UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20222023
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: 001-41507
NEXALIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 27-5566468 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1776 Yorktown, Suite 550 Houston, TX 77056 | 77056 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (832) 260-0222
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The Capital Market | ||||
The Capital Market |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 9, 2022,10, 2023, there were shares of the registrant’sRegistrant’s common stock outstanding.
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
FORM 10-Q
TABLE OF CONTENTSFor the Quarter Ended September 30, 2023
i
PART I—FINANCIAL INFORMATION
ITEMItem 1. Financial Statements
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 7,864,079 | $ | 661,778 | $ | 361,397 | $ | 162,743 | ||||||||
Accounts receivable (Includes related party of $6,912 and $-, respectively) | 10,352 | 16,303 | ||||||||||||||
Short-term investments | 3,575,805 | 6,831,192 | ||||||||||||||
Accounts receivable (Includes related party of $10,207 and $0, respectively) | 14,483 | 4,875 | ||||||||||||||
Inventory | 152,071 | 31,410 | 158,619 | 154,370 | ||||||||||||
Prepaid expenses | 318,113 | 43,168 | ||||||||||||||
Prepaid expenses and other current assets | 153,045 | 272,282 | ||||||||||||||
Total Current Assets | 8,344,615 | 752,659 | 4,263,349 | 7,425,462 | ||||||||||||
ROU Asset | 7,512 | - | 1,963 | 6,171 | ||||||||||||
Equipment, net of accumulated depreciation of $30,265 and $29,862, respectively | 636 | 1,039 | ||||||||||||||
Equipment, net of accumulated depreciation of $2,583 and $2,181, respectively | 100 | 503 | ||||||||||||||
Patent, net of amortization | 72,355 | - | ||||||||||||||
Equity Method Investment | 96,000 | - | ||||||||||||||
Total Assets | $ | 8,352,763 | $ | 753,698 | $ | 4,433,767 | $ | 7,432,136 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable (Includes related party of $250,000 and $399,320, respectively) | $ | 788,293 | $ | 843,794 | ||||||||||||
Accounts payable (Includes related party of $0 and $260,000, respectively) | $ | 72,549 | $ | 658,367 | ||||||||||||
Accrued expenses | 442,501 | 611,795 | 606,891 | 539,822 | ||||||||||||
Lease liability | 49,562 | 40,845 | ||||||||||||||
Loan payable - shareholder | - | 37,200 | ||||||||||||||
Lease liability, current portion | 17,635 | 50,797 | ||||||||||||||
Loan payable - officer | 200,000 | 200,000 | - | 200,000 | ||||||||||||
Note payable | 500,000 | 500,000 | 500,000 | 500,000 | ||||||||||||
Deferred revenue | - | 130,000 | ||||||||||||||
Total Current Liabilities | 1,980,356 | 2,363,634 | 1,197,075 | 1,948,986 | ||||||||||||
Long-term Liabilities: | ||||||||||||||||
Lease liability - net of current portion | 17,634 | 49,089 | ||||||||||||||
PPP Loan payable | - | 22,916 | ||||||||||||||
Lease liability, net of current portion | - | 4,463 | ||||||||||||||
Total Liabilities | 1,997,990 | 2,435,639 | 1,197,075 | 1,953,449 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
Commitments and Contingencies (Note 8) | ||||||||||||||||
Stockholders’ Equity (Deficit): | ||||||||||||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively7,280 | 4,880 | ||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 7,437 | 7,287 | ||||||||||||||
Accumulated other comprehensive income | 800 | 36,313 | ||||||||||||||
Additional paid in capital | 78,007,156 | 69,004,703 | 79,485,835 | 77,824,427 | ||||||||||||
Accumulated deficit | (71,659,663 | ) | (70,691,524 | ) | (76,257,380 | ) | (72,389,340 | ) | ||||||||
Total Stockholders’ Equity (Deficit) | 6,354,773 | (1,681,941 | ) | |||||||||||||
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 8,352,763 | $ | 753,698 | ||||||||||||
Total Stockholders’ Equity | 3,236,692 | 5,478,687 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 4,433,767 | $ | 7,432,136 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
1
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenues, net (Includes related party of $520,000 and $26,132 for the three months ended and $1,183,367 and $26,132 for the nine months ended respectively) | $ | 545,323 | $ | 55,970 | $ | 1,282,933 | $ | 120,066 | ||||||||||||||||||||||||
Cost of revenue | 187,298 | 9,306 | 356,345 | 22,448 | ||||||||||||||||||||||||||||
Revenues, net (Includes related party of $0 and $520,000 for the three months ended and $10,207 and $1,183,367 for the nine months ended respectively) | $ | 24,113 | $ | 545,323 | $ | 90,212 | $ | 1,282,933 | ||||||||||||||||||||||||
Cost of revenues | 3,973 | 187,298 | 20,457 | 356,345 | ||||||||||||||||||||||||||||
Gross profit | 358,025 | 46,664 | 926,588 | 97,618 | 20,140 | 358,025 | 69,755 | 926,588 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Professional fees | 7,632 | 152,851 | 486,197 | 455,213 | 127,202 | 7,632 | 405,949 | 486,197 | ||||||||||||||||||||||||
Salaries and benefits | 164,142 | 67,662 | 469,996 | 164,187 | 363,330 | 164,142 | 965,988 | 469,996 | ||||||||||||||||||||||||
Selling, general and administrative | 479,445 | 1,621,600 | 1,083,809 | 4,919,330 | 1,945,145 | 479,445 | 2,769,641 | 1,083,809 | ||||||||||||||||||||||||
Total operating expenses | 651,219 | 1,842,113 | 2,040,002 | 5,538,730 | 2,435,677 | 651,219 | 4,141,578 | 2,040,002 | ||||||||||||||||||||||||
Loss from operations | (293,194 | ) | (1,795,449 | ) | (1,113,414 | ) | (5,441,112 | ) | (2,415,537 | ) | (293,194 | ) | (4,071,823 | ) | (1,113,414 | ) | ||||||||||||||||
Other (income) expense: | ||||||||||||||||||||||||||||||||
Interest expense, net | 10,452 | 27,175 | 45,886 | 63,880 | ||||||||||||||||||||||||||||
Other income (expense), net: | ||||||||||||||||||||||||||||||||
Interest income (expense), net | (5,330 | ) | (10,452 | ) | (19,685 | ) | (45,886 | ) | ||||||||||||||||||||||||
Gain on sale of short-term investments | 82,943 | - | 180,593 | - | ||||||||||||||||||||||||||||
Other income | (168,245 | ) | - | (168,245 | ) | - | 40,735 | 168,245 | 42,875 | 168,245 | ||||||||||||||||||||||
Forgiveness of PPP Loan | - | (22,916 | ) | (22,916 | ) | (22,916 | ) | |||||||||||||||||||||||||
Total other (income) expense | (157,793 | ) | 4,259 | (145,275 | ) | 40,964 | ||||||||||||||||||||||||||
Other income - PPP loan forgiveness | - | - | - | 22,916 | ||||||||||||||||||||||||||||
Total other income (expense), net | 118,348 | 157,793 | 203,783 | 145,275 | ||||||||||||||||||||||||||||
Net loss | $ | (135,401 | ) | $ | (1,799,708 | ) | $ | (968,139 | ) | $ | (5,482,076 | ) | (2,297,189 | ) | (135,401 | ) | (3,868,040 | ) | (968,139 | ) | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Unrealized loss from short-term investments | (32,289 | ) | - | (35,513 | ) | - | ||||||||||||||||||||||||||
Comprehensive loss | $ | (2,329,478 | ) | $ | (135,401 | ) | $ | (3,903,553 | ) | $ | (968,139 | ) | ||||||||||||||||||||
Net loss per share attributable to common stockholders - Basic and Diluted | $ | (0.03 | ) | $ | (0.41 | ) | $ | (0.19 | ) | $ | (1.33 | ) | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||
Weighted Average Shares Outstanding - Basic and Diluted | 5,186,692 | 4,423,570 | 4,994,797 | 4,115,207 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
2
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
Additional | Total Shareholders’ | Accumulated Other Comprehensive Gain | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Equity | Common Stock | (Loss) on ST | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | (Deficit) | Shares | Amount | Investments | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2021 | 3,695,464 | $ | 3,695 | $ | 63,019,495 | $ | (64,613,520 | ) | $ | (1,590,330 | ) | |||||||||||||||||||||||||||||||||
Stock issued for cash | 69,672 | 70 | 253,605 | - | 253,675 | |||||||||||||||||||||||||||||||||||||||
Stock compensation | 258,076 | 258 | 1,290,124 | - | 1,290,382 | |||||||||||||||||||||||||||||||||||||||
Shares issued for conversion of debt | 5,947 | 6 | 20,379 | - | 20,385 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,582,637 | ) | (1,582,637 | ) | |||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | 4,029,159 | 4,029 | 64,583,603 | (66,196,157 | ) | (1,608,525 | ) | |||||||||||||||||||||||||||||||||||||
Stock issued for cash | 68,204 | 68 | 349,914 | - | 349,982 | |||||||||||||||||||||||||||||||||||||||
Stock compensation | 295,820 | 296 | 1,572,552 | - | 1,572,848 | |||||||||||||||||||||||||||||||||||||||
Shares issued for conversion of debt | 4,560 | 5 | 18,235 | - | 18,240 | |||||||||||||||||||||||||||||||||||||||
Shares issued for conversion of warrants | 8,492 | 8 | 35,959 | - | 35,967 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (2,099,731 | ) | (2,099,731 | ) | |||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2021 | 4,406,235 | 4,406 | 66,560,263 | (68,295,888 | ) | (1,731,219 | ) | |||||||||||||||||||||||||||||||||||||
Stock issued for cash | 13,550 | 14 | 67,736 | - | 67,750 | |||||||||||||||||||||||||||||||||||||||
Stock compensation | 81,461 | 81 | 1,494,722 | - | 1,494,803 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,799,708 | ) | (1,799,708 | ) | |||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2021 | 4,501,246 | $ | 4,501 | $ | 68,122,721 | $ | (70,095,596 | ) | $ | (1,968,374 | ) | |||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 4,879,923 | $ | 4,880 | $ | 69,004,703 | $ | (70,691,524 | ) | $ | (1,681,941 | ) | |||||||||||||||||||||||||||||||||
