Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of Operations
You should read the
following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements
(prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes
included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). The following discussion contains forward-looking
statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion
of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed
in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form
10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the
terms “we,” “us,” “our” and the “Company” refer to Aclarion, Inc.
Overview
Aclarion is a healthcare
technology company that leverages Magnetic Resonance Spectroscopy (“MRS”), proprietary signal processing techniques, biomarkers,
and augmented intelligence algorithms to optimize clinical treatments. The Company is first addressing the chronic low back pain market
with Nociscan, the first, evidence-supported, SaaS platform to noninvasively help physicians distinguish between painful and nonpainful
discs in the lumbar spine. Through a cloud connection, Nociscan receives magnetic resonance spectroscopy (MRS) data from an MRI machine
for each lumbar disc being evaluated. In the cloud, proprietary signal processing techniques extract and quantify chemical biomarkers
demonstrated to be associated with disc pain. Biomarker data is entered into proprietary algorithms to indicate if a disc may be a source
of pain. When used with other diagnostic tools, Nociscan provides critical insights into the location of a patient’s low back pain,
giving physicians clarity to optimize treatment strategies.
We have funded our
operations with proceeds from the April 2022 IPO. Since inception we have incurred significant operating losses. As of December 31,
2022, we had an accumulated deficit of approximately $39.9 million. Our ability to generate product revenue sufficient to achieve
profitability will depend heavily on the successful commercialization and continued development of our SaaS platform. We expect that
our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as
we:
Our primary near-term
growth strategy is to secure payer contracts (including insurance companies, self- insured employers, Medicare, Medicaid, workmen’s
compensation boards et. al.) to cover our Category III CPT codes. We believe that with favorable payer coverage, the Company has the opportunity
to more efficiently engage physicians and imaging centers that will adopt our technology.
As a result, we may need
substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate
significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other
capital sources, which may include collaborations with other companies or other strategic transactions.
As of December 31, 2022,
we had cash of approximately $1.5 million, which we believe will fund our operating expenses and capital expenditure requirements into
the second quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available
capital resources sooner than we expect. See “Liquidity and capital resources.” To finance our operations beyond that point,
we will need to raise additional capital, which cannot be assured. If we are unable to raise additional capital in sufficient amounts
or on terms acceptable to us, we may have to significantly delay, scale back, or discontinue the commercialization or further development
of our SaaS platform.
Corporate Information
We were formed under
the name Nocimed, LLC, a limited liability company in January 2008, under the laws of the State of Delaware. In February 2015, Nocimed,
LLC was converted into Nocimed, Inc. a Delaware corporation. On December 3, 2021, we changed our name to Aclarion, Inc. Our principal
executive offices are located at 8181 Arista Place, Suite 100, Broomfield, Colorado 80021. Our main telephone number is (833) 275-2266.
Our internet website is www.aclarion.com. The information contained in, or that can be accessed through, our website is not incorporated
by reference and is not a part of this Annual Report on Form 10-K (this “Form 10-K”).
Effect of COVID-19
Pandemic on business operations
The COVID-19 Pandemic is not currently impacting
plans for marketing our products or our continuing development efforts, as all such activities have been conducted by us using remote
work strategies. The Company cannot accurately predict the longer- term impact of the COVID-19 Pandemic on its business.
Results of operations
Operating activities:
The following table summarizes
our results of operations for the twelve months ended December 31, 2022, and 2021.
Revenue
Operating expenses:
Other income (expense):
Changes in fair value of redeemable preferred stock – (1,900,310 ) 1,900,310
Income tax provision – – –
Years ended December 31, 2022, and 2021
Total revenues. Total revenues for the
year ended December 31, 2022, were $60,444, which was a small increase of $152 from $60,292 for the year ended December 31, 2021.
Volumes and pricing were consistent in each year.
Cost of Revenue. Cost of Revenue is
comprised of hosting and software costs, field support, UCSF royalty cost, NuVasive commission of 6%, partner fees (Radnet), and credit
card fees. Total Cost of Revenue was $65,298 for the year ended December 31, 2022, compared to $69,175 for the year ended December 31,
2021, a decrease of 5.6%. This decrease was primarily due to a variation in commissions.
