10-Q: NeurAxis Q3: Sales Up, Losses Persist, Going Concern Warning

NeurAxis, Inc. reported increased net sales for Q3 and the nine months ended September 30, 2025, but continues to face significant operating losses and a going concern warning from its auditors.

Summary

• Net sales increased by 21.7% to $811,414 for the three months ended September 30, 2025, and by 35.1% to $2,601,155 for the nine months ended September 30, 2025, driven by volume growth from both insured and financial assistance programs, and the launch of the RED product.
• Gross profit rose by 18.7% to $675,927 for the three months and by 30.7% to $2,179,890 for the nine months, but gross margin decreased to 83.3% (from 85.4%) and 83.8% (from 86.7%) respectively, due to higher discounting in patient assistance programs and expired RED inventory.
• Operating loss increased by 27.2% to $(2,100,085) for the three months and by 7.4% to $(6,113,040) for the nine months, primarily due to higher selling and general and administrative expenses.
• Net loss increased by 20.9% to $(2,122,796) for the three months but decreased by 10.3% to $(6,091,898) for the nine months, with the nine-month improvement attributed to higher sales volume and the absence of one-time 2024 settlements.
• The company's auditors have expressed substantial doubt about its ability to continue as a going concern due to accumulated losses and negative cash flows from operations since inception.
• NeurAxis terminated its NSS-2 Bridge license with Masimo Corporation on July 1, 2025, for $200,000 consideration, recapturing trademark and patent rights.
• A $750,000 lawsuit settlement was reached on April 25, 2025, payable in 12 equal monthly installments starting January 2026, related to alleged misrepresentations about NeuroStim device billing.

Sentiment

Score: 3

Explanation: The company shows some positive signs with increased sales and new product launches, but these are overshadowed by persistent operating losses, declining gross margins, a critical 'going concern' warning from auditors, and identified material weaknesses in internal controls. While capital raises provide liquidity, they are dilutive and highlight the ongoing need for external funding to sustain operations. The settlement of a lawsuit is a positive resolution, but the ongoing patent dispute adds uncertainty. The overall financial health remains precarious.

Positives

• Net sales increased by 21.7% for the three months ended September 30, 2025, to $811,414, and by 35.1% for the nine months ended September 30, 2025, to $2,601,155.
• Gross profit increased by 18.7% for the three months and 30.7% for the nine months, reaching $675,927 and $2,179,890 respectively.
• Net loss for the nine months ended September 30, 2025, decreased by 10.3% to $(6,091,898) compared to the prior year.
• Basic and diluted loss per share improved to $(0.78) for the nine months ended September 30, 2025, from $(1.01) in the prior year.
• Successful launch of the Rectal Expulsion Device (RED) contributed to sales growth.
• The company recaptured trademark and patent rights for the NSS-2 Bridge device by terminating the license with Masimo for $200,000.
• Cash and cash equivalents increased to $4,377,109 as of September 30, 2025, from $3,696,870 at December 31, 2024.
• Working capital surplus increased slightly to $1,840,599 as of September 30, 2025, from $1,832,858 at December 31, 2024.

Negatives

• Gross margin decreased to 83.3% for the three months and 83.8% for the nine months ended September 30, 2025, primarily due to higher discounting in patient assistance programs and expired RED inventory.
• Operating loss increased by 27.2% to $(2,100,085) for the three months and by 7.4% to $(6,113,040) for the nine months ended September 30, 2025.
• Net loss increased by 20.9% to $(2,122,796) for the three months ended September 30, 2025.
• Selling expenses increased significantly by 125.3% for the three months and 67.3% for the nine months, driven by commissions, temporary commission structures, headcount, and advertising costs.
• General and administrative expenses increased by 7.2% for the three months and 3.3% for the nine months, partly due to incentive plans and internal control enhancement costs, and a one-time lawsuit settlement in 2025.
• Net cash used in operating activities increased by 3.7% to $(4,498,684) for the nine months ended September 30, 2025.
• The company has incurred losses and negative cash flows from operations since inception.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to accumulated losses and negative cash flows from operations.
• Future capital requirements are significant and dependent on developing, manufacturing, and marketing technologies, patent enforcement, collaborative arrangements, and market developments.
• Ability to generate revenue and achieve profitability is dependent on successfully marketing products, securing purchase orders, and widespread adoption of insurance coverage by commercial carriers.
• Material weaknesses in internal control over financial reporting were identified, including ineffective approval processes, inadequate contract management, misapplication of U.S. GAAP, and ineffective disclosure controls.
• Ongoing threatened litigation by Dr. Arturo Taca asserting an interest in U.S. Patent No. 10,413,719, valued at $2,000,000, remains unresolved.
• The company's transition to profitability is dependent upon achieving a level of revenues adequate to support its cost structure, and there is no assurance that profitability will ever be achieved.
• Additional funding may be required, which could be dilutive or non-dilutive, but there are no assurances it will be available on acceptable terms, if at all.
• Compliance with public company financial disclosure and reporting requirements, particularly Section 404 of the Sarbanes-Oxley Act, requires significant management time, potentially delaying growth plans.