Balance as January 1, 2022 | 4,879,923 | $ | 4,880 | $ | - | $ | 69,004,703 | $ | (70,691,524 | ) | $ | (1,681,941 | ) | |||||||||||||||||||||||||||||||
Stock issued for cash | 850 | 1 | 5,099 | - | 5,100 | 850 | 1 | - | 5,099 | - | 5,100 | |||||||||||||||||||||||||||||||||
Stock compensation | 24,390 | 24 | 97,476 | - | 97,500 | 24,390 | 24 | - | 97,476 | - | 97,500 | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | (393,249 | ) | (393,249 | ) | - | - | - | - | (393,249 | ) | (393,249 | ) | |||||||||||||||||||||||||||||
Balance as of March 31, 2022 | 4,905,163 | 4,905 | 69,107,278 | (71,084,773 | ) | (1,972,590 | ) | 4,905,163 | $ | 4,905 | $ | - | $ | 69,107,278 | $ | (71,084,773 | ) | $ | (1,972,590 | ) | ||||||||||||||||||||||||
Stock compensation | - | - | 171,600 | - | 171,600 | - | - | - | 171,600 | - | 171,600 | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | (439,489 | ) | (439,489 | ) | - | - | - | - | (439,489 | ) | (439,489 | ) | |||||||||||||||||||||||||||||
Balance as of June 30, 2022 | 4,905,163 | 4,905 | 69,278,878 | (71,524,262 | ) | (2,240,479 | ) | 4,905,163 | $ | 4,905 | $ | - | $ | 69,278,878 | $ | (71,524,262 | ) | $ | (2,240,479 | ) | ||||||||||||||||||||||||
Stock issued for cash | 2,315,000 | 2,315 | 8,537,856 | - | 8,540,171 | |||||||||||||||||||||||||||||||||||||||
Stock Issued for cash | 2,315,000 | 2,315 | - | 8,537,856 | - | 8,540,171 | ||||||||||||||||||||||||||||||||||||||
Stock compensation | 59,798 | 60 | 184,231 | - | 184,291 | 59,798 | 60 | - | 184,231 | - | 184,291 | |||||||||||||||||||||||||||||||||
Related party foregone interest | - | - | 2,718 | - | 2,718 | - | - | - | 2,718 | - | 2,718 | |||||||||||||||||||||||||||||||||
Warrants issued for cash | - | - | 3,473 | - | 3,473 | - | - | - | 3,473 | - | 3,473 | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | (135,401 | ) | (135,401 | ) | - | - | - | (135,401 | ) | (135,401 | ) | ||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | 7,279,961 | $ | 7,280 | $ | 78,007,156 | $ | (71,659,663 | ) | $ | 6,354,773 | 7,279,961 | $ | 7,280 | $ | - | $ | 78,007,156 | $ | (71,659,663 | ) | $ | 6,354,773 |
Accumulated Other Comprehensive Gain | Additional | Total | ||||||||||||||||||||||
Common Stock | (Loss) on ST | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Investments | Capital | Deficit | Equity | |||||||||||||||||||
Balance as of January 1, 2023 | 7,286,562 | $ | 7,287 | $ | 36,313 | $ | 77,824,427 | $ | (72,389,340 | ) | $ | 5,478,687 | ||||||||||||
Other comprehensive gain | - | - | 4,756 | - | - | 4,756 | ||||||||||||||||||
Net loss | - | - | - | - | (748,414 | ) | (748,414 | ) | ||||||||||||||||
Balance as of March 31, 2023 | 7,286,562 | $ | 7,287 | $ | 41,069 | $ | 77,824,427 | $ | (73,137,754 | ) | $ | 4,735,029 | ||||||||||||
Other comprehensive loss | - | - | (7,980 | ) | - | - | (7,980 | ) | ||||||||||||||||
Stock compensation | - | - | - | 88,388 | - | 88,388 | ||||||||||||||||||
Net loss | - | - | - | - | (822,437 | ) | (822,437 | ) | ||||||||||||||||
Balance as of June 30, 2023 | 7,286,562 | $ | 7,287 | $ | 33,089 | $ | 77,912,815 | $ | (73,960,191 | ) | $ | 3,993,000 | ||||||||||||
Other comprehensive loss | - | - | (32,289 | ) | - | - | (32,289 | ) | ||||||||||||||||
Stock compensation | 150,000 | 150 | - | 1,573,020 | - | 1,573,170 | ||||||||||||||||||
Net loss | - | - | - | - | (2,297,189 | ) | (2,297,189 | ) | ||||||||||||||||
Balance as of September 30, 2023 | 7,436,562 | $ | 7,437 | $ | 800 | $ | 79,485,835 | $ | (76,257,380 | ) | $ | 3,236,692 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
3
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | Nine Months Ended September 30, | |||||||||||||||
September 30, 2022 | September 30, 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net Loss | $ | (968,139 | ) | $ | (5,482,076 | ) | ||||||||||
Net loss | $ | (3,868,040 | ) | $ | (968,139 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Bad debt | 11,175 | - | - | 11,175 | ||||||||||||
Stock compensation | 453,391 | 4,358,033 | 1,661,558 | 453,391 | ||||||||||||
Amortization of debt discount | - | 58 | ||||||||||||||
Forgiveness of Interest Expense | (168,361 | ) | - | |||||||||||||
Forgiveness of PPP loan | (22,916 | ) | (22,916 | ) | ||||||||||||
Depreciation | 403 | 403 | 402 | 403 | ||||||||||||
Amortization | 2,105 | - | ||||||||||||||
Forgiveness of interest expense | - | (168,361 | ) | |||||||||||||
Forgiveness of PPP Loan | - | (22,916 | ) | |||||||||||||
Non-cash lease expense | 3,848 | - | 4,208 | 3,848 | ||||||||||||
Gain on sale of short-term investments | (180,593 | ) | - | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (5,224 | ) | (10,268 | ) | (9,608 | ) | (5,224 | ) | ||||||||
Prepaid assets | (274,945 | ) | (5,942 | ) | 119,237 | (274,945 | ) | |||||||||
Inventory | (120,661 | ) | 6,842 | (4,249 | ) | (120,661 | ) | |||||||||
Accounts payable - related party | (260,000 | ) | (149,320 | ) | ||||||||||||
Accounts payable | 93,819 | 245,548 | (325,818 | ) | 93,819 | |||||||||||
Accounts payable - related party | (149,320 | ) | 140,000 | |||||||||||||
Accrued expenses | 1,785 | - | 67,069 | 1,785 | ||||||||||||
Deferred revenue | (130,000 | ) | 130,000 | - | (130,000 | ) | ||||||||||
Lease liability | (34,097 | ) | (27,382 | ) | (37,625 | ) | (34,097 | ) | ||||||||
Net cash used in operating activities | (1,309,242 | ) | (667,700 | ) | ||||||||||||
Net cash (used) provided in operating activities | (2,831,354 | ) | (1,309,242 | ) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Sale of short-term investments | 32,671,394 | - | ||||||||||||||
Purchase of short-term investments | (29,270,926 | ) | - | |||||||||||||
Investment in Equity Method Investment | (96,000 | ) | - | |||||||||||||
Purchase of patents | (74,460 | ) | - | |||||||||||||
Net cash provided by investing activities | 3,230,008 | - | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Sale of common stock for cash, net of financing fees | 8,545,270 | 671,407 | - | 8,545,270 | ||||||||||||
Proceeds from exercise of warrants | - | 35,967 | - | 3,473 | ||||||||||||
Proceeds from sale of warrants | 3,473 | - | ||||||||||||||
Proceeds from PPP loans | - | 22,916 | ||||||||||||||
Payments on loan payable - shareholder | (37,200 | ) | (4,600 | ) | - | (37,200 | ) | |||||||||
Net cash provided by financing activities | 8,511,543 | 725,690 | ||||||||||||||
Payments on notes payable - officer | (200,000 | ) | - | |||||||||||||
Net cash (used) provided in financing activities | (200,000 | ) | 8,511,543 | |||||||||||||
Net increase in cash and cash equivalents | 7,202,301 | 57,990 | 198,654 | 7,202,301 | ||||||||||||
Cash and cash equivalents - beginning of period | 661,778 | 78,436 | 162,743 | 661,778 | ||||||||||||
Cash and cash equivalents - end of period | $ | 7,864,079 | $ | 136,426 | $ | 361,397 | $ | 7,864,079 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid for: | ||||||||||||||||
Interest | 664 | 502 | ||||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Conversion of debt and accrued interest into common stock | - | $ | 38,625 | |||||||||||||
Unrealized loss on short-term investments | $ | (35,513 | ) | $ | - | |||||||||||
ROU asset and lease liability recorded | $ | 11,359 | - | $ | - | $ | 11,359 | |||||||||
Forgiveness of Interest Expense | 168,361 | - | ||||||||||||||
Forgiveness of PPP loan | 22,916 | - | ||||||||||||||
Forgiveness of interest expense | $ | - | $ | 168,361 | ||||||||||||
Forgiveness of PPP Loan | $ | - | $ | 22,916 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF THE ORGANIZATION AND BUSINESS
Corporate History
Nexalin Technology, Inc. (“NV Nexalin”) was formed on October 19, 2010 as a Nevada corporation. The Company’s principal offices are located at 1776 Yorktown, Suite 550, Houston, Texas 77056.
On September 6, 2019, Neuro-Health International, Inc. (“Neuro-Health”), a Nevada corporation a wholly-ownedand wholly owned subsidiary of NV Nexalin, was formed. Neuro-Health had no activity from SeptemberDecember 6, 2019 (Inception) through the nine months ended September 30, 2022.2023.
On November 22, 2021, NV Nexalin entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nexalin Technology, Inc., a Delaware corporation (“Nexalin”, or the “Company”). Pursuant to the Merger Agreement, NV Nexalin merged with and into Nexalin with all shareholders of NV Nexalin receiving one common share of Nexalin in exchange for twenty shares of NV Nexalin held at the time of the Merger Agreement. NV Nexalin treated the transaction as a corporate reorganization with the historical consolidated financial statements of NV Nexalin becoming the historical consolidated financial statements of Nexalin. Nexalin had nominal assets and liabilities and did not conduct any operations prior to the reorganization other than its incorporation. NV Nexalin has retroactively applied the 20-for-1 exchange, effective on November 22, 2021, to share and per share amounts on the unaudited condensed consolidated financial statements for the nine months ended September 30, 20222023 and 2021.2022. NV Nexalin’s authorized shares of common stock waswere not affected as a result of the Merger.Merger Agreement. As a result of the Merger Agreement, NV Nexalin was dissolved, and Neuro-Health became a subsidiary of Nexalin. The Company completed its initial public offering on September 20,16, 2022.
