and sold by the Company.
     
  The NSS-2 Bridge is a percutaneous nerve field stimulator (PNFS) device indicated for use in the reduction of the symptoms of opioid withdrawal. The NSS-2 Bridge device was licensed to Masimo Corporation in April 2020, and the Company received a one-time licensing fee of $250,000 from Masimo. Masimo markets and sells this product as its Masimo Bridge, and the Company will not receive any further licensing payments or other revenue from this product.
     
  The original 510(K) device was the EAD, an electroacupuncture device, now called NeuroStim. The EAD is no longer being manufactured, sold or distributed but reserved only for research purposes.

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments which are necessary for a fair presentation of the Company’s financial information. These unaudited interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2024, or any other interim period or for any other future year. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2023.

 

7

 

 

2. Summary of Significant Accounting Policies

 

Use of Estimates and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.

 

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 March 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.

 

8

 

 

The Company’s Level 3 assets/liabilities include derivative and 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.

 

There were no transfers between any of the levels during the periods ended March 31, 2024 and December 31, 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 nonrecurring fair value measurements. As of March 31, 2024 and December 31, 2023, the Company had no assets that were measured on a nonrecurring basis.

 

Basic and Diluted Net Income (Loss) per Share

 

Earnings or loss per share (“EPS”) is computed by dividing net income (loss), net of preferred stock dividends, by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average of all potentially dilutive shares of common stock that were outstanding during the periods presented. As of March 31, 2024 and December 31, 2023, there were no preferred stock dividends declared or paid.

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for March 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.

 

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

 

         
         
   2024   2023 
         
Convertible Series A Preferred Stock       1,013,270 
Convertible Series Seed Preferred Stock       230,954 
Options   1,319,394    1,319,394 
Pre-Funded Warrants for Convertible Series A Preferred Stock       289,779 
Warrants   1,857,618    954,044 
Convertible Bridge Debt       717,432 
Totals   3,177,012    4,524,873 

 

Revenue Recognition

 

Neuraxis, Inc. specializes in the development, production, and sale of medical neuromodulation devices to healthcare providers primarily located in the United States. Patented and trademarked neuromodulation devices is the Company’s major product line. Products are generally transferred at a point in time (rather than over time). Essentially all the Company’s revenue is generated from purchase order contracts.

 

9

 

 

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, 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:

 

  (i) identify the contract(s) with a customer;
  (ii) identify the performance obligations in the contract;
  (iii) determine the transaction price;
  (iv) allocate the transaction price to the performance obligations in the contract; and
  (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

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 estimating expected credit losses over the contractual term of the receivable using a discounted cash flow method. When developing this estimate of expected credit losses, the Company considers all available information (past, current, and future) relevant to assessing the collectability of cash flows.

 

The Company offers a Patient Assistance Program for patients without insurance coverage for IB-Stim. This program extends 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 economic factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows as indicated:

 

Type of customer: Based on dollar amounts of revenue, essentially all of the goods sold by the Company are sold to healthcare customers including hospitals and clinics. Sales to healthcare customers lack seasonality and have a mild correlation with economic cycles.

 

Geographical location of customers: Sales to customers located within the United States represent essentially all of the Company’s sales.

 

Type of contract: Sales contracts consist of purchase order contracts that tend to be short-term (i.e., less than or equal to one year in duration).

 

Company’s Performance Obligations with Customers:

 

Timing of Satisfaction

 

The Company typically satisfies its performance obligations as the goods are delivered.

 

Goods that are shipped to customers are typically shipped FOB shipping point with freight prepaid by the Company. As such, ownership of goods in transit transfer to the customer when shipped and the customer bears the associated risks (e.g., loss, damage, delay).

 

Shipping and handling costs are recorded as general and administrative expenses in the Statement of Operations.

 

10

 

 

Significant Payment Terms

 

Payment for goods sold by the Company is typically due after an invoice is sent to the customer, within 30 days. However, other payment terms are frequently negotiated with customers ranging from due upon receipt to due within 90 days. Some payment terms may call for payment only after the healthcare provider receives their insurance reimbursement. Invoices for goods are typically sent to customers within three calendar days of shipment. 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.

 

Nature

 

Medical devices that the Company contracts to sell and transfer to customers are manufactured by one specific third-party manufacturer. The manufacturer is 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).

 

Returns, Refunds, etc.

 

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:

 

  Refund the price paid for any defective or nonconforming products.
  Supply and deliver to the customer replacement conforming products.
  Reimburse the customer for the cost of repairing any defective or nonconforming products.