Future Outlook

The company expects to incur significant expenses and operating losses for the foreseeable future as it pursues widespread insurance coverage for its IB-Stim device and seeks FDA clearance for new indications. A top priority is the adoption of insurance coverage by commercial carriers nationally to drive revenue. Future research and development efforts are planned for indications such as post-concussion syndrome and cyclic vomiting syndrome in children. The new IB-Stim CPT Category I code, effective January 1, 2026, is anticipated to boost adoption and utilization.

Management Comments

• Management believes the estimated fair value of Level 1 accounts (cash, accounts receivable, accounts payable, prepaids, and other current assets) approximates their carrying value due to their short-term nature or the use of market interest rates for debt instruments.
• Management regularly evaluates key factors and assumptions used to develop estimates, utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions.
• Management 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, but there can be no assurance it will be able to do so on reasonable terms, or at all.
• Management is committed to maintaining a strong internal control program over financial reporting and will take further actions and implement additional enhancements or improvements as necessary to remediate identified material weaknesses.

Industry Context

NeurAxis operates in the neuromodulation medical device industry, focusing on treatments for chronic and debilitating conditions, particularly in children. The company's strategy to expand insurance coverage for its IB-Stim device and pursue new FDA clearances for additional indications (e.g., functional nausea, post-concussion syndrome, cyclic vomiting syndrome) aligns with a growth-stage company seeking to broaden market access and product utility. The termination of the NSS-2 Bridge license with Masimo and recapture of intellectual property suggests a strategic shift towards direct control or new partnerships for that product. The launch of the RED device indicates diversification within diagnostic or therapeutic areas related to gastrointestinal health. The upcoming CPT Category I code for IB-Stim is a critical development, potentially streamlining reimbursement and increasing market penetration, which is a common challenge for novel medical devices.

Comparison to Industry Standards

• NA The filing does not provide specific comparable companies, projects, or results to assess performance against global benchmarks. The company is a growth-stage entity with unique FDA-cleared neuromodulation devices, making direct comparisons challenging without more context on market share, specific clinical trial outcomes versus competitors, or industry-average gross margins for similar specialized devices.

Management Changes

Corporate Governance

Legal Proceedings

• A lawsuit initiated by Ritu Bhambhani, M.D., in 2019, asserting RICO Act and misrepresentation claims seeking over $5,000,000, was dismissed by the District Court in 2022, and the Fourth Circuit Court of Appeals denied the plaintiffs' appeal on June 3, 2024, with the mandate entered on June 25, 2024.
• A separate lawsuit (the 2022 Lawsuit) initiated by business entities related to the initial plaintiffs, asserting similar claims and seeking over $75,000, had its RICO Act claims dismissed on May 25, 2023. The remaining claims were tentatively settled for $750,000 on April 25, 2025, with the agreement executed on May 15, 2025, payable in 12 equal monthly installments starting January 2026.
• Threatened litigation from Dr. Arturo Taca in January 2024, asserting an interest in U.S. Patent No. 10,413,719, valued at $2,000,000, based on his work in neurostimulation. The company denies the claims and intends to defend vigorously; the case remains unresolved.