The initial public offering consisted of its Common Stock and accompanying warrants to purchase up to 2,315,000 shares of common stock. Each share of common stock is beingwas sold together with one Warrant, each to purchase one share of common stock with an exercise price of $4.15 per share at a combined offering price of $4.15, for gross proceeds of approximately $9,607,250 million,, before deducting underwriting discounts and offering expenses. In addition, Nexalin granted the underwriters a 45-day option to purchase up to an additional shares of common stock and/or Warrants to purchase up topurchased shareswarrants for net proceeds of common stock to cover over-allotments at the initial public offering price, less the underwriting discount.$3,473. units consisting of shares of
The registration statement on Form S-1 (File No. 333-261989) was filed with the Securities and Exchange Commission (“SEC”), which became effective on September 15, 2022. A final prospectus relating to the offering was filed with the SEC and is available on the SEC’s website at http://www.sec.gov. The offering was being made only by means of a prospectus forming part of the effective registration statement.
TheOur shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) on September 20,16, 2022, under the symbols “NXL” and “NXLIW”, respectively.
Throughout this report, the terms “Nexalin,” “our,” “we,” “us,” and the “Company” refer to Nexalin Technology, Inc.
Business Overview
The Company is a medical device company that designsWe design and developsdevelop innovative neurostimulation products to help uniquely and effectively help combat the ongoing global mental health epidemic. The Nexalin Device (the Device) emits a patented, frequency-based waveform that has been proven to be highly effective in stimulating a positive response from the mid-brain structures associated with various mental health disorders. The Company’s design of an advanced waveform that is safely administered to the human brain is the basis of the Company’s treatment and the evolution of its business strategy.
The Company had previously marketed and licensed a Federal Drug Administration approved 4-milliamp device which is a non-invasive drug-free therapy for the treatment of anxiety and insomnia. Although the devices are being used in the field and continue to use our single use disposable, we no longer are marketing the 4-milliamp device.
We have designed and developed an advanced device. The 4-milliampeasy-to-administer medical device and the advanced device may be— referred to as Generation 1 or Gen-1 — that utilizes bioelectronic medical technology to treat anxiety and insomnia, without the “Nexalin Device”need for drugs or “Nexalin Therapy”psychotherapy. Our original Gen-1 devices are cranial electrotherapy stimulation (CES) devices that emit waveform at 4 milliamps during treatment and collectively, “Nexalin”. The Company has received approval fromare presently classified by the China National Medical ProductsU.S. Food and Drug Administration to market and sell the advanced device in China for the treatment of insomnia and depression. The Company sells the advanced device in China though an acting distributor. It is in the Company’s plan to also achieve regulatory approval for the advanced device in other countries including the United States.(“FDA”) as a Class II device.
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While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licensing fees and payments for the sale of electrodes. We have suspended marketing efforts for new sales of devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team makes a final decision on amending our existing 510(k) application at 4 milliamps. A new pre-sub document in preparation of a new 510(k) for our Gen-3 Halo headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments to our pre-sub document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023. Minutes of the meeting with the FDA were filed with the FDA on May 16, 2023. No additional comments have been received from the FDA at this time.
We have designed and developed a new advanced wave form technology to be emitted at 15 milliamps through new and improved medical devices referred to as Generation 2 or Gen-2 and Generation 3 or Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that is intended to be prescribed by licensed medical professionals in a virtual clinic setting similar to existing Tele-health platforms. Preliminary data provided by the University of California San Diego supports the safety of utilizing our 15 milliamp waveform technology, however the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA.
Additionally, we are currently designing clinical trial strategies for the use of Gen-3 for the treatment of substance use disorders including opiate, cocaine, and alcohol abuse. Recently the Gen-2 device was tested in pilot trials in China for the treatment of Alzheimer’s disease, and dementia. Continued pilot testing for Alzheimer’s and dementia, cognition and memory, and neurotransmitter changes is planned in China in 2023.
On May 31, 2023, the Company formalized an agreement related to the formation of a joint venture established to engage in the clinical development, marketing, sale and distribution of Nexalin’s second generation transcranial Alternating Current Stimulation (“tACS”) devices (“Gen-2 devices”) in China and the greater Asia Pacific region. In connection with the formation of the joint venture, to be conducted through a company formed under the laws of Hong Kong (the “JV”), the Company entered into a Joint Venture Agreement (“JV Agreement”) with Wider Come Limited (“Wider”). Under the JV Agreement, the Company was issued a 48% minority interest in the JV. The investment in the JV is accounted for using the equity method of accounting. There has been no activity in the joint venture through September 30, 2023. The Incorporation Form (Company Limited by Shares) filed with the Companies Registry in Hong Kong originally reflected a 50%-50% ownership interest in the JV, but has been amended to properly reflect the 52%-48% ownership formalized in the JV agreement. The Company invested $96,000 in the joint venture in September 2023, while Wider contributed $104,000 bringing the Company’s ownership percentage to 48%. There has been no operating activity in the joint venture through September 30, 2023.
Emerging Growth Company
The Company isWe are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s condensed consolidated financial statements with another public company which is neither an emerging growth company, nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
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COVID-19 PandemicRisks and Uncertainties
In March 2020,Management continues to evaluate the World Health Organization (the “WHO”) characterized the outbreakimpact of the novel straineconomy and the capital markets and has concluded that, while it is reasonably possible that events could have negative effects on the Company’s financial position and results of coronavirus, specifically identifiedits operations, the specific impacts are not readily determinable as COVID-19, as a global pandemic. This has resulted in governments enacting emergency measures to combat the spread of the virus. These measures, whichdate of these unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the implementationoutcome of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business, resulting in a global economic slowdown. Equity markets have experienced significant volatility and weakness and the governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.uncertainties.
The current challenging economic climate may lead to adverse changes in cash flows, working capital levels and/or debt balances, which may also have a direct impact on the Company’s operating results and financial position in the future. The ultimate duration and magnitude of the impact and the efficacy of government interventions on the economy has and may continue to indirectly impact the Company because of its current dependence upon its distributorjoint venture relationship with Wider Come Limited. Wider Come Limited, as part of its obligations under the JV Agreement, acts as a distributor for the Company’s devices in China and Asia. Because of significant restrictions imposed by the Chinese government during the CovidCOVID-19 pandemic through calendar year 2022 and into 2023, Wider’s ability to market and sell the Company’s devices has been negatively impacted, resulting in decreased revenue to the Company. Patients and salespeople arehave been restricted in their movements resulting in a significant slowdown in the medical and other sectors. Fortunately, our Chinese distributor continues our strategy of multiple clinical studies in the major institution in Beijing in an array of brain related diseases. Significant efforts and funds expended by our Chinese distributor has led to regulatory approval in China in both depression and insomnia thus far which has allowed for sales of our devices in China this year.in 2022, and into 2023. The extent of future impact will dependis dependent on future developments, including future activities by the Chinese government and other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others. The repercussions of this health crisis could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results.
In response
Continued Nasdaq Listing
On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to COVID-19,regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023.
On November 7, 2023, the Company submitted a letter to NASDAQ requesting a second 180-day period in order to regain compliance with NASDAQ Rule 5550(a)(2). The Company stated in that letter that it believed it will be able to cure the deficiency and increase its stock price to above $1.00 per share pursuant to its plan to do so.
On November 7, 2023, the Company received written notice from the Nasdaq Listing Qualifications Department (the “Staff”) that the Company was not eligible for an additional 180 calendar day compliance period because the Company no longer complied with Nasdaq’s $5 million minimum stockholders equity initial listing requirement.
As of the filing date of this Quarterly Report, the Company has implemented working practicesrequested an appeal of the Staff’s determination and submitted a hearing request to address potential impactsthe Nasdaq Hearings Panel (“Panel”). As a result of the request for the appeal to its operations, employeesthe Panel, and customers,while the appeal process is pending, the suspension of trading of the Company’s common stock is stayed, and the Company’s common stock and warrants will take further measurescontinue to trade on Nasdaq until the hearing process concludes and the Panel issues a written decision. As part of the appeal process, the Company will be asked to provide the Panel with a plan to regain compliance with the minimum bid price and stockholder equity requirements. The Company’s plan will need to include a discussion of the events that the Company believes will enable it to timely regain compliance with such requirements. The Company intends to submit a plan that it believes will be sufficient to permit the Company to regain compliance with the minimum bid price requirement and stockholder equity requirements.
There can be no assurance that the Panel will grant the Company a 180-day extension to regain compliance, or that Company will be able to regain compliance with such applicable Nasdaq listing requirements. If the Company’s common stock and warrants are delisted by Nasdaq, it could adversely affect the Company’s ability to attract new investors, decrease the liquidity of the outstanding shares of common stock, reduce the Company’s flexibility to raise additional capital, reduce the price at which the Company’s common stock and warrants trade, and increase the transaction costs inherent in trading such shares and warrants with overall negative effects for the stockholders. In addition, delisting of the Company’s common stock and warrants could deter broker-dealers from making a market in or otherwise seeking or generating interest in the future ifCompany’s common stock. Furthermore, the delisting of the Company’s common stock and as required. At present, we do not believe there has been any appreciable impact onwarrants from The Nasdaq Stock Market could adversely affect the Company specifically associated with COVID-19.business, financial condition and results of operations of the Company.
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NOTE 2 — LIQUIDITY AND GOING CONCERN AND LIQUIDITY
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Companywe will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At September 30, 2022, the Company2023, we had a significant accumulated deficit of $71.7$76.3 71,659,66376,257,380 million. For the three and nine months ended September 30, 2023, we had a loss from operations of $2.4 2,415,537 million and $4.1 4,071,823 million, respectively and negative cash flows used in operations of approximately $2.8 2,831,354 million for the nine months ended September 30, 2022, the Company2023. While we had a loss from operations of $1.1 1,113,414 million and negative cash flows from operations of $1.31 1,309,242 million. At December 31, 2021, the Company had a significant accumulated deficit of approximately $70.7 70,691,524 million and a working capital deficitsurplus as of September 30, 2023 of approximately $1.63.1 million. The Company’smillion our operating activities consume the majoritymost of itsour cash resources. The Company will continue to service existing customers in the United States. During the nine months ended September 30, 2022, the Company sold devices in China to its acting distributor.
The Company expectsWe expect to continue to incur operating losses as it executes itswe execute our development plans, through 2023, as well as undertaking other potential strategic and business development initiatives.initiatives through 2023 and through the twelve months from the date of this report. In addition, the Company haswe have had and expectsexpect to have negative cash flows from operations, at least into the near future. The CompanyWe have previously funded these losses primarily through the sale of equity and issuance of convertible notes. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. These plans require the Company to place reliance on several factors including, favourable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, management does not believe we have sufficient cash for the next twelve months from the issuance of the financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
At the closing of the Company’s initial public offering on September 20, 2022, the Company sold 2,315,000 Units and 347,250 Warrants at a price of $ per Unit and $ per Warrant for total gross proceeds of $9,610,723. The Company incurred offering costs of $1,067,078, consisting of $878,858 of underwriting fees and expenses and $188,220 of costs related to the Initial Public Offering.