 

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. Historically, returns have been immaterial, and the Company currently does not provide a provision for this liability.

 

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 March 31, 2024, we had a stockholders’ deficit of $3,184,454 and short-term outstanding borrowings of $1,396,175. As of March 31, 2024, we had cash of $81,752 and a working capital deficit of $3,407,877.

 

On August 9, 2023, the Company consummated its initial public offering, 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, 2022 deferred offering costs totaling $736,736 and 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. 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.

 

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 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.

 

11

 

 

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 near term.

 

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 Issued Accounting Pronouncements

 

In December 2023, the FASB issued ASU 2023-19, 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 provided an allowance for the entire balance of principal and interest as of December 31, 2019. The current allowance is $1,166,069 as of March 31, 2024. The current loan balances are as follows:

 

   Loan   Interest   Interest 
   Receivable   Receivable   Income 
March 31, 2024               
Shareholder 1  $506,400   $76,882   $5,944 
Shareholder 2   506,400    76,747    5,944 
    1,012,800    153,629    11,888 
Allowance for Collection Risk   (1,012,800)   (153,629)   (11,888)
Net Balance  $   $   $ 

 

12

 

 

   Loan   Interest   Interest 
   Receivable   Receivable   Income 
December 31, 2023               
Shareholder 1  $506,400   $70,938   $23,867 
Shareholder 2   506,400    70,803    23,867 
    1,012,800    141,741    47,734 
Allowance for Collection Risk   (1,012,800)   (141,741)   (47,734)
Net Balance  $   $   $ 

 

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 three months ended March 31, 2024 and 2023, the Company paid Mr. Watkins $0 and $564, respectively, for these services. No amounts were owed to Mr. Watkins as of March 31, 2024 and December 31, 2023, respectively, for these services.

 

The Company’s former Chief Financial Officer is contracted for services through a third-party public accounting firm. He is the firm’s managing partner and majority shareholder. The firm is engaged by the Company to provide accounting and tax services on a continuous basis. Fees paid for services were $62,987 and $17,551 for the three months ended March 31, 2024 and 2023, respectively. The Company owed RBSK for open invoices of $68,899 and $84,279 that are included in accounts payable as of March 31, 2024 and December 31, 2023, respectively.

 

4. Notes Payable

 

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 stockholders approve of an amendment to the Company’s Certificate of Incorporation to authorize the creation of the Series B Preferred Stock (the “Stockholder Approval”). The Series B Preferred Stock is 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 will 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 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 before such date, convertible into Series B Preferred Stock with identical funding amounts and terms.

 

In the first quarter of 2024, the Company entered into a series of convertible promissory notes totaling $3,135,000 with identical terms to the $3,000,000 convertible promissory note issued on February 12, 2024 (collectively referred to as the “2024 Convertible Promissory Notes”). As of March 31, 2024, the Company has received $1,535,000 of the principal amount with the remainder due in monthly installments through the maturity date in March of 2025.

 

The Company’s private placement agent fees included (i) 10% of the funded principal amount and (ii) warrants calculated as 6.0% of the funded principal amount divided by the $2.38 exercise price. The fair value of the warrants of $97,465 were deferred as a financing fee and classified as additional paid in capital. The private placement agreement was terminated on March 18, 2014 pursuant to an new advisory agreement (See Note 12).

 

The 2024 Convertible Promissory Notes bear 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. As of March 31, 2024, no investor has converted any portion of the 2024 Convertible Notes into Series B Preferred Stock as the shareholders have not yet authorized its issuance.

 

Accrued interest totaled $76,319 and $66,648 as of March 31, 2024 and December 31, 2023, respectively. The unamortized debt discount on the 2024 Convertible Promissory Notes total $235,281 as of March 31, 2024. Amortization of the debt discount on the 2024 Convertible Notes totaled $21,863 for the three months ended March 31, 2024.

 

5. Leases

 

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.

 

13

 

 

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.

 

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 as of March 31, 2024 and December 31, 2023.

 

The Company had three leases primarily consisting of office space in Versailles and Carmel Indiana. Two of the leases in Versailles started January 1, 2022. Both have an term of one year, with automatic one year renewal, unless 60 day notice of vacating is given, commencing on the execution hereof and continuing through December 31st of each year.. The monthly lease payments for these leases are $470 and $1,664 with a 4% per annum increase. The new lease in Carmel started 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 isn’t in default, they are 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 three months ended March 31, 2024 and 2023, the Company recognized $25,756 and $11,729 of operating lease expense, including short-term lease expense and variable lease costs, which are immaterial.