Sales and Marketing. Sales and marketing
expenses were $537,069 for the year ended December 31, 2022, compared to $330,814 for the year ended December 31, 2021, an increase of
$206,255 or 62.3%, This increase was driven primarily by additional investment in website and branding development, press releases, attendance
at conferences, and Key Opinion Leader consulting fees.
Research and Development. Research
and development expenses were $1,088,778 for the year ended December 31, 2022, compared to $787,850 for the year ended December 31, 2021,
an increase of $300,928 or 38.2%. This increase was due to a $123,828 contract milestone payment to UCSF in April 2022, and increased
utilization of independent service providers in the areas of clinical and reimbursement.
General and Administrative. General and
administrative expenses were $4,467,815 for the year ended December 31, 2022, an increase of $2,642,324 or 144.7%, from $1,825,491 for
the year ended December 31, 2021. The increase in general and administrative expenses was driven by increased compensation expense related
to the vesting of the Executive Chairman’s and executive’s outstanding common stock options, increased compensation expense
related to new management, director and executive chairman bonuses, and an increase in directors’ and officers’ liability
insurance.
Interest Expense. Total Interest expense
was $1,507,546 for the year ended December 31, 2022, an increase of $1,032,635, from the $474,911 for the year ended December 31, 2021.
This increase was driven by the $1.3 million beneficial conversion rate charged to interest expense for the conversion of all accrued
interest on the Company's outstanding secured promissory notes into common shares and common stock warrants in connection with the effectiveness
of the IPO. There was a partial positive offset due to fewer months of accrued interest charges in 2022 related to both the secured promissory
notes and convertible notes outstanding in 2021.
Changes in Fair Value of Redeemable Preferred
Stock. In the year ended December 31, 2021, the Company recorded $1,900,310 of changes in the fair value of a B2 and B3 series preferred
stock commitment prior to the issuance of those shares on December 3, 2021.
Other Net Expenses. During the year ended December
31, 2022, Other Net expenses were $520, which included bank interest, government fees, and realized exchange rate losses. During the
year ended December 31, 2021, Other Net expenses of $4,458 (gain) included a $5,000 grant from the California Relief Program and cash
rewards from credit card programs, offset in part by government fees and realized exchange rate losses.
Net income (loss). The Company experienced
a net loss of $7,605,542 for the year ended December 31, 2022, compared to a net loss of $4,950,290 for the year ended December 31, 2021.
In general, the year 2022 included higher compensation expenses and interest charges specific to the April 2022 IPO. During the year 2021
the Company had an approximate $1.9 million fair value adjustment (expense) related to the issuance of preferred stock.
Critical accounting
policies and use of estimates
Our Management’s
Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared
in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related
disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses
and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known
trends and events and various other factors that we believe are reasonable 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. We evaluate
our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
While our significant
accounting policies are described in more detail in the notes to our financial statements, we believe that the following accounting policies
are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
The Company derives its revenues from one source,
the delivery of Nociscan reports to medical professionals. Revenues are recognized when a contract with a customer exists, and the control
of the promised services are transferred to our customers. The amount of revenue recognized reflects the consideration we expect to receive
in exchange for those services. Substantially all our revenues are generated from contracts with customers in the United States.
Equity-based compensation
The Company accounts for stock-based awards in
accordance with provisions of ASC Topic 718, Compensation—Stock Compensation, under which the Company recognizes the grant-date
fair value of stock-based awards issued to employees and nonemployee board members as compensation expense on a straight-line basis over
the vesting period of the award, while awards containing a performance condition are recognized as expense when the achievement of the
performance criteria is considered probable. The Company uses the Black-Scholes option pricing model to determine the grant-date fair
value of stock options. The Company adjusts expense for actual forfeitures in the periods they occur.
Until our April 2022 IPO, we were a private company
with no active public market for our common equity. Therefore, we had periodically determined the overall value of our company and the
estimated per share fair value of our common equity at their various dates using contemporaneous valuations performed in accordance with
the guidance outlined in the American Institute of CPA’s Practice Aid. Since a public trading market for our common stock has been
established in connection with the completion of our IPO, the fair value of the Company’s common stock underlying its equity awards
is the quoted market price of the Company’s common stock on the grant date.
