Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on March 18, 2026. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part II, Item 1A, "Risk Factors" and elsewhere in this Quarterly Report. You should carefully read the "Risk Factors" section of this Quarterly Report and of our Annual Report on Form 10-K for the year ended December 31, 2025, which was as filed with the SEC on March 18, 2026, to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements."

Overview

Corporate Information

The Company currently operates as a Delaware corporation, under the name Aclarion, Inc.

Results of operations

For the Three Months Ended March 31, 2026, and 2025:

The following table summarizes our results of operations for the three months ended March 31, 2026, and 2025.

		Three Months Ended March 31,
		2026				2025				$ Change
Revenue:
Revenue		$	21,140			$	18,991			$	2,149
Cost of revenue			17,390				23,479				(6,089	)
Gross profit (loss)			3,750				(4,488	)			8,238
Operating expenses:
Sales and marketing			908,797				302,584				606,213
Research and development			315,417				198,190				117,227
General and administrative			1,766,477				986,663				779,814
Total operating expenses			2,990,691				1,487,437				1,503,254
Loss from operations			(2,986,941	)			(1,491,925	)			(1,495,016	)
Other income (expense):
Gain on extinguishment of debt			-				73,272				(73,272	)
Changes in fair value of warrant and derivative liabilities			18				11,721				(11,703	)
Penalties and settlements			-				(672,500	)			672,500
Interest income			133,035				42,163				90,872
Other, net			313				(167	)			480
Total other expense			133,366				(545,511	)			678,877
Loss before income taxes			(2,853,575	)			(2,037,436	)			(816,139	)
Income tax provision			-				-				-
Net loss		$	(2,853,575	)		$	(2,037,436	)		$	(816,139	)

Total Revenues.

Total revenues for the three months ended March 31, 2026 were $21,140, which was an increase of $2,149 or 11.3%, from $18,991 for the three months ended March 31, 2025. This increase in revenue was driven primarily by the growing volume of NOCISCAN® reports sold into the UK market following recent local coverage decisions. We expect this increase in revenue to continue as we bring on more insurance payors, and our scan volumes increase.

Cost of Revenue.

Direct cost of revenue is comprised of hosting and software costs, field support, UCSF royalty cost, partner fees (Radnet), and credit card fees. Total cost of revenue was $17,390 for the three months ended March 31, 2026, compared to $23,479 for the same period ended March 31, 2025, a decrease of $6,089 or 25.9%. The gross margin increased to 17.7% in 2026 as compared to (23.6%) in 2025. This increase was primarily due to a reduced allocation of hosting fees to cost of revenue and a change in revenue mix that reduced partner fees.

Sales and Marketing.

Sales and marketing expenses primarily consist of post-clearance clinical services related to the CLARITY Trial, product marketing consulting, travel and entertainment costs, and salaries and benefits. Sales and marketing expenses totaled $908,797 for the three months ended March 31, 2026, compared to $302,584 for the three months ended March 31, 2025, representing an increase of $606,213 or 200.3%.

The increase in sales and marketing expenses was primarily driven by higher post-clearance clinical services, which was $191,021 for the three months ended March 31, 2026, compared to $150,532 for the same period in 2025, an increase of $40,489, reflecting costs associated with the initiation of the CLARITY Trial, for which the first patient enrolled in June 2025. With continued enrollment in the CLARITY Trial in 2026, we expect these expenses will continue to increase for the remainder of 2026.

Product marketing consulting expenses increased by $239,401 to $250,374 for the three months ended March 31, 2026, compared to $10,973 for the same period in 2025, reflecting expanded use of external marketing consultants.

Salaries and benefits increased by $228,171 to $303,844 for the three months ended March 31, 2026, compared to $75,673 for the same period in 2025, primarily due to accruals for incentive-based performance payouts and hiring of additional sales and marketing personnel in the United States and the United Kingdom. We expect salaries and benefits to continue to increase as a result of planned hiring within our sales and marketing functions during 2026.

Travel and entertainment expenses increased by $23,982 to $65,595 for the three months ended March 31, 2026, compared to $41,613 for the same period in 2025, primarily due to activities supporting local coverage determinations in the United Kingdom and increased travel by salespeople.

Research and Development.

Research and development expenses increased by $117,227, or 59.1%, to $315,417 for the three months ended March 31, 2026, compared to $198,190 for the three months ended March 31, 2025.

The increase was primarily driven by higher patent maintenance fees, which totaled $40,879 for the three months ended March 31, 2026, compared to $314 for the same period in 2025, an increase of $40,565. This rise reflects the Company's ongoing efforts to strengthen and expand protection of its intellectual property portfolio.