 

14

 

 

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

 

  

March 31,

2024

  

December 31,

2023

 
Operating lease right-of-use assets  $337,286   $70,263 
           
Other current liabilities   35,753    49,127 
Operating lease liabilities   314,472    27,071 
Total  $350,225   $76,198 
           
Weighted-average remaining lease term (in years)   4.72    3.75 
Weighted-average discount rate   15.0%   15.0%

 

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

 

      
2024  $57,737 
2025   111,472 
2026   114,702 
2027   86,856 
2028   89,027 
Thereafter   38,025 
Total lease payments   497,819 
Less: imputed interest   147,594 
Total present value of lease payments  $350,225 

 

6. Common Stock and Warrants

 

The Company authorized 100,000,000 shares of common stock, of which 6,594,897 and 6,508,897 were issued and outstanding as of March 31, 2024 and December 31, 2023, respectively. In conjunction with 1,098,667 common shares issued upon the completion of the initial public offering on August 8, 2023, the Company also issued (i) 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, (ii) 1,649,900 common shares upon conversion of convertible notes, (iii) 425,000 common shares as payment to vendors for services and (iv) 127,780 common shares upon the exercise of warrants. 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.

 

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.

 

On August 9, 2023, the Company consummated an initial public offering, 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 of $6,592,002. See Note 1.

 

On January 2, 2024, the Company issued 75,000 shares of common stock with a fair value of $200,250 pursuant to a consulting agreement. As the term of the consulting agreement covers the full fiscal year ending December 31, 2024, the Company expensed $50,062 in the three month’s ended March 31, 2024 with the remaining $150,188 recorded in prepaids and other current assets as of March 31, 2024.

 

In connection with a bridge loan, the Company issued a warrant on September 18, 2018 that allows the holder to purchase common stock from the Company at a share price of $4.38 per share. The number of shares was based on a formula tied to the final amount of loans made by the holder of $375,000, multiplied by 150%, and divided by $70.03. The number of shares based on this formula is 12,852. The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. If the fair market value of one share is greater than the warrant price, the holder may elect to receive a number of shares equal to the value of the warrant. If the exercise is in connection with the sale of the Company, the holder may, at its option, condition its exercise of the warrant upon the consummation of such transaction. The warrant expires on September 18, 2028 and can be exercisable either in whole or from time to time in part prior to the expiration date.

 

15

 

 

The Company issued a second warrant on September 6, 2019, under similar terms but is a penny warrant that allows the holder to purchase 40,000 shares of common stock and is subject to adjustment for certain equity events. The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. The warrant expires on September 6, 2029. This warrant was converted to 39,924 shares of common stock on December 28, 2023. The fair market value of the stock on that day was calculated as the average of the daily closing prices per share for the 30 consecutive trading day period ending on the second trading day prior to such date or $2.61 per share. Since the fair value was greater than the warrant price of $0.01 per share the holder elected to receive the number of shares equal to 40,000 times the difference between the fair market value and the exercise price divided by the fair market value, resulting in 39,924.

 

The Company issued a third warrant to Masimo Corporation on April 9, 2020. This warrant was pre-funded in the amount of $2,734,340. The warrant allows the holder to purchase 289,779 shares of Series A Preferred Stock at $9.44 per share and is subject to adjustment for certain equity events. The warrant contains certain rights in the event of liquidation, merger, or consolidation of the Company. There will be no additional purchase price for the Warrants. In the event that all outstanding shares of Series A Preferred Stock are converted, automatically or by action of the holders thereof, into Common Stock, including, without limitation, in connection with the Company’s initial, underwritten public offering and sale of its Common Stock pursuant to an effective registration statement under the Act, then from and after the date on which all outstanding shares of Series A Preferred Stock have been so converted, this Warrant shall be exercisable for such number of shares of Common Stock into which the Warrant Shares would have been converted had the Warrant Shares been outstanding on the date of such conversion, and the Exercise Price shall equal the Exercise Price in effect as of immediately prior to such conversion divided by the number of shares of Common Stock into which one share of Series A Preferred Stock would have been converted, all subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. On August 14, 2023, the 144,890 Series A Preferred Stock warrants were converted to 289,779 common stock warrants.

 

During 2022, the Company issued 793,655 five-year warrants to purchase common stock equal to one hundred percent (100%) of the shares into which the 2022 convertible notes can be converted at issuance. The 2024 Convertible Promissory Notes triggered the anti-dilution clause of the original agreement and decreased the exercise price to $2.38.