Going Concern
The Company believes that cash on hand of approximately
$1.5 million, as of December 31, 2022, will be sufficient to fund current operating plans into the second quarter of 2023. The Company
has based these estimates, however, on assumptions that may prove to be wrong, and could spend available financial resources much faster
than we currently expect. The Company will need to raise additional funds to continue funding our technology development and commercialization
efforts over the following twelve months. Management has plans to secure such additional funding.
As a result of the Company’s recurring losses
from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding
the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to
the Company’s ability to continue as a going concern.
Liquidity and capital
resources
Sources of liquidity
To date, we have financed
our operations primarily through private placements of preferred shares and debt financing, PPP loans that were forgiven, and an initial
public offering on April 21, 2022.
Through the year ended
December 31, 2022, we raised an aggregate of $33,145,148 of gross proceeds from $19,319,098 of preferred and common stock, $2,928,541
from the sale of convertible notes, $2,000,000 from secured promissory notes payable, $370,191 of PPP loans that were forgiven, and net
proceeds of $8,527,318 from the IPO, after underwriter compensation and deductions. As of December 31, 2022, we had cash, including $10,000
of restricted cash, of $1,482,806.
Cash flows
The following table summarizes
our sources and uses of cash for each of the periods presented:
Year Ended December 31,
Net increase (decrease) in cash and cash equivalents $ 1,030,276 $ 437,546
Operating activities
During the year ended December 31, 2022, net cash
used in operating activities was $5,314,171. This use of cash consisted primarily of compensation and benefit expense, bonuses in connection
with the completion of the IPO, a milestone payment to UCSF, directors’ and officers’ liability insurance, and pre-IPO marketing
activities. During the twelve months ended December 31, 2021, operating activities used $2,399,949, consisting primarily of compensation
and benefit expense, consulting, and professional fees.
Investing activities
During the year ended December 31, 2022, and 2021,
investing activities used $207,870 and $102,005 of cash, respectively. These investing activities consisted almost entirely of patent
and license maintenance.
Financing activities
During the year ended
December 31, 2022, net cash provided by financing activities was $6,552,318, which included the net of $8,552,318 (net of underwriter
compensation and deductions but excluding $25,000 pre-payment in 2021) of initial public offering proceeds and $2,000,000 repayment of
promissory notes. During the year ended December 31, 2021, net cash provided by financing activities was $2,939,500, which included $2,000,000
from issuance of promissory notes, $814,500 from our sale of convertible notes and the issuance of a $125,000 PPP loan to the Company.
Funding requirements
Developing medical technology
products is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate meaningful revenues.
Accordingly, we may need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds
may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity securities,
current stockholders’ ownership interests may be diluted. Any debt or preferred equity financing, if available, may involve agreements
that include restrictive covenants that may limit our ability to take specific actions, such as incurring additional debt, making capital
expenditures, or declaring dividends, which could adversely impact our ability to conduct our business, and may require the issuance of
warrants, which could potentially dilute existing stockholders’ ownership interests.
If we raise additional
funds through licensing agreements and strategic collaborations with third parties, we may have to relinquish valuable rights to our technology,
future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds, we may be required to delay, limit, reduce and/or terminate development of our product candidates or
any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop
and market ourselves.
Contractual obligations and commitments
Our current office lease and sublease expired
on June 30, 2022. The Company does not have any contractual obligations not otherwise on our balance sheet as of December 31, 2022.
Off-balance sheet
arrangements
We did not have, during
the periods presented, and we do not currently have any off-balance sheet arrangements as defined in the rules and regulations of the
Securities and Exchange Commission (“SEC”).
Recently issued accounting
pronouncements
We have reviewed all
recently issued standards and have determined that, other than as disclosed in Note 2 to our financial statements appearing at the end
of this annual report, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.