Bonus expense increased by $24,050 for the three months ended March 31, 2026, from $0 in the corresponding prior-year period, due to accruals for incentive-based compensation.

In addition, quality system and regulatory consulting expenses increased by $16,109 to $60,681 for the three months ended March 31, 2026, compared to $44,572 for the same period in 2025, primarily as a result of expanded regulatory compliance and documentation activities. We expect research and development expenses to continue to increase as we continue the development of the Nociscan 3.0 product.

General and Administrative.

General and administrative expenses were $1,766,477 for the three months ended March 31, 2026, compared to $986,663 for the three months ended March 31, 2025, representing an increase of $779,814 or 79.0%.

The increase was primarily driven by investor relations expenses of $360,550 for the three months ended March 31, 2026, compared to $37,358 in the corresponding prior-year period, representing an increase of $323,192, primarily reflecting expanded investor outreach activities and increased use of third-party investor relations service providers.

The Company recorded accruals under its 2026 incentive bonus program totaling $111,875 for the three months ended March 31, 2026, compared to the absence of any bonus accruals in the corresponding prior-year period.

For the three months ended March 31, 2026, legal expenses were $215,492 compared to $88,805 in the same period in 2025, an increase of $126,687 primarily due to increased legal and advisory fees associated with corporate governance and shareholder-related matters.

In addition, insurance expenses, primarily related to directors and officers ("D&O") coverage, increased to $99,375 for the three months ended March 31, 2026, from $72,434 for the same period in 2025, an increase of $26,941, reflecting expanded policy coverage and higher renewal premiums.

Delaware franchise tax expense increased to $237,000 for the three months ended March 31, 2026, from $8,947 in the prior-year period, an increase of $228,053, primarily due to changes in the Company's capital structure and the methodology used to calculate the Company's Delaware franchise tax obligation.

These increases were partially offset by a decrease of $51,203 in stock-based compensation expense, which totaled $4,694 for the three months ended March 31, 2026, compared to $55,897 for the same period in 2025, primarily attributable to stock options that vested in the prior year.

Gain On Extinguishment Of Debt.

Gain on extinguishment of debt was $0 for the three months ended March 31, 2026, compared to $73,272 in the corresponding prior-year period, reflecting the absence of debt extinguishment activity in the current period. The prior-year gain primarily related to the retirement of an obligation associated with commitment shares.

Changes in Fair Value of Warrant Liabilities.

The Company's warrant liabilities are measured at fair value at each reporting date. For the three months ended March 31, 2026, the Company recorded a favorable fair value adjustment of $18, compared to $11,721 in the corresponding prior-year period, representing a decrease of $11,703, primarily due to the settlement of warrants in the prior period, resulting in fewer outstanding warrant liabilities subject to remeasurement in the current period.

Penalties and Settlements.

Penalties and settlements expense were $0 for the three months ended March 31, 2026, compared to $672,500 in the corresponding prior-year period, reflecting the absence of settlement-related charges in the current period. The prior-year expense primarily related to a payment to settle a dispute under the "fee tail" provision of a previously executed investment banking agreement, partially offset by a favorable accounts payable settlement.

Interest Income.

Interest income was $133,035 for the three months ended March 31, 2026, compared to $42,163 in the corresponding prior-year period, representing an increase of $90,872, primarily reflecting higher average cash balances following the Company's fundraising activities and related interest earned on money market deposits.

Critical Accounting Policies and Use of Estimates

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed 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 condensed 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 condensed financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our condensed 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 the Company expects to receive in exchange for those services. Substantially all of our revenues are generated from contracts with customers in the United Kingdom and 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 achieved. The Company uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options. The Company records expense for forfeitures in the periods they occur.

Liquidity and capital resources

Sources of liquidity

To date, we have financed our operations primarily through private placements and public offerings of our equity and debt securities.

As of March 31, 2026, we had cash and cash equivalents of $19,029,976, including $25,000 of restricted cash.

During the three months ended March 31, 2026, the Company completed a registered direct public offering of (i) 200,000 shares of the Company's common stock, and (ii) pre-funded warrants (the "Pre-funded Warrants") to purchase up to 1,800,000 shares of common stock, at an offering price of $5.18 per share. The purchase price of each Pre-funded Warrant was $5.17999, which represents the offering price per share of common stock, minus the exercise price of $.00001 per share. The Pre-funded Warrants are immediately exercisable. The aggregate gross proceeds to the Company from this offering were approximately $10.4 million, before deducting placement agent fees of 6% of the aggregate gross proceeds and other offering expenses payable by the Company.