The Company’s ability to continue as a going concern will be dependent upon its ability to execute on its business plan, including the ability to generate revenueresult from the proposed joint venture and obtain U.S. approval for the saleoutcome of its devices in the United States, or the Company’s ability to raise additional capital. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans or that unforeseen expenses may arise, management has evaluated the significance of the conditions as of September 30, 2022 and has concluded that due to the receipt of the net proceeds from the completion of the Initial Public Offering, the Company has sufficient cash on hand to satisfy its anticipated cash requirements for the next twelve to fifteen months. The substantial doubt about the Company’s ability to continue as a going concern for more than twelve months from the date of these financial statements has been alleviated.this uncertainty.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
Basis of Presentation
The accompanying unaudited condensed consolidated financial information has been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position and the operating results and cash flows. Operating results for the three and nine months ended September 30, 20222023 and 20212022 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”). These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021.2022.
Principles of Consolidation
The consolidated financial statements include the accounts of Nexalin and its wholly-ownedwholly owned subsidiary Neuro-Health. Intercompany accounts and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee’s net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be another than-temporary loss in value. The Company’s equity method investment is its interest in the newly formed joint venture. The Company invested $96,000 in the joint venture in September 2023.There has been no operating activity in the joint venture through September 30, 2023.
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Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure of contingent liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ from these estimates, which may cause the Company’s future results to be affected.
Revenue
The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
The Company has existing licensing and treatment fee agreements with its customers for the use of the Nexalin Devicedevice in their practices. These agreements generally have terms of one year with automatic renewal if certain requirements are met and amounts due per these agreements are billed monthly. The Company also sells products related to the provision of services. The Company sells its Devicesdevices in China to its acting distributor and sells products relating to the use of the Devices.devices. The Company has a Royalty Agreement whereby the manufacturer of the Company’s electrodes will pay a royalty to the Company for a three yearthree-year period beginning January 1, 2022. The amount of the Royalty is equal to 20% of the amount that the manufacturer invoices to the acting distributor for the sale of the electrodes.
Revenue Streams
The Company derives revenues from its license agreements by charging a monthly licensing fee for the duration of the agreement. The Company derives revenues from equipment by selling additional individual electrodes to customers for use with the Nexalin Device.device. The Company receives revenue from the sale in China of its Devicesdevices to its acting distributor and from the sale of products relating to the use of those Devices.devices. The Company derives revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales.
Performance Obligations
Management identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied as long as the licensing contract remains valid and is not terminated. The licensing revenue is invoiced monthly and is recognized at a point in time in which the invoice is sent to the customer.
Management identified that the Company’s equipment and Devicedevice revenue has one performance obligation. That performance obligation is satisfied when the equipment and Devicesdevices are shipped. The Company recognizes revenue at a point in time in which the electrodes and Devicesdevices are shipped to the customer. The Company does not offer a warranty on the electrodes and Devices.devices.
Management identified that treatment fee revenue has one performance obligation. The performance obligation is satisfied upon the completion of individual treatments on patients by customers.
Management identified that royalty revenue has one performance obligation. The performance obligation is satisfied at the time the Electrode manufacturer invoices the acting distributor for the sale to the acting distributor.
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Practical Expedients
As part of ASC 606, the Company has adopted several practical expedients including:
● | Significant Financing Component — the Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised goods or services to the customer and when the customer pays for that service will be one year or less. |
● | Unsatisfied Performance Obligations — all performance obligations related to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC Topic 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. |
● | Shipping and Handling Activities — the Company elected to account for shipping and handling activities as a fulfilment cost rather than as a separate performance obligation. |
● | Right to |
Disaggregated Revenues
Major Revenue Streams
Revenue consists of the following by service offering:
Schedule of disaggregation of revenue | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||
Device Sales | $ | 520,000 | $ | - | $ | 1,164,500 | $ | - | ||||||||||||||||
Licensing Fee | 21,113 | 27,329 | 60,561 | 83,266 | ||||||||||||||||||||
Royalty Fee | - | - | 9,702 | - | ||||||||||||||||||||
Device sales | $ | - | $ | 520,000 | ||||||||||||||||||||
Licensing fee | 18,664 | 21,113 | ||||||||||||||||||||||
Equipment | 4,100 | 28,078 | 22,033 | 36,058 | 5,179 | 4,100 | ||||||||||||||||||
Other | 110 | 563 | 26,137 | 742 | 270 | 110 | ||||||||||||||||||
Total | $ | 545,323 | $ | 55,970 | $ | 1,282,933 | $ | 120,066 | $ | 24,113 | $ | 545,323 |
Nine Months Ended | ||||||||
September 30, 2023 | September 30, 2022 | |||||||
Device sales | $ | 9,600 | $ | 1,164,500 | ||||
Licensing fee | 62,566 | 60,561 | ||||||
Royalty Fee | - | 9,702 | ||||||
Equipment | 16,679 | 22,033 | ||||||
Other | 1,367 | 26,137 | ||||||
Total | $ | 90,212 | $ | 1,282,933 |
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Major Geographic Locations
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
US Sales | $ | 25,323 | $ | 29,838 | $ | 89,864 | $ | 93,934 | ||||||||
China Sales | 520,000 | 26,132 | 1,193,069 | 26,132 | ||||||||||||
Total | $ | 545,323 | $ | 55,970 | $ | 1,282,933 | $ | 120,066 |
Three Months Ended | ||||||||
September 30, 2023 | September 30, 2022 | |||||||
U.S. sales | $ | 24,113 | $ | 25,323 | ||||
China sales | - | 520,000 | ||||||
Total | $ | 24,113 | $ | 545,323 |
Nine Months Ended | ||||||||
September 30, 2023 | September 30, 2022 | |||||||
U.S. sales | $ | 80,005 | $ | 89,864 | ||||
China sales | 10,207 | 1,193,069 | ||||||
Total | $ | 90,212 | $ | 1,282,933 |
Contract Modifications
There were no contract modifications during the nine months ended September 30, 20222023 and 2021.2022. Contract modifications are not routine in the performance of the Company’s contracts.
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Deferred Revenue
The Company receives payment for equipment and devices in advance of shipping. The Company recognizes the revenue as being earned upon shipment. DeferredNo deferred revenue of $0 and $130,000 was recognized as of September 30, 20222023 and December 31, 2021, respectively.2022.
Schedule of deferred revenue | ||||
Deferred Revenue | ||||
Outstanding at January 1, 2022 | $ | 130,000 | ||
Recognized | 754,000 | |||
Transferred to revenue | (884,000 | ) | ||
$ | - |
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase and all treasury obligations to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions.
Short-Term Investments
The appropriate classification of marketable securities is determined at the time of purchase and evaluated as of each reporting balance sheet date. Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair value is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unrealized holding gains and losses for equity securities are recognized in earnings. Unrealized holding gains and losses for available for sale debt securities are recognized in other comprehensive income. Realized gains and losses and interest and dividends earned are included in other income (expense), net. For individual debt securities classified as available-for-sale securities, the company determines whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If the decline below amortized cost is a result of credit loss or the company will more likely than not be required to sell the security before recovery of its amortized cost basis, the company will recognize an impairment relating to the decline through an allowance for credit losses. There were no impairments recognized for the three and nine months ended September 30, 2023.
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Accounts Receivable
Accounts receivables are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts.credit loss. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowancesan allowance for doubtful receivablescredit loss based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts receivable against the allowance for doubtful accountscredit loss when a balance is determined to be uncollectible. During the nine months ended September 30, 20222023 and 2021,2022, the Company wrote off accounts receivable of $11,1750 and $-11,175, respectively, in accounts receivable. During the three months ended September 30, 2022 and 2021, the Company wrote off $- and $-, respectively, in accounts receivable.respectively. The Company did not record an allowance for doubtful accountscredit loss on September 30, 20222023 and December 31, 2021,2022, respectively.
Inventory
Inventory consists of finished goods and components stated at the lower of cost or net realizable value (NRV) with cost determined on a first-in first-out basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete slow-moving, quantities in excess of demand, or otherwise non-saleable items. The Company did not record a reserve for obsolete inventory at September 30, 2022 and December 31, 2021.
Equipment
Equipment areis recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the related assets, generally five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated.
Maintenance and repairs are charged to expense as incurred. The Company capitalizes costs attributable to the betterment of property and equipment when such betterment enhances the functionality of the asset or extends the useful life of the asset. Should an asset be disposed of before the end of its useful life, the cost and accumulated depreciation at that date areis removed from the consolidated balance sheets, with the resulting gain or loss, if any, reflected in operations in that period.
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Impairment of Long-Lived AssetsPatents
The Company reviews long-lived assetsPatents are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determinedwhen warranted by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets.
Advertising and Marketing Costs
The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses wereeconomic conditions. Amortization expense was $18,3452,105 and $25,4700 for the nine months ended September 30, 2023 and 2022, and 2021, respectively. Advertising and marketing expenses wereAmortization expense was $12,435753 and $3,5920 for the three months ended September 30, 2023 and 2022, respectively.
The following table summarizes the gross carrying amount, amortization and 2021, respectively. All advertisingthe net carrying value at September 30, 2023 and marketing expenses are recorded in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.December 31, 2022.
Schedule of patents | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
September 30, 2023 | ||||||||||||
Patents | $ | 74,460 | $ | (2,105 | ) | $ | 72,355 | |||||
Total September 30, 2023 | $ | 74,460 | $ | (2,105 | ) | $ | 72,355 | |||||
December 31, 2022 | ||||||||||||
Patents | $ | - | $ | - | $ | - | ||||||
Total December 31, 2022 | $ | - | $ | - | $ | - |
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Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.
The Company records valuation allowances against deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company routinely evaluates the realizability of deferred tax assets by assessing the likelihood that deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, historical results are considered along with certain assumptions related to future earnings. At September 30, 20222023 and December 31, 2021,2022, the Company had a full valuation allowance applied against its deferrednet tax assets
From time to time the Company may recognize an income tax benefit, in its consolidated statements of operations, related to uncertain tax positions taken. For uncertain tax positions that are “more likely than not” to sustain an income tax audit, the Company may record an allowance against certain deferred tax assets related to these positions. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations.assets.
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is 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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs 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 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
● | Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
● | Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. |
Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques.