Emerging growth company
status
The JOBS Act permits an emerging growth company
such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public
companies until those standards would otherwise apply to private companies. We have irrevocably elected to apply of this extended transition
period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards
is required for public entities. Accordingly, our financial statements may not be comparable to other public companies that do not elect
the extended transition period.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate sensitivity
We had cash and cash equivalents totaling $1,482,806
as of December 31, 2022. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly
liquid debt instruments purchased with a maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents.
The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing
client funds, generating interest income while maintaining the safety of principal. We do not enter into investments for trading or speculative
purposes.
Our cash equivalents are subject to market risk
due to changes in interest rates. The market value of fixed rate securities may be adversely affected due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced
to sell securities that decline in market value due to changes in interest rates.
Item 8. Financial Statements and Supplementary
Data
Aclarion, Inc. Page
Financial Statements
Report of Independent Registered Public Accounting Firm 89
Statements of Operations, for the Years Ended December 31, 2022, and 2021 92
Statements of Cash Flows, for the Years Ended December 31, 2022, and 2021 95
Notes to Financial Statements 96
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Aclarion, Inc.
Broomfield, Colorado
Opinion on the Financial Statements
We have audited the accompanying balance sheets
of Aclarion, Inc. (the “Company”) at December 31, 2022 and 2021, and the related statements of operations, changes in stockholders’
equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively
referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and has a deficiency in shareholders’ equity that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Intangible Assets Impairment Assessments
As described in Notes 8 to the financial statements,
the Company has intangible assets, mainly comprised of patents and license costs of approximately $1.2 million at December 31, 2022. No
directly observable market inputs are available to measure the fair value to determine if the asset is recoverable. Therefore, an estimate
is derived indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. The estimates that
management used in calculating the net present values depend on assumptions specific to the nature of the markets in which its product
operates with regard to the amount and timing of projected future cash flows; long-term demand forecasts; actions of competitors, future
tax and discount rates.
The principal considerations for our determination
that performing procedures relating to the intangible assets impairment assessment is a critical audit matter are the significant judgment
by management when developing the net present value of the intangible assets. This in turn led to a high degree of auditor judgment, subjectivity,
and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of projected
future cash flows and the discount rate.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing
management’s process for developing the fair value estimate; evaluating the appropriateness of the net present value techniques;
testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions used by management,
including the amount and timing of projected future cash flows and the discount rate. Evaluating management’s assumptions related
to the amount and timing of projected future cash flows and the discount rate involved evaluating whether the assumptions used by management
were reasonable considering the current and past performance of the intangible assets, the consistency with external market and industry
data, and whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ Daszkal Bolton LLP
Daszkal Bolton LLP
We have served as the Company’s auditor since 2021
Fort Lauderdale, Florida
February 27, 2023
229
Aclarion, Inc.
Balance
Sheets
December 31, 2022 and
2021
December 31,
ASSETS
Current assets:
Deferred Compensation 291,331 –
Non-current assets:
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Preferred dividends payable – 3,856,898
Liability to issue equity 345,243 –
Commitments and contingencies (See Note 9)
Redeemable preferred stock: (See Note 8)
Additional paid-in capital - series B2 and B3 preferred Stock – 7,102,229
Stockholders' equity (deficit)
See Accompanying Notes to
Financial Statements
Aclarion, Inc.
Statements
of Operations
For the Years Ended December
31, 2022, and 2021
Year Ended December 31,
Revenue
Operating expenses:
Other income (expense):
Changes in fair value of redeemable preferred stock – (1,900,310 )
Income tax provision – –
Dividends accrued for preferred stockholders $ (415,523 ) $ (1,005,598 )
Net income (loss) allocable to common stockholders $ (8,021,064 ) $ (5,955,888 )
Net income (loss) per share allocable to common stockholders $ (1.31 ) $ (6.58 )
See Accompanying Notes to
Financial Statements
Aclarion, Inc.