 

From March to June of 2023, the Company issued 505,570 one-year warrants to purchase common stock equal to fifty percent (50%) of the shares into which the 2023 convertible notes can be converted at issuance. The warrants have an exercise price of $5.25 per share. The 2024 Convertible Promissory Notes triggered the anti-dilution clause of the original agreement and decreased the exercise price to $2.38.

 

On August 9, 2023, the Company issued 122,202 five-year warrants to purchase common stock pursuant to an advisory agreement with a consulting firm upon closing of the Company’s initial public offering. The warrants have an exercise price of $6.00 per share. The 2024 Convertible Promissory Notes triggered the anti-dilution clause of the original agreement and decreased the exercise price to $2.38.

 

On August 14, 2023, the Company issued 186,156 five-year warrants to purchase common stock pursuant to an agreement with an underwriter upon closing of the Company’s initial public offering. The warrants have an exercise price of $7.20 per share. The 2024 Convertible Promissory Notes triggered the anti-dilution clause of the original agreement and decreased the exercise price to $2.38.

 

From January to March of 2024, the Company issued 38,697 warrants to its private placement agent in conjunction with the 2024 Convertible Promissory Notes at an exercise price of $2.38 to purchase common stock.

 

On March 30, 2024, the Company issued 7,563 warrants pursuant to an advisory agreement at an exercise price of $2.38 to purchase common stock (See Note 12).

 

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

 

   Number of   Weighted-Avg.   Weighted-Avg. 
   Warrants for   Exercise   Remaining 
   Common Stock   Price   Contractual Life 
Outstanding as of January 1, 2023   846,507   $5.06    4.72 
Granted   813,928    5.81    4.38 
Cancelled/Expired   289,779    0.01     
Exercised   (127,856)        
Outstanding as of December 31, 2023   1,822,358   $4.69    3.05 
Granted   46,260   $2.38    4.94 
Converted Prefunded Warrants            
Exercised   (11,000)        
Outstanding as of March 31, 2024   1,857,618   $2.05    3.13 

 

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

 

   Number of   Weighted-Avg. 
   Warrants for   Exercise 
   Preferred Stock   Price 
Outstanding as of January 1, 2023   144,890   $0.01 
Granted        
Cancelled/Expired        
Exercised   (144,890)   (0.01)
Outstanding as of December 31, 2023      $ 

 

There was no preferred stock warrant activity for the three months ended March 31, 2024.

 

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

 

   Number of        
   Warrants   Exercise   Expiration
   Outstanding   Price   Date
Brian Hannasch W-01   12,852   $8.76   September 18, 2028
Masimo Corporation PSA-01   289,779   $0.01   None
2022 Convertible Notes   793,655   $2.38   Various
2023 Convertible Notes   537,949   $2.38   Various
Consulting Agreement Warrants   157,462   $2.38   August 8, 2028
Underwriter’s Warrants   65,921   $2.38   August 8, 2028
    1,857,618         

 

The Company is a party to two investment banking and advisory agreements with a consulting firm engaged in connection with listing our common stock for trading on NYSE. Pursuant to the first advisory agreement, dated March 3, 2022, the Company agreed to pay the consulting firm a monthly consulting fee of $5,000 and a final payment of $50,000 upon a successful NYSE listing, and, also upon such listing, to issue the consulting firm shares of our common stock representing 1.5% of our outstanding shares after giving effect to the initial public offering and to issue the consulting firm five-year warrants to purchase shares of our common stock representing 2.0% of our outstanding shares, after giving effect to the initial public offering, on a fully-diluted basis with an exercise price per share representing the public offering price per share. Pursuant to the second advisory agreement with consulting firm, dated June 20, 2022, and amended December 20, 2022, the Company agreed to pay fees in the aggregate of up to $136,166 for advice in connection with communication and other related matters leading up to, and in connection with, the initial public offering and to issue the consulting firm 125,000 shares of common stock upon a successful NYSE listing. The Company agreed to piggyback registration rights with respect to all shares issued to the consulting firm under both advisory agreements, including shares issuable upon exercise of the warrants. The Company evaluated the agreements and determined that the shares will not be recorded and valued until the performance condition is satisfied.

 

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7. Preferred Stock

 

The Company has authorized 1,120,000 shares of preferred stock of which 1,000,000 has been designated Series A Preferred Stock and 120,000 has been designated Series Seed Preferred Stock, of which 0 shares of Series A Preferred Stock and 0 shares of Series Seed Preferred Stock are issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.

 

The following is a summary of Preferred Stock terms:

 

Voting Rights - The Series A Preferred and Series Seed Preferred shall vote together with the Common Stock on an as-converted basis, and not as separate classes.