Related Party Transactions

• Two demand notes receivable from shareholders, each with a principal balance of $506,400, totaling $1,012,800. No payments have been received, and a full allowance for collection risk has been provided since December 31, 2019.
• An exclusive, worldwide, non-transferable, royalty-free license for auricular patents from a limited liability company in which the company's President and CEO and Chief Regulatory, Compliance and Privacy Officer both maintain an ownership interest. The Board of Directors pre-approved reimbursement of up to $10,000 for maintenance costs for the year ending December 31, 2025.
• Sales of IB-STIM devices to a member of the Board of Directors at cost for research and development activities, pre-approved up to $16,000 for the year ended December 31, 2025.
• Services provided by a third-party public accounting firm, where the company's former Chief Financial Officer was the managing partner and majority shareholder. Services totaled $6,778 and $38,457 for the three and nine months ended September 30, 2025, respectively.

Stakeholder Impact

• **Shareholders:** Face significant dilution risk from ongoing capital raises (common stock issuance, warrant exercises, ATM offering) to fund operations. The 'going concern' warning indicates substantial risk to investment value. The increase in stockholders' equity is primarily due to these dilutive financing activities. Preferred shareholders maintain liquidation priority.
• **Employees:** Benefit from the adoption of the 2025 Employee Stock Purchase Plan (ESPP), offering a 15% discount on common stock, which could enhance retention and alignment of interests. Stock-based compensation is a significant component of overall compensation. The termination of the COO indicates potential management restructuring.
• **Customers:** Benefit from the Patient Assistance Program offering discounts for IB-Stim devices to lower-income patients without insurance. The launch of the RED device expands product offerings. The upcoming IB-Stim CPT Category I code is expected to improve insurance reimbursement, potentially increasing access and affordability.
• **Creditors:** The company has short-term borrowings and notes payable. The 'going concern' warning raises concerns about the company's ability to meet its obligations in the long term, although current cash and working capital show some liquidity.
• **Regulatory Authorities:** The company is actively seeking FDA clearances for new indications, demonstrating ongoing engagement with regulatory processes. Remediation efforts for internal control weaknesses are being undertaken under the oversight of the Audit Committee, addressing compliance concerns.

Next Steps

• Pursue widespread insurance coverage of the IB-Stim device by commercial insurance carriers nationally.
• Seek FDA clearance for IB-Stim and RED devices for other indications, including functional nausea in children, post-concussion syndrome in children, cyclic vomiting syndrome in children, and functional abdominal pain associated with IBS in adults.
• Fund selling and marketing efforts to expand the adoption of the RED device.
• Continue remediation efforts for identified material weaknesses in internal control over financial reporting, including testing and validation in fiscal year 2025.
• Manage the 12 equal monthly installments of the $750,000 lawsuit settlement, beginning in January 2026.
• Defend vigorously against the threatened litigation by Dr. Arturo Taca regarding U.S. Patent No. 10,413,719.
• Monitor the effectiveness of the new IB-Stim CPT Category I code, effective January 1, 2026, for its impact on reimbursement and market adoption.
• Seek shareholder approval for the NeurAxis, Inc. 2025 Employee Stock Purchase Plan (ESPP) by July 1, 2026.

Key Dates

Recommendation

NeurAxis presents a mixed financial picture. While the company achieved notable sales growth and launched a new product (RED), demonstrating market traction for its neuromodulation devices, it continues to operate at a significant loss. The 'going concern' warning from auditors is a critical red flag, indicating substantial uncertainty about its long-term viability without further funding. The identified material weaknesses in internal controls also point to operational and governance challenges that need robust remediation. Recent capital raises have provided liquidity but are dilutive. The upcoming IB-Stim CPT code is a positive catalyst for future revenue, and the settlement of one major lawsuit reduces a contingent liability. However, the ongoing patent dispute adds new uncertainty. Given the high-risk profile due to persistent losses and going concern issues, but also the potential for growth from new products and improved reimbursement, a 'hold' recommendation is appropriate for investors who are already invested and willing to monitor the company's progress on profitability and internal control remediation. New investors should approach with extreme caution due to the significant risks.

Keywords

Neuromodulation, Medical Devices, IB-STIM, Rectal Expulsion Device, RED device, FDA Clearance, Functional Abdominal Pain, IBS, Chronic Constipation, SEC Filing, 10-Q, Financial Results, Going Concern, Internal Controls, Capital Raise, Biotech, Healthcare