The Company believes its current cash resources are sufficient to fund its operating expenses and capital expenditure requirements for at least twelve months from the issuance date of these condensed financial statements and into the second half of 2027. Management continues to actively monitor and manage the Company's cash position.

Cash flows

The following table summarizes our sources and uses of cash for each of the periods presented:

		Three Months Ended March 31,
		2026				2025
Net cash used in operating activities		$	(2,641,845	)		$	(2,510,782	)
Net cash used in investing activities			(49,345	)			(78,288	)
Net cash provided by financing activities			9,680,377				16,885,681
Net increase in cash and cash equivalents		$	6,989,187			$	14,296,611

Operating activities

During the three months ended March 31, 2026, the Company used $2,641,845 in cash for operating activities, compared to $2,510,782 for the same period in 2025, representing an increase in cash used of $131,063. The increase was primarily driven by a higher net loss after adjusting for non-cash items, partially offset by favorable changes in working capital.

Net loss after non-cash adjustments was $2,787,990 for the three months ended March 31, 2026, compared to $1,831,734 for the same period in 2025, an increase of $956,256. This increase was primarily attributable to a higher net loss of $816,139 and lower non-cash adjustments in the current period. The prior-year period included higher non-cash charges, including share-based compensation of $55,897, non-cash settlements of $58,272, and warrant amendment costs of $48,087, which did not recur in the current period. In addition, the change in fair value of warrants and derivative liabilities resulted in a smaller non-cash gain in 2026 compared to 2025. These factors were partially offset by a modest increase in depreciation and amortization.

Changes in working capital partially offset the increase in cash used in operating activities. Prepaid expenses and other current assets decreased, resulting in a source of cash of $20,243 for the three months ended March 31, 2026, compared to the use of cash of $40,841 for the same period in 2025. Accounts receivable increased, resulting in a use of cash of $10,903 for the three months ended March 31, 2026, compared to $849 for the same period in 2025. These changes were partially offset by an increase in accounts payable, which provided $242,195 of cash for the three months ended March 31, 2026, compared to a use of $15,334 for the same period in 2025. In addition, accrued and other liabilities decreased by $105,390 for the three months ended March 31, 2026, compared to a decrease of $622,024 for the same period in 2025.

The Company expects that cash used in operating activities may increase in future periods as it continues to develop its business. Potential increases in cash usage may be driven by higher legal and professional fees, increased investor outreach programs, and expanded sales and marketing activities. In addition, as the Company advances its commercialization efforts, operating expenses may increase to support these activities, which could result in higher cash utilization.

Investing activities

Net cash used in investing activities decreased to $49,345 for the three months ended March 31, 2026, compared to $78,288 for the same period in 2025, representing a decrease in cash used of $28,943. Cash used in investing activities in both periods related to capitalized patent costs. The decrease was primarily due to lower expenditures related to patent and license filings in the current period compared to the prior-year period.

Financing activities

Net cash provided by financing activities decreased to $9,680,377 for the three months ended March 31, 2026, compared to $16,885,681 for the three months ended March 31, 2025, representing a decrease of $7,205,304.

Cash provided by financing activities for the three months ended March 31, 2026, was primarily attributable to $10,359,982 in aggregate proceeds from a registered direct public offering of common stock and prefunded warrants, partially offset by $679,605 in offering-related issuance costs.

In comparison, cash provided by financing activities for the three months ended March 31, 2025, was primarily driven by $19,722,472 in aggregate proceeds from public and registered direct offerings of common stock and warrants, partially offset by $1,959,642 in issuance costs and $1,213,590 related to the redemption of Series B Preferred Stock. In addition, the prior-year period included $336,441 in proceeds from the exercise of Series C warrants.

The decrease in financing cash flows was primarily attributable to lower aggregate proceeds from public and registered direct offerings for the three months ended March 31, 2026, compared to the same period in 2025.

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

The Company does not have any contractual obligations, not otherwise on our balance sheet as of March 31, 2026.

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 4 to our condensed financial statements appearing at the end of this annual report, such standards will not have a material impact on our condensed financial statements or do not otherwise apply to our operations.

Emerging growth company and smaller reporting 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 not to "opt out" 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 condensed financial statements may not be comparable to other public companies that do not elect the extended transition period.

We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior December 31st, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

We are also a "smaller reporting company" meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.