 

Conversion - The Series A Preferred and Series Seed initially convert 1:1 to Common Stock at any time at option of holder, subject to adjustments for stock dividends, splits, combinations, and similar events and as described below under “Anti-dilution Provisions.”

 

Dividends - The Series A Preferred will carry an annual 8% cumulative dividend, payable upon any liquidation, dissolution or winding up of the Company (the “Accruing Dividend”). For any other dividends or distributions, participation with Common Stock on an as-converted basis.

 

Liquidation - In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid in the following priority:

 

First, to the Series A Preferred in proportion to each holder’s respective pro rata Series A Original Purchase Price, plus any pro rata share of the Accruing Dividend until the entire Series A Original Purchase Price and Accruing Dividend are paid;

 

Second, to the Series Seed Preferred in proportion to each holder’s respective pro rata Series Seed Original Purchase Price until the entire amount of the Series Seed Original Purchase Price is paid; and

 

Thereafter, the Series A Preferred and Series Seed Preferred participate with the Common Stock pro rata on an as-converted basis.

 

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 (a “Deemed Liquidation Event”), thereby triggering payment of the liquidation preferences described.

 

Anti-dilution Provisions - The Series A Preferred have full-ratchet anti-dilution protection so that the conversion price will be reduced to 80% of the price at which any future shares are issued, if less than the Series A Original Purchase Price.

 

Preferred stock has all converted pursuant to the initial public offering.

 

18

 

 

8. Stock Options and Awards

 

The following is a summary of stock option activity for the periods ended March 31, 2024 and December 31, 2023:

 

       Weighted         
       Avg.         
   Number of  

Remaining

Contractual Life

  

Weighted Avg.

Exercise

  

Aggregate

Intrinsic

 
   Options   (in years)   Price   Value 
Outstanding as of January 1, 2023   1,319,394    6.69   $6.94   $ 
Granted                
Forfeited                
Cancelled/Expired                
Exercised                
Outstanding as of December 31, 2023   1,319,394    5.69   $6.94   $ 
Granted                
Forfeited                
Cancelled/Expired                
Exercised                
Outstanding as of March 31, 2024   1,319,394    5.45   $6.94   $ 
Vested and Exercisable as of March 31, 2024   1,319,394    5.45   $6.94   $ 

 

Stock-based compensation expense is classified in the Company’s statements of operations as general and administrative expense. Compensation expense totaled $237,000 and $0 for the three months ended March 31, 2024 and 2023, respectively (See Note 9). As of March 31, 2024, there was no unrecognized compensation expense related to unvested options granted under the Company’s share-based compensation plans.

 

9. Share Liability

 

As of March 31, 2024, the Company had not issued 100,000 shares of its common stock pursuant to a hiring grant of an executive officer, representing stock compensation expense of $237,000 in the three months ended March 31, 2024, due to administrative delays. These shares are classified as share liabilities as they have been authorized but not yet issued as of the reporting date.

 

The Company expects to issue these shares to the respective shareholder as soon as the administrative delays are resolved. These shares will be recorded as issued and outstanding upon their issuance, and the corresponding share liability will be reclassified to shareholders’ equity. The administrative delays are not expected to have any material impact on the financial position or results of operations of the Company.

 

Management’s best estimate is that the administrative delays will be resolved within the next fiscal quarter, at which point the share liabilities will be eliminated, and the shares will be issued. However, the timing of resolution is subject to various factors, and actual timing may vary.

 

10. Warrant Liabilities

 

Management evaluates all of the Company’s financial instruments and contracts, including issued warrants to purchase its Class A common stock and Series B Preferred Stock, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative 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 Monte Carlo simulation model for warrants 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, an expected remaining term of each warrant as of the valuation date, estimated volatility, drift, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the statements of operations.

 

The Company utilizes a Monte Carlo simulation model for warrants 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 $9.20 per share, an expected remaining term of each warrant as of the valuation date, estimated volatility ranging from 68% to 80%, drift, and a risk-free rate ranging from 4.00% to 4.22%.

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the Black-Scholes option-pricing model.

 

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

 

Volatility: The Company calculates the expected volatility based on comparable company’s historical stock prices with a look back period commensurate with the period to maturity.

 

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Expected term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.

 

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

 

   Level 1   Level 2   Level 3 
Warrant liabilities as of January 1, 2023  $   $   $2,234,384 
Addition           2,446,502 
Changes in fair value of warrant liabilities           (844,854)
Reclassify to equity           (3,827,807)
Warrant liabilities as of December 31, 2023           8,225 
Changes in fair value of warrant liabilities           9,284 
Warrant liabilities as of March 31, 2024  $   $   $17,509