Statements
of Changes in Stockholders' Equity (Deficit)
For the Years Ended December
31, 2022, and 2021
Series A-1 Series A-2 Series A-3 Series A-4 Series B
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Shares Value Shares Value Shares Value Shares Value Shares Value
Issuance of warrants – – – – – – – – – –
Preferred stock dividend payable – – – – – – – – – –
Issuance of preferred shares * – – – – – – – – – –
Share-based compensation – – – – – – – – – –
Net income (loss) – – – – – – – – – –
Issuance of warrants – – – – – – – – – –
Exercise of convertible note warrants – – – – – – – – – –
Preferred stock dividend payable – – – – – – – – – –
Conversion of accrued interest on promissory notes – – – – – – – – – –
IPO issuance costs – – – – – – – – – –
Issuance of preferred shares – – – – – – – – – –
Issuance of common shares – – – – – – – – – –
Share-based compensation – – – – – – – – – –
Net income (loss) – – – – – – – – – –
Balance, December 31, 2022 – $ – – $ – – $ – – $ – – $ –
___________________
* Series B2 and B3 Preferred Stock amounts reflected in mezzanine equity
Series B1 Series B2 Series B3 Additional
Preferred Stock Preferred Stock Preferred Stock Common Stock Paid-In Accumulated
Shares Value Shares Value Shares Value Shares Value Capital Deficit Total
Issuance of warrants – – – – – – – – 30,393 – 30,393
Preferred stock dividend payable – – – – – – – – – (1,005,597 ) (1,005,597 )
Issuance of warrants – – – – – – – – 1,280 – 1,280
Issuance of preferred shares – – – – – – – – – – –
* Series B2 and B3 Preferred Stock amounts reflected in mezzanine equity
See Accompanying Notes to
Financial Statements
Aclarion, Inc.
Statements
of Cash Flows
For the Years Ended December
31, 2022, and 2021
Year Ended December 31,
Cash flows from operating activities
Share-based vendor payments 102,000 –
Warrants issued as non- cash finance charge – 30,393
Gain on forgiveness of PPP loans – (373,511 )
Loss on disposal of furniture and equipment 3,789 –
Changes in fair value of redeemable preferred stock – 1,900,310
Change in assets and liabilities
Accrued interest on promissory and convertible notes 200,712 114,404
Investing Activities
Proceeds from sale of furniture 1,000 –
Net cash (used in) investing activities (207,870 ) (102,005 )
Financing Activities
Proceeds from issuance of PPP Loan – 125,000
Proceeds from issuance of convertible notes – 814,500
Proceeds from issuance of promissory notes – 2,000,000
Repayment of promissory notes (2,000,000 ) –
Net increase (decrease) in cash and cash equivalents $ 1,030,276 $ 437,546
Cash, cash equivalents, and restricted cash, beginning of period 452,530 14,984
Cash, cash equivalents, and restricted cash, end of period $ 1,482,806 $ 452,530
Non- cash activities
Conversion of indebtedness to preferred equity commitment – 5,201,977
Conversion of preferred stock to common stock 25,754,379 –
Conversion of preferred stock dividends to common stock 4,272,420 –
Issuance of underwriter's warrants related to IPO 74,677 –
Changes in fair value of redeemable preferred stock – 1,900,310
Liability to issue common shares 345,243 –
See Accompanying Notes to
Financial Statements
Aclarion, Inc.
Notes to Financial Statements
For the Year Ended December 31, 2022
NOTE
1. THE COMPANY AND BASIS OF PRESENTATION
The Company
Aclarion, Inc., formerly Nocimed, Inc., (the “Company”
or “Aclarion”) is a healthcare technology company that leverages magnetic resonance spectroscopy (“MRS”), and
a proprietary biomarker to optimize clinical treatments. The Company was formed in February 2015, is incorporated in Delaware, and has
its principal place of business in Broomfield, Colorado.
Risks and Uncertainties
The Company is subject to various risks and uncertainties
frequently encountered by companies in the early stages of development. Such risks and uncertainties include, but are not limited to,
its limited operating history, competition from other companies, limited access to additional funds, dependence on key personnel, and
management of potential rapid growth. To address these risks, the Company must, among other things, develop its customer base; implement
and successfully execute its business and marketing strategy; develop follow-on products; provide superior customer service;
and attract, retain, and motivate qualified personnel. There can be no guarantee that the Company will be successful in addressing these
or other such risks.