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● | Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. |
Fair Value of Financial Instruments
The carrying value of cash, short-term investments, accounts receivable, inventory, prepaids, accounts payable and accrued expenses, and other current liabilities approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the loans payable approximates the estimated fair value for this financial instrument as management believes that such debt and interest payable on the note approximates the Company’s incremental borrowing rate.
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The following table summarizes the amortized cost, unrealized gains and the fair value at September 30, 2023 and December 31, 2022.
Amortized Cost | Unrealized Gain | Fair Value | ||||||||||
September 30, 2023 | ||||||||||||
Short-term investments | $ | 3,575,005 | $ | 800 | $ | 3,575,805 | ||||||
Total September 30, 2023 | $ | 3,575,005 | $ | 800 | $ | 3,575,805 | ||||||
December 31, 2022 | ||||||||||||
Short-term investments | $ | 6,794,879 | $ | 36,313 | $ | 6,831,192 | ||||||
Total December 31, 2022 | $ | 6,794,879 | $ | 36,313 | $ | 6,831,192 |
The unrealized loss of $35,513 for the nine months ended September 30, 2023 is included in the table above as a reduction in the total unrealized gain.
The following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of September 30, 2023 and December 31, 2022.
Schedule of fair value, assets measured on recurring basis | ||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2023 | ||||||||||||||||
U.S. Treasury Notes | $ | 3,575,805 | $ | 3,575,805 | $ | - | $ | - | ||||||||
December 31, 2022 | ||||||||||||||||
U.S. Treasury Notes | $ | 6,831,192 | $ | 6,831,192 | $ | - | $ | - |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The dilutive effect, if any, of warrants is calculated using the treasury stock method. All outstanding convertible notes, if any, are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the warrants and shares issuable upon conversion have been excluded from the Company’s computation of net loss per common share for the three and nine months ended September 30, 20222023 and 2021. These shares were included in the basic and diluted net loss per common share on the unaudited condensed consolidated statements of operations.2022.
The following table summarizes the securities that would be excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less than the most recent fair value of the common shares:
Schedule of antidilutive shares | ||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Warrants | 2,503,850 | 40,800 | 2,662,250 | 2,503,850 | ||||||||||||
Total | 2,503,850 | 40,800 | 2,662,250 | 2,503,850 |
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Warrants | 2,662,250 | 2,503,850 | ||||||
Total | 2,662,250 | 2,503,850 |
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Stock-BasedStock-Based Compensation
The Company applies the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the unaudited condensed consolidated statements of operations.operations and comprehensive loss.
For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. Due to the Company’s limited history and lack of public market for its common stock, the Company used the average of historical share prices of similar companies within its industry to calculate volatility for use in the Black-Scholes option pricing model.
Pursuant to ASU 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.
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Warrant Accounting
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued private and public placement stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is assessed as part of this evaluation.
During the reporting periods the Public Warrants were outstanding, they were precluded from liability classification, being equity-classified. The Company accounted for these warrants in accordance with ASC 815-40. Accordingly, the Company recognized the warrants as an equity at fair value and recorded in additional paid-in capital. The fair value of the warrants was determined using a Black-Scholes option-pricing methodology (“Black-Scholes model”). The valuation was primarily based on observable market data while the related theoretical warrant volatility assumption within the Black-Scholes model represented a Level 3 measurement within the fair value measurement hierarchy.
Research and Development
All research and development costs are charged to operations as incurred. For the nine months ended September 30, 20222023 and 2021,2022, the Company recorded $154,7221,842,341 and $111,440154,722, respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.operations and comprehensive loss. For the three months ended September 30, 20222023 and 2021,2022, the Company recorded $113,6171,638,508 and $33,474113,617, respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.operations and comprehensive loss.
Leases
A lease is defined as an agreement that conveys the right to control the use of identified property, plant or equipment (right of use asset or “ROU asset”) for a period of time in exchange for consideration. The Company accounts for itits leases in accordance with ASC 842, Leases, which requires that an ROU asset identified in a lease to be recorded as a noncurrent asset with a related liability. The Company does not record ROU assets for those agreements of a twelve-month duration or less. The Company recognized a ROU asset and corresponding lease liability on its balance sheets related to its office lease agreement. See Note 10 —9, Leases, for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
ROU assets include any initial direct costs and prepaid lease payments and exclude any lease incentives. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
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Paycheck Protection ProgramEquity Method Investments
The Company’s policy iscompany accounts for its investments in common stock or in-substance common stock that give it the ability to account forexercise significant influence over as an equity method investment in accordance with the PPP loanguidance in ASC 323, Equity Method and Joint Ventures. Specifically, the company initially recognizes its investment in investees as debt. The Company continued to recordan asset at cost. Further, the loan as debt until either (1)company subsequently measures its investment by recognizing its share of earnings or losses of the loan was partially or entirely forgiven andinvestee in the Company had been legally released, atperiod in which point the amount forgiven would be recorded as income or (2) the Company paid off the loan. As of September 30, 2022, the Company’s outstanding PPP loan was forgiven (see Note 7).they are reported.
Recent Accounting Pronouncements
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effectiveare in effect for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modifyon January 1, 2023 modified the way the Company analyzes financial instruments, but it doesdid not anticipatehave a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its unaudited condensedour consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
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NOTE 4 — INITIAL PUBLIC OFFERING
Pursuant to the Initial Public Offering completed on September 20, 2022, the Company sold 2,315,000 Units and 347,250 of Warrants at a price of $ per Unit and $ per Warrant for a total of $9,610,723 of gross proceeds. The Company incurred offering costs of $1,067,078, consisting of $878,858 of underwriting fees and expenses and $188,220 of costs related to the Initial Public Offering.
Each Unit consisted of one share of Common Stock and one Warrant. Each redeemable Warrant entitles the holder to purchase one share of Common Stock at a price of $4.15 per share, will be exercisable upon issuance and will expire on September 16, 2025
NOTE 5 — ACCRUED EXPENSES
Accrued expenses consist of the following amounts:
Schedule of accrued expenses | ||||||||||||||||
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
Accrued interest | $ | 106,501 | $ | 232,952 | $ | 110,001 | $ | 111,501 | ||||||||
Accrued – other | - | 42,843 | 15,136 | 2,321 | ||||||||||||
Accrued settlement liabilities | 336,000 | 336,000 | 336,000 | 336,000 | ||||||||||||
Accrued expenses | $ | 442,501 | $ | 611,795 | ||||||||||||
Accrued research and development expense | 145,754 | 90,000 | ||||||||||||||
Total | $ | 606,891 | $ | 539,822 |
NOTE 65 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS
PotentialFormalized Joint Venture
On SeptemberDecember 21, 2018, the Company entered into the first of a series of preliminary agreements providing for the establishment of a joint venture (“JV”) agreement (the “JV Agreement”) with Wider Come Limited, a China company (“Wider”) for the purpose of marketing, sale and distribution of the Company’s proprietary devices for the treatment of (i) anxiety, depression and insomnia (“ADI”) and (ii) Alzheimer’s and dementia (“AD”) in the applicable territories. Wider has an experienced medical technology team in China and whenChina. The parties formalized the JV on May 31, 2023. The joint venture is to be conducted through a company formed under the Joint Venturelaws of Hong Kong.
The JV will design and implement a comprehensive business model and distribution plan for our devices in China, Hong Kong, Macau and Taiwan. The Joint Venture will be formed followingembodiment of the agreed-upon terms and conditions of the JV in the formalized JV Agreement follows Wider’s completion of certain funding, clinical study, and publication milestones, which Wider has agreedas well as the resolution of certain regulatory concerns in China.
The Company granted the JV a license to undertake but not yet completed. Following its formation,commercialize and exploit certain of the Joint VentureCompany’s products and technologies in specified designated territories., and the JV will design and implement a comprehensive business model and distribution plan for ourthese products and devices in China, Hong Kong, Macausuch designated territories.
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Under the JV Agreement, Wider is obligated to fund all operations for the initial 12-month period of the JV, after which Nexalin and Taiwan. The first phase of distributionWider plan to jointly fund the JV’s operating expenses in China includes implementation of a sales strategy by Wider for mainland China and other territories serviced by Wider.accordance with their pro rata ownership.
As originally contemplated, each of the parties to the joint venture would hold a 50% interest in the equity, profits and losses, shareholder voting, management control and rights to use production capacity of the facility. The Company will provide a global exclusive technology license for ADI treatment to the JV and Wider will contribute funding for the design and execution of Company approved clinical studies, which we had estimated at the time of our initial public offering would have cost the Company approximately $4,800,000 if the clinical studies had been undertaken by us in the United States. The Company will also provide the Joint Venture (the “JV”) with a license for exclusive distribution of its technology for the treatment of ADI in additional territories. The JV if completed, will beentity is controlled by an equally representeda Board of Directors in which Wider is to have sole representation but neither entitythe Company nor Wider has soleexclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin will own 52% and 48% of the JV, respectively. There has been no activity in the joint venture through September 30, 2023. The Incorporation Form (Company Limited by Shares) filed with the Companies Registry in Hong Kong currently originally reflected a 50%-50% ownership interest in the JV, but has been amended to properly reflect the 52%- 48% ownership formalized in the JV agreement.
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During the three months ended September 30, 2023 the company contributed $96,000 to the joint venture, which was recognized as an asset on the Company’s unaudited condensed consolidated balance sheet. As of September 30, 2022,2023, the joint venture has not been established.generated any earnings or losses.
On May 22, 2019,Under the preceding terms of the collaborative arrangement between the Company entered into a supplementary agreementand Wider, Wider served as an authorized distributor of the Company’s Gen-2 devices in Asia. As part of the consideration for Wider’s performance of its obligations to the JV Agreement (the “Supplementary Agreement”). AtCompany prior to the timerecent formalization of the May, 2019 Supplementary Agreement, the parties desired to expand the scope of the Joint Venture to include and address the pain management opportunities for our devices and technology. Pursuant to the Supplementary Agreement, Wider was to fund the JV, within thirty days of execution of the JV Agreement with $600,000 in cash to be used for clinical trials and other activities related to pain management utilization of our devices and technology in China. Within thirty days of the funding, the Company was to issue 5% of the Company in non-diluted common stock to Wider’s shareholders. As of the date of this report the JV has yet to be formally established and therefore the $600,000 has not been funded. Further, the parties have determined not to proceed with the pain management scope of the Joint Venture and have decided to terminate the May, 2019 Supplementary Agreement. The parties may elect to proceed with a similar arrangement in the future.
