@hyp36rmax - is your game pad / stick plugged into P1 USB before powering on? If you haven’t already, can you try with a standard Xbox 360 controller?
Also if you are powering the device from the Naomi CN connector using a USB adapter make sure you’re getting a steady 5v or try an alternate power source.
Searching Twitter for MP07 IONA and Naomi shows many users using it with no issues under many different circumstances on both N1 and N2.
I’m leaning toward it being a power issue or controller incompatibility.
Have pinged Toyoshim to check this thread, but please do the same on Twitter if any of you are active.