The Company is also subject to risks and uncertainties
as a result of the coronavirus disease (“COVID-19”) pandemic. The pandemic continues to evolve and its impact on the Company’s
business will depend on several factors that are highly uncertain and unpredictable, including, the efficacy and adoption of vaccines,
future resurgences of the virus and its variants, the imposition of governmental lockdowns, quarantine and physical distancing requirements,
patient capacity at hospitals and healthcare systems, the duration and severity of healthcare worker shortages, and the willingness and
ability of patients to seek care and treatment due to safety concerns or financial hardship. As such, given the dynamic nature of this
situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows
in the future. We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue
to sustain and grow our business.
Initial Public Offering
On April 21, 2022, the registration statement
for our initial public offering (“IPO”) was declared effective. In connection with the effectiveness of the IPO registration
statement:
· we effected a 1-for-7.47 reverse stock split of our outstanding common stock;
On April 26, 2022, the Company completed its IPO
of 2,165,000
units, at a public offering price of $4.35 per unit. Each unit consisted of (i) one share of common stock and (ii) one common stock warrant
with an exercise price of $4.35 per share. Following the commencement of the IPO, the underwriters partially exercised their over-allotment
option and purchased an additional 324,750
common stock warrants. After deducting underwriter's commissions and expenses, we received net proceeds of approximately $8.6
million and our common stock and warrants started trading on Nasdaq under the ticker symbols “ACON” and “ACONW”,
respectively.
In connection with the IPO, we issued to the representative
of the underwriters a common stock warrant for 173,200
shares with an exercise price of $5.44 per share. The representative's warrants are exercisable commencing October 26, 2022 and will expire
on April
26, 2027.
On April 21, 2022, 1,204,819
outstanding common stock options previously awarded to the Company's Executive Chairman, Dr. Jeffrey Thramann, vested in connection with
the completion of the IPO pursuant to the terms of such options. The exercise price of these options is $1.94 per share. The options have
a 10-year term.
On April 21, 2022, in connection
with the IPO, the Company’s 2022 Aclarion Equity Incentive Plan, or “2022 Plan”, became effective. Our board of directors
has appointed the compensation committee of our board of directors as the committee under the 2022 Plan with the authority to administer
the 2022 Plan. The aggregate number of our shares of common stock that may be issued or used for reference purposes under the 2022 Plan
may not exceed 2,000,000
shares, subject to adjustments as described in the 2022 Plan.
On April 29, 2022, in connection with the IPO,
a bonus was paid to David Neal and Brent Ness of $100,000
each. On May 13, 2022, in connection with the IPO, a bonus of $130,000
was paid to James Peacock.
On May 2, 2022, in connection with the IPO, the
Company paid the University of California - San Francisco the amount of $123,828
to satisfy the Indexed Milestone Payment obligation included within the exclusive license agreement.
Reverse Stock Split
On April 21, 2022, the Company effected a 1-for-7.47
reverse stock split (the “Stock Split”) of its issued and outstanding common stock. As a result of the Stock Split,
unless described otherwise, all references to common stock, options to purchase common stock, share data, per share data and related information
contained in these financial statements have been retrospectively adjusted to reflect the effect of the Stock Split for all periods presented.
In addition, any fractional shares that would otherwise be issued as a result of the Stock Split were rounded up to the nearest whole
share. Further, the number of shares issuable and exercise prices of stock options and warrants have been retrospectively adjusted in
these financial statements for all periods presented to reflect the Stock Split.
Basis of Presentation
The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The financial statements include some amounts
that are based on management's best estimates and judgments. The most significant estimates relate to depreciation, amortization, valuation
of capital stock, and valuation of warrants and options to purchase shares of the Company's preferred and common stock. These estimates
may be adjusted as more current information becomes available, and any adjustment could be significant.
Reclassifications
Certain accounts relating to the prior year have
been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the net income or net
assets as previously reported.
Valuation
of Derivative Instruments
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging: Contracts on an Entity’s Own Equity,
addresses whether an equity-linked contract qualifies as equity in the entity’s financial statements. Agreements where an entity
has insufficient authorized and unissued shares to settle the contract generally are accounted for as a liability and marked to fair value
through earnings each reporting period. The Company evaluates its financial instruments, to determine if such instruments are liabilities
or contain features that qualify as embedded derivatives. For financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported
as charges or credits to income.