On April 6, 2020, the Company entered into a three-year service agreement with Wider, pursuant to which Wider agreed to perform clinical trials associated with the formation of the JV. In consideration, the Company and certain designated Wider shareholders entered into stock issuance agreements for the issuance of shares of the Company’s common stock, and simultaneously with the execution of this service agreement, Wider contributed $200,000 to the Company. During the year ended December 31, 2020, the Company issued shares to affiliates of Wider in satisfaction of the obligation. Under the terms of the collaborative agreement, designated shareholders of Wider are entitled to an additional 300,000 shares upon Wider’s achievement of certain milestones. The fair value of the 150,000 shares issued during the year ended December 31, 2020 (less the contributed $200,000 in cash) resulted in a charge to stock-based compensation of $ and iswas recorded in selling, general and administrative expenses on the consolidated statement of operations. Asunaudited condensed consolidated statement of December 31, 2021 and September 30, 2022, these milestones have not been met.
In March 2022, we entered into a second supplement to the Joint Venture agreement with Wider, whereby the parties confirmed that the Joint Venture had not yet been established and is subject to further review and analysis of regulatory issues in China and the United States, trade and political issues between the two countries and potential changes in the use and market for the Company’s products and technology. Pursuant to the second supplement, the parties agreed to use their commercial efforts to complete documentation by September 30, 2022. Wider has continued its work with respect to undertaking and establishing clinical trials. In light of general economic conditions in China and the United States and the continued impact of regulatory issues in China and the United States and trade and political issues between the two counties, the parties determined to further extend the time frame to complete establishment of the joint venture to September 30, 2023 and entered into a supplement 3 to the Joint Venture Agreement to memorialize such extension. The parties intend to continue to work together to complete the establishment prior to such extended time, however, the ramifications of continued COVID pandemic, especially in China, and the China government’s regulatory approaches to the pandemic have adversely affected Wider’s ability to distribute our current products. As a result, the Joint Venture may be further delayed or we and Wider may determine to re-structure the business terms (which changes may include timing and the scope of the intended operations and trial studies) of the proposed joint venturecomprehensive loss.
During the nine months ended September 30, 20222023 and 2021,2022, the Company recorded $1,183,367 10,207and $26,132 1,183,367in revenue, respectively, from Wider on the unaudited condensed consolidated statements of operations. At September 30, 2022 there was $6,912 in accounts receivable attributable to Wider.operations and comprehensive loss. During the three months ended September 30, 20222023 and 2021,2022, the Company recorded $520,000 0and $26,132 520,000in revenue, respectively, from Wider on the unaudited condensed consolidated statements of operations.operations and comprehensive loss.
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U.S. Asian Consulting Group, LLC
On May 9, 2018, the Company entered into a five-year consulting agreement with U.S. Asian Consulting Group, LLC (“U.S. Asian”). In March, 2021, the Company agreed to extend the consulting agreement for an additional period of eight years upon the closing of our initial public offering. The two members of U.S. Asian are shareholders in the Company, and includewith Marilyn Elson who is thehaving been appointed Chief Financial Officer of the Company. Company on January 11, 2022. Effective November 1, 2023 Ms. Elson stepped down from her position as CFO. Please refer to the company’s Form 8-k filed on September 21, 2023 for additional information.
Pursuant to the consulting agreement, U.S. Asian will provideprovides consulting services to the Company with regardsregard to, among other things, corporate development and financing arrangements. The Company is to paypays U.S. Asian $10,000 per month for services rendered and, on October 24, 2018,pursuant to the Company issued shares of the Company’s common stock to U.S. Asian.consulting agreement. The Company recorded consulting expenses related to the consulting agreement of $90,000 and $90,000$90,000 for each of the nine months ended September 30, 2023 and 2022, respectively, and 2021,$30,000 for each of the three months ended September 30, 2023 and 2022, respectively, on the Company’s unaudited condensed consolidated statements of operations. The Company recorded consulting expenses related to the consulting agreement of $30,000operations and $30,000 for the three months ended September 30, 2022 and 2021, respectively.comprehensive loss. At September 30, 20222023 and December 31, 2021,2022, U.S. Asian was owed $250,0000 and $399,320260,000, respectively, for accrued and unpaid services and expenses. With respect to the amount owed, U.S. Asian has agreed to defer payment of $250,000 until December 15, 2022.services.
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Pursuant to the consulting agreement, U.S Asian’s shares in the Company consist of an anti-dilution provision whereas U.S. Asian’s security holdings, during the term of the consulting agreement, shall remain at 10% of the Company’s total number of issued and outstanding shares of the Company’s common stock, on a fully diluted basis. In March 2021, the Company entered into an agreement with U.S. Asian pursuant to which U.S. Asian waived and relinquished any rights of protection against dilution afforded to it, provided such dilution results from a transaction that (i) imputes a pre-money valuation to the Company of not less than $7 million, (ii) raises not less than $7 million, and (iii) imputes a post-money valuation to the Company of not less than $25 million. Pursuant to the agreement, upon closing of the Initial Public Offering, the consulting agreement is extended to May 2031. In exchange for the waiver and relinquishment of such rights, the Company issued shares of the Company’s common stock in an amount sufficient for U.S. Asian (together with its owners) to own an aggregate amount of fifteen (15%) percent of the Company’s issued and outstanding shares of common stock as of the date of issuance. On June 22, 2021, the Company issued 304,570 shares of common stock in satisfaction of the waiver (See Note 8). On November 29, 2021, the Company issued an additional 217,500 shares of common stock, with a fair value of $5.00 per share, in satisfaction of the waiver (see Note 8). In August 2022 the Company issued an additional 17,699 shares of common stock in full satisfaction of the waiver.
On December 22, 2021, the Company entered into a one-year agreement with Leonard Osser to serve on the Company’s Board of Advisors. The agreement may be extended for an additional one-year term upon agreement of both parties. As consideration, the Company will issue $80,000 in shares of the Company’s common stock to Mr. Osser (see Note 8 — Stockholders’ Equity (Deficit) — Shares To Be Issued). As of September 30, 2022, these shares have yet to be issued.Officers
On January 11, 2022, the Company entered into an employment agreement with Marilyn Elson to serve as Chief Financial Officer of the Company for a three-year term with an option for the Company and Ms. Elson to extend the term for an additional two years. On September 21, 2023, Ms. Elson provided the Company notice that she will step down as Chief Financial Officer effective November 1, 2023. After this date, Ms. Elson will continue as Controller for Nexalin Technology. Ms. Elson is the spouse of the other member of U.S. Asian.
On July 1, 2023, the Company entered into a new employment agreement with Mark White to serve as Chief Executive Officer, a new services agreement with David Owens, M.D. to serve as Chief Medical Officer and a new employment agreement with Michael Nketiah to serve as Senior Vice President, Quality, Regulatory and Clinical Affairs. Each of the foregoing agreements are governed by three-year terms and provide compensation in the form of performance-based stock option awards, subject to and contingent upon approval and adoption of the Board of Directors, as well as approval of the stockholders and, in all cases, based on the closing price of the Company’s publicly-traded common stock on the applicable date of grant. Under the terms of his employment agreement, Mr. White is entitled to (i) a sign-on/retention bonus consisting of a one-time lump-sum payment of $50,000 and a grant of nonqualified stock options to purchase shares of the Company’s common stock with an exercise price equal to $400,000 (subject to shareholder approval), and (ii) stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $840,000 (subject to shareholder approval.) Under the terms of his service agreement, Mr. Owens is entitled to (i) a sign-on/retention bonus consisting of a grant of nonqualified stock options to purchase shares of the Company’s common stock with an exercise price equal to $125,000 (subject to shareholder approval) and (ii) stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $585,000 (subject to shareholder approval.) Under the terms of his employment agreement Mr. Nketiah is entitled to stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $90,000 (subject to shareholder approval.) In addition to the payments stock and option grants described above, each of Messrs. White, Owens and Nketiah are receiving cash compensation and are eligible for additional cash bonuses. Pursuant to the guidance in ASC 718 a grant date has not been established for the stock option awards “granted” to the senior employees as 1) shareholder approval for the awards, which is not a formality or perfunctory, has not been obtained and 2) the specific performance criteria has not been established. Once a grant date has been established the company plans to recognize and measure the awards in accordance with ASC 718.
Loan Payable – Officer
On November 1, 2021, the Company received $200,000 as a loan from the Company’s Chief Executive Officer. The loan hashad a principal of $200,000, an interest rate of 99%%, and a maturity date of the earlier of (i) October 31, 2022 or (ii) the date of the consummation of the initial public offering. The note was amended as of January 1, 2023 to extend the due date to March 17, 2023 and to provide that interest payable on the maturity date will be $39,000 less any interest payments previously made. Total interest expense on this note was $4,50018,000 and $13,500 for the three and nine months ended September 30, 2022. Total interest expense on this note was $0 and $0 for the three and nine months ended September 30, 2021. There was $200,000 outstanding at September 30, 2022 and December 31, 2021, respectively. With respect to the amount owed under this loan, the Company’s Chief Executive Officer has agreed to defer payment until December 15, 2022.
Promissory Notes
On October 19, 2018, the Company issued an on demand promissory note payable with the Company’s Chairman of the Board for $10,000 with interest to begin accruing on January 1, 2020 at 5% per annum. On September 28, the Company’s Chairman of the Board waived the accrued interest of $2,718 which amount is reflected as Additional Paid in Capital. The note was paid in full as of September 30, 2022. Total interest expense on this note was $369 and $1,110 for the nine months ended September 30, 2023 and 2022, respectively. The December 31, 2022 outstanding principal balance of $200,000 was satisfied by a payment on March 17, 2023. The March 31, 2023 outstanding interest balance of $34,500 was satisfied by a payment on April 26, 2023.
Leases
Our principle executive office is located at 1776 Yorktown, Suite 550, Houston, Texas 77056. Under ASC 842 “Leases”, we have two separate sub-leases (through IIcom Strategic Inc. controlled and 2021, respectively. Total interest expense onowned by our Chief Executive Officer) totaling approximately 4,000 square feet of office space under operating leases. Management and supporting staff are hosted at this note waslocation. Our lease payments for fiscal year 2022 were $11954,000 and $370. Our lease costs for each of the threenine months ended September 30, 2023 and 2022 were $40,500. The sub-leases are due to expire in 2024. Pursuant to the sublease, we pay the third-party landlord (not the sub landlord) all direct and 2021, respectively.indirect rent costs under the primary lease directly for the leased premises. No additional payments are made to the Chief Executive Officer or the entity controlled by him.