Fair
Value Measurements
The carrying values of the Company’s financial
instruments including cash equivalents, restricted cash, accounts receivable and accounts payable, and notes payable are approximately
equal to their respective fair values due to the relatively short-term nature of these instruments.
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated
with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed
based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists
of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3).
Cash
and Cash Equivalents
The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company had no
cash equivalents for all periods presented. The Company maintains cash deposits at several financial institutions, which are insured by
the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. On December
31, 2022, and 2021, the Company had approximately $1,229,000
and $201,000, respectively, in
excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of, the financial institutions
with which it invests. The Company maintains no international bank accounts. As of December 31, 2022, $10,000
of the Company’s cash was restricted as collateral related to the credit card program offered by our bank.
Accounts
Receivable, Less Allowance for Doubtful Accounts
The Company estimates an allowance for doubtful
accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably
possible that the Company’s estimate of the allowance for doubtful accounts will change. The allowance for doubtful accounts was
$0
on December 31, 2022, and 2021.
Revenue
Recognition
Revenues are recognized when a contract with a
customer exists, and at that point in time when we have delivered a Nociscan report to our customer. Revenue is recognized in the amount
that reflects the negotiated consideration expected to be received in exchange for those reports. Following the delivery of the report,
the company has no ongoing obligations or services to provide to the customer. Customers pay no other upfront, licensing, or other fees.
To date, our reports are not reimbursable under any third-party payment arrangements, The Company invoices its customers based on the
billing schedules in its sales arrangements. Payment terms range generally from 30 to 90 days, from the date of invoice.
Geographic
Locations & Segments
Approximately 9%
and 11%
of the Company’s revenues were generated from contracts with customers outside the United States in the years ended December 31,
2022, and 2021, respectively. All invoices are billed in the currency of the customers and are recorded in US Dollars at the then spot
rate, which automatically is converted to dollars upon receipt and deposited in the Company’s bank. Differences between the amounts
received and the amounts initially recorded are reflected in Other Income (Expense).
Segment
Disclosure
The Company
has a single operating and reporting segment, which is the delivery of Nociscan reports to our customers. The Company’s
Chief Executive Officer reviews financial information for purposes of making operating decisions and assessing financial performance.
Property
and Equipment
Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives of the related assets. Furniture and fixtures are depreciated
over seven years. Computer and office equipment and computer software are depreciated over five years. Repairs and maintenance costs,
which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred.
Impairment
of Long-Lived Assets
The Company
reviews long-lived assets, including intangible assets, property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable using pre-tax undiscounted cash flows. Impairment,
if any, is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value.
Sales
and Marketing Expenses
The Company expenses the costs of sales and marketing
its products and services as incurred. The primary drivers of cost have been employee payroll, website and branding development, press
releases, attendance at various industry conferences, Key Opinion Leader consulting fees, and travel expenses.
Research
and Development Costs
Costs related
to research, design and development of products are charged to research and development expense as incurred. These costs include direct
compensation, benefits, and other headcount related costs for research and development personnel; costs for materials used in research
and development activities; costs for outside services and allocated portions of facilities and other corporate costs. The Company has
entered into research and clinical study arrangements with selected hospitals, cancer treatment centers, academic institutions and research
institutions worldwide. These agreements support the Company’s internal research and development capabilities.
Liquidity,
Capital Resources and Going Concern
The Company believes that the net proceeds from
the April 2022 initial public offering will be sufficient to fund current operating plans into the second quarter of 2023. The Company
has based these estimates, however, on assumptions that may prove to be wrong, and could spend available financial resources much faster
than we currently expect. The Company will need to raise additional funds to continue funding our technology development. Management plans to secure such additional funding.
As a result of the Company’s recurring losses
from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding
the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to
the Company’s ability to continue as a going concern.
Share-Based
Compensation
The Company accounts for stock-based awards in
accordance with provisions of ASC Topic 718, Compensation—Stock Compensation, under which the Company recognizes the grant-date
fair value of stock-based awards issued to employees and nonemployee board members as compensation expense on a straight-line basis over