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NOTE 76 — LOANS PAYABLE
Loans Payable
On October 25, 2018, the Company entered in a promissory note payable with an accredited investor for $50,000 due on October 25, 2019. Pursuant to the note, the maturity date was extended to October 25, 2020. The promissory note bears interest at 100% per annum and the note holder was issued shares of the Company’s common stock in lieu of interest. On October 7, 2020, the Company entered into a Letter of Agreement Addendum with the note holder, whereas, the Company agreed to make ten monthly principal payments beginning November 1, 2020 with the full principal amount to be paid in full by August 31, 2021. In addition, if the full principal amount was not paid in full by August 31, 2021 the Company was to and did issue an additional 2,500 shares of common stock to the noteholder. On November 11, 2021, the Company entered into a Second Letter of Agreement Addendum with the note holder, whereas, the Company agreed to continue making monthly payments beginning on December 1, 2021. Total interest expense related to this note was $15,643 and $37,500 for the nine months ended September 30, 2022 and 2021, respectively. Total interest expense related to this note was $4,100 and $12,500 for the three months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company paid $27,200 and $9,600, respectively, in cash towards the outstanding principal. The amount outstanding at December 31, 2021, was $27,200. On September 28, the note holder waived the accrued interest of $165,643 and the note was paid in full as of September 30, 2022.
On February 4, 2021, under the U.S. Small Business Administration’s Paycheck Protection Program, the Company entered into a second note payable with a financial institution for $22,916 at an interest rate of 1% per annum and a maturity date of February 4, 2026. Pursuant to the note, principal and interest payments are deferred for ten months, which, at any time during the ten months the Company may apply for loan forgiveness. The Company applied for loan forgiveness on a timely basis, and as of September 30, 2022, the total amount of $22,916 has been forgiven.
Legacy Ventures International, Inc.
On September 11, 2017, the Company issued a promissory note (the “Promissory Note”) in favor of Legacy Ventures International, Inc. (“Legacy”) as part of a commercial transaction with Legacy that was never consummated. The Promissory Note was issued in the original principal amount of $500,000, with interest at 44%% per annum and a maturity date of December 31, 2017. As of September 30, 2022,2023, this promissory note is in default. The Company recorded $15,000 and $15,000 of interest expense for the nine months ended September 30, 20222023 and 2021,2022, respectively. The Company recorded $5,000 and $5,000 of interest expense for the three months ended September 30, 20222023 and 2021,2022, respectively. The amount outstanding at September 30, 20222023 and December 31, 20212022 was $500,000.
NOTE 87 — STOCKHOLDERS’ EQUITY (DEFICIT)(Deficit)
Issuance of Common Stock
During the three months and nine months ended September 30, 2021, the Company issued an aggregate of and shares of common stock to various investors for cash proceeds of $67,750 and $671,407.
During the three months and nine months ended September 30, 2021, the Company issued an aggregate of and shares of common stock with a fair value of $and $per share to various consultants for services rendered in lieu of cash for a compensation charge of $1,494,803 and $4,358,033.
During the three months and nine months ended September 30, 2021, the company issued an aggregate of and shares of common stock to various note holders for the conversion of debt.
During the three months and nine months ended September 30, 2021, the company issued an aggregate of 0 and 8,492 shares of common stock to various investors for the conversion of warrants.
During the three months and nine months ended September 30, 2022, the Company issued and shares of common stock to investors for net proceeds of $8,540,171 and $8,545,171.
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During the three months ended September 30, 2022, the Company issued shares of common stock for services in lieu of cash of which was to outside consultants, to U.S. Asian (a related party) and shares to the members of the Board of Directors for their services as Board Members. The amount expensed during the three months ended September 30, 2022 in the unaudited condensed consolidated statement of operations was $ which included $60,000 related to shares not yet issued.
During the nine months ended September 30, 2022, the Company issued 453,391 which included $120,000$120,000 related to shares not yet issued.
During the three months ended September 30, 2023, the Company issued shares of common stock to Wider pursuant to the service agreement resulting in $750,000 of stock-based compensation expense. Under the service agreement the Company has an obligation to issue an additional 150,000 shares to Wider resulting in an additional $750,000 of stock-based compensation. Due to the nature of the payment the amount was classified in research and development expense.
Warrants
The issuance of warrants to purchase shares of the Company’s common stock are summarized as follows:
Schedule of warrants | ||||||||||||||||
Number of Warrants | Weighted Average Exercise Price | Number of warrants | Weighted Exercise | |||||||||||||
Outstanding, December 31, 2021 | 21,600 | $ | 10.00 | |||||||||||||
Outstanding December 31, 2022 | 2,662,250 | $ | 4.15 | |||||||||||||
Issued | 2,482,250 | 4.15 | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Expired or cancelled | - | - | - | - | ||||||||||||
Outstanding September 30, 2022 | 2,503,850 | $ | 4.20 | |||||||||||||
Outstanding September 30, 2023 | 2,662,250 | $ | 4.15 |
The following table summarizes information about warrants to purchase shares of the Company’s common stock outstanding and exercisable at September 30 2022:2023:
Summary information about warrants to purchase | Summary information about warrants to purchase | |||||||||||||||||||||||||||||||||||
Exercise Price | Exercise Price | Outstanding Number of Warrants | Weighted Average Remaining Life In Years | Weighted Average Exercise Price | Exercisable Number of Warrants | Exercise Price | Outstanding Number of Warrants | Weighted Average Remaining Life In Years | Weighted Average Exercise Price | Exercisable Number of Warrants | ||||||||||||||||||||||||||
$ | 10.00 | 21,600 | 0.08 | $ | 10.00 | 21,600 | 4.15 | 2,315,000 | $ | 4.15 | 2,135,000 | |||||||||||||||||||||||||
$ | 4.15 | 2,135,000 | 3.00 | 4.15 | 2,135,000 | 4.15 | 347,250 | 4.15 | 347,250 | |||||||||||||||||||||||||||
$ | 4.15 | 347,250 | 3.00 | 4.15 | 347,250 | |||||||||||||||||||||||||||||||
2,503,850 | 3.00 | $ | 4.15 | 2,503,850 | 2,662,250 | $ | 4.15 | 2,662,250 |
The compensation expense attributed to the issuance of the warrants, if required to be recognized on the nature of the transaction, was recognized as they vested/earned. These warrants are exercisable up to one yearthree years from the date of grant. All are currently exercisable.
Shares To Be Issued
During December 2021, the Company entered into one-year agreements with three individuals to serve on the Company’s Board of Advisors. Each agreement may be extended for an additional one-year term upon agreement of both parties. As consideration, the Company is to issue an aggregate of $ in shares of the Company’s common stock. During the nine months ended September 30, 2022, an aggregate of $ of stock-based compensation was recorded in the unaudited condensed consolidated statement of operations. As of September 30, 2022, the shares were not issued.
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NOTE 98 — COMMITMENTS AND CONTINGENCIES
Legal Claims
There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company other than the following:
Sarah Veltz v. Nexalin Technology, Inc. et al.
Plaintiff, Sarah Veltz, filed a lawsuit in this matter on January 20, 2021 in Orange County Superior Court (Case No. 30-2021-01180164-CU-WT-CJC) (the “Complaint”) naming the Company and others as defendants. In her Complaint, Plaintiff contends that she was employed by defendants, including Nexalin, and has not been paid all wages, including overtime wages and other benefits allegedly due her. Plaintiff also contends that, during her employment, she was subjected to sexual harassment by the Company’s then Chief Executive Officer. Plaintiff seeks both compensatory and punitive damages. On March 12, 2021, the Company filed its answer to the Complaint. TheAlthough the parties are seeking mediation, the court has set a jury trial in this matter for April 24, 2023.March 18, 2024. Management’s intent is to contest the allegations vigorously and, as of the date of this report, is unable to provide an evaluation of the potential outcome of the litigation within the probable or remote range or to provide an estimate of the amount of or a range of potential loss that might be incurred by the Company. The Company believes its potential exposure to be approximately $50,000 and, as such, has accrued this amount on the unaudited consolidated balance sheet at September 30, 2022 and December 31, 2021.
Employment Development Department
The Company is currently engaged in settlement discussions with the Employment Development Department (EDD) of the state of California. This matter involves issues related to our previous management’s classification of certain work provided to or on behalf of the Company’s business as contract labor instead of employee labor. The EDDtotal amount involved is approximately $300,000. Management has subpoenaed six years’ worth of information from the Company and currently is considering levying a $286,000 tax charge. Management have petitioned for reassessment and believebelieves the hired workers at issue were indeed actual contractors and not employees. All ourWe have no business in California has been closedother than one part time and moved out of the state. We have one partfull time worker residing in California. An initial hearing before an EDD magistrate was held on April 15, 2022. A second hearing was held in June of 2022. We are now in negotiations with the EDD for a final settlement. The Company believes its potential exposure to be approximately $286,000$300,000 and, as such, has accrued this amount on the unaudited condensed consolidated balance sheets atas of September 30, 20222023 and December 31, 2021.2022 and believes it has adequately accrued for this matter.
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Demand Letter from The University of Arizona
On December 8, 2022, the Company received a demand letter from the University of Arizona seeking payment of $111,094 purportedly due on an Investigator Initiated Cooperative Study Agreement, dated as of September 25, 2017 (the “2017 Study”). The Company believes that the 2017 Study was not completed and no payment was due. In fact, for a number of months prior to receipt of the demand letter, the Company had had discussions with the person at the University of Arizona who was to conduct the 2017 Study concerning updating the 2017 Study and completing an updated study and related work. After receipt of the demand letter, the Company has had discussions with the University of Arizona concerning resuming an updated study and receipt of credit for some or all the monies claimed to be due for the 2017 Study. As of October 13, 2023, the Company and the University of Arizona agreed on the terms of a settlement for the amounts claimed by the University, whereby the Company will pay an aggregate of approximately $69,000 (in three equal monthly payments) in full satisfaction of amounts the University claims it is owed.
NOTE 109 — LEASES
With the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as ROU assets and corresponding lease liabilities.
On January 1, 2022, the Company exercised its right to lease an additional 400 square feet of office space and an increase of monthly rent of $500. In accordance with ASC 842 management accounted for this as a separate lease and, as a result, recorded an ROU asset and lease liability of $11,359.
When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 99%%.
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Operating leases are included in the condensed consolidated balance sheets as follows:
Schedule of Operating leases | |||||||||||||||||||||
Schedule of operating leases | |||||||||||||||||||||
Classification | 9/30/2022 | 12/31/2021 | Classification | September 30, 2023 | December 31, 2022 | ||||||||||||||||
Lease assets | |||||||||||||||||||||
Operating lease cost ROU assets | Assets | $ | 7,512 | $ | - | Assets | $ | 1,963 | $ | 6,171 | |||||||||||
Total lease assets | $ | 7,512 | $ | - | $ | 1,963 | $ | 6,171 | |||||||||||||
Lease liabilities | |||||||||||||||||||||
Operating lease liabilities, current | Current liabilities | $ | 49,562 | $ | 40,845 | Current liabilities | $ | 17,635 | $ | 50,797 | |||||||||||
Operating lease liabilities, non-current | Liabilities | 17,634 | 49,089 | Liabilities | - | 4,463 | |||||||||||||||
Total lease liabilities | $ | 67,196 | $ | 89,934 | $ | 17,635 | $ | 55,260 |
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The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations and comprehensive loss, were as follows:
Schedule of Lease costs | ||||||||||||||||||||||||
Schedule of lease cost | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Leases costs | ||||||||||||||||||||||||
Operating lease costs | $ | 13,500 | $ | 12,000 | $ | 40,500 | $ | 36,000 | $ | 13,500 | $ | 13,500 | ||||||||||||
Total lease costs | $ | 13,500 | $ | 12,000 | $ | 40,500 | $ | 36,000 | $ | 13,500 | $ | 13,500 |
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Leases costs | ||||||||
Operating lease costs | $ | 40,500 | $ | 40,500 | ||||
Total lease costs | $ | 40,500 | $ | 40,500 |
Future minimum payments under non-cancellable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2022:2023:
Future minimum payments under non-cancelable leases for operating leases | ||||||||
Fiscal Year | Operating Leases | Operating Leases | ||||||
Remainder of 2022 | $ | 13,341 | ||||||
2023 | 53,675 | |||||||
Remainder of 2023 | $ | 13,467 | ||||||
2024 | 4,496 | 4,496 | ||||||
Total future minimum lease payments | 71,512 | 17,963 | ||||||
Amount representing interest | 4,316 | (328 | ) | |||||
Present value of net future minimum lease payments | $ | 67,196 | $ | 17,635 |
Additional information related to leases is presented as follows:
Schedule of additional information related to leases | ||||||||||||||||
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
Leases | ||||||||||||||||
Weighted average remaining lease term | 1.25 | 2.00 | .25 | 1.00 | ||||||||||||
Weighted average discount rate | 9.9 | % | 10 | % | 9.9 | % | 9.9 | % |
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NOTE 1110 — CONCENTRATION OF CREDIT RISK
Revenues
Concentration of credit risk | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Customer A – related party | 95 | % | 47 | % | 92 | % | 22 | % | ||||||||
Customer B | - | % | - | % | - | % | 11 | % |
Three customers accounted for 70% and 55% of revenues for the three and nine months ended September 30, 2023, respectively as set forth below:
Concentration of credit risk | ||||||||
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||
Customer A | 27 | % | 24 | % | ||||
Customer B | 23 | % | 18 | % | ||||
Customer C | 20 | % | 13 | % |
One customer, a related party, accounted for 92% and 95% of revenue for the three and nine months ended September 30, 2022, respectively.
Accounts Receivable
Two customersOne customer, a related party, accounted for 8670%% or of accounts receivable at September 30, 2022.
Three customers accounted for 67% of the accounts receivable as of December 31, 2021,2023, as set forth below:
September 30, 2023 | |||||
Customer | % |
Four customers accounted for 84% of accounts receivable at December 31, 2022, as set forth below:
December 31, 2022 | ||||
Customer A | 29 | % | ||
Customer B | 20 | % | ||
Customer C | % | |||
Customer D | 15 | % |
NOTE 11 — SUBSEQUENT EVENTS
Management did not identify any additional subsequent events that would have required adjustment or disclosure in the unaudited consolidated condensed financial statements.
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ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
You should read the following discussion and analysis of financial condition and operating results together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in included in our Registration StatementAnnual Report on Form S-1 as10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission, or SEC with respect to our initial public offering completed on September 20, 2022. (SEC File number 333-261989).March 27, 2023. References in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “us,” “we,” “our,” and similar terms refer to Nexalin Technology, Inc. This discussion contains forward-looking statements as that term is defined within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. sections. The events described in forward-looking statements contained in this discussion may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions that may be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Risk Factors “in this quarterly report on Form 10-Q as well as the risk factors set forth in the section titled “Risk Factors” included in our Registration Statement for our initial public offering as filed with the Securities and Exchange Commission (SEC File number 333-26198), Our actual results may differ materially from those anticipated in these forward-looking statements. For convenience of presentation some of the numbers have been rounded in the text below.
Overview
We design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic. We previously developed and sold an easy-to-administer medical device — referred to as Generation 1 or Gen-1 — that utilizes bioelectronic medical technology to treat anxiety and insomnia, without the need for drugs or psychotherapy. These types ofOur original Gen-1 devices are based upon cranial electrotherapy stimulation (CES). Our original Gen-1 devices that emit a waveform at 4 milliamps during treatment and are nowpresently classified by the FDA, as of December 2019U.S. Food and Drug Administration (“FDA”) as a Class II device.
Medical professionals in the United States have utilized the Gen-1 device to administer CES to patients in clinical settings. While the Gen-1 device had originally been cleared by the FDA to treat depression, anxiety, and insomnia, three prevalent and serious diseases, as a resultbecause of the FDA’s December 2019 reclassification of CES devices, the Gen-1 device was reclassified as a Class II device for the treatment of anxiety and insomnia. Additionally, weWe are required to file an amendeda new application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the marketingsales and salesmarketing of our devices for the treatment of anxiety and insomnia. We are analyzing whether to proceed with an amendment of our prior applications with the FDA for Gen-1 devices.
In the FDA’s December 2019 reclassification ruling, the treatment of depression with our device will remainrequire a classClass III certification and require a new PMA (premarket approval) application to demonstrate safety and effectiveness.
We have also designed and developed new advanced waveform technology to be emitted at 15 milliamps through our existing medical device. Now improved with a modern enclosure referred to as Generation 2 or Gen-2 which can penetrate deeper into the brain and stimulate associated structures of mental illness, which we believe will generate enhanced patient response. Gen-2 is presently being tested in clinical trials, for anxiety, insomnia and depression in the United States, and preliminary data provided by the University of California San Diego supports the safety of utilizing our new waveform technology. Currently, the waveform that comprises the basis of Gen-2 and Gen-3 devices is being tested in a research setting to determine safety. This data is to be provided for review by the FDA for safety and efficacy evaluation. Determinations of the safety and efficacy of our devices are solely within the authority of the FDA.
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The Nexalin regulatory team has made a strategic decision to begin developing strategies for a new PMA application for the treatment of depression with our new Gen-2 device. While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices in the United States. Servicing consists of warranty coverage, electrode sales, and patient cable replacement. This servicing is included in the monthly lease payment. Providers may continue to use these devices for treatment purposes. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licenselicensing fees and paymentpayments for the sale of electrodes to clinical providers of our technology.and patient cables. We have suspended marketing andefforts for new sales efforts in the United States onof devices related to the Gen-1 device for treatment of anxiety and insomnia. Additionally,insomnia in the United States until the Nexalin regulatory team makes a decision on amending our existing 510(k) application at 4 milliamps. A new pre-sub document in preparation of a new 510K for our Gen-3 Halo headset at 15 mAmps was filed with the FDA in January of 2023. Formal comments to our pre-sub document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023. Minutes of the meeting with the FDA were filed with the FDA on May 16, 2023. No additional comments have been received from the FDA at this time.
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We have designed and developed a new advanced waveform technology to be emitted at 15 milliamps through new and improved medical devices referred to as Generation 2 or Gen-2 and Generation 3 or Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that will be prescribed by licensed medical professionals in a virtual clinic setting similar to existing Tele-health platforms. The Nexalin research team believes that the new 15 milliamp Gen-2 and Gen-3 devices can penetrate deeper into the brain and stimulate associated structures of mental illness, which we believe will generate enhanced patient response without any risk or unpleasant side effects. The Nexalin regulatory team has informed FDA inspectors that we continuemade a strategic decision to supportdevelop strategies for pilot trials in various mental health disease states. In addition, a new PMA application in the operationsUnited States is in development for the treatment of clinical providers that were using our Gen-1 devices prior todepression utilizing both Gen-2 and Gen-3. The new Gen-3 device is also scheduled for additional pilot trials for anxiety and insomnia in the December 2019 rulingUnited States beginning in the fourth quarter of 2023. Preliminary data provided by the University of California San Diego supports the safety of utilizing our 15 milliamp waveform technology. However, the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA.
WeAdditionally, we are currently making strategic plans fordesigning clinical trialstrial strategies for the use of Gen-2Gen-3 for the treatment of substance use disorders opiates additions, chronic pain,including opiate, cocaine, and alcohol abuse. Recently the Gen-2 device was tested in pilot trials in China for substance abuse/addiction and the treatment of Alzheimer’s disease and dementia. Continued pilot testing for Alzheimer’s and dementia is planned in China in 2023 and 2024.
In part due to increasing incidence attributed to the devastating impacts of the COVID-19 pandemic, mental health and cognitive disorders are widespread across the globe and cause substantial health, social and economic losses.losses, and hardships accordingly. Our focus is on the continued development of our innovative bioelectronic medical technologies and rapid regulatory approvalapproval. We intend to help reverse these losses, and hardships of these losses, by safely and effectively treating various mental health disorders.disorders associated with post Covid and long Covid mental disease states.
All our products are non-invasive, andsafe, undetectable to the human body and critically, can provide relief to those afflicted with mental health issues without adverse side effects. We have a proprietary design of varying voltages,that stabilizes currents, electromagnetic fields, and various frequencies — referred to collectively as waveform —- particularly our proprietary, 15 milliamp patented symmetrical alternating current waveform. Our devices generate a high frequency charge balanced electrical current waveform thatcarrier wave. It is applied to threethe brain with an array of electrodes on the head.forehead and behind each ear at the mastoid. The features of this proprietary waveform makeand the array of electrodes allow the application of the stimulation undetectablewaveform to the human body.entire brain rather than a small, targeted area of the brain. By increasing the power, our waveform can penetrate deeper into the brain and stimulate deep mid-brain structures associated with mental illness. Our research and clinical teams believe that a more powerful waveform will create a stronger response in the brain. A stronger response creates a higher level of efficacy. This entire proprietary technique allows Nexalin to provide a safe and comfortable treatment that is proprietarymore powerful than any stimulation device in the market. Current pilot study protocols and randomized clinical trials have been designed and submitted to the FDA to provide feedback on final reports and data sets for the purpose of safety and efficacy evaluations in the future. Determinations of the safety and efficacy of our devices which enablesare solely within the useauthority of a higher current than all otherthe FDA.
Currently, the waveform that comprises the basis of Gen-2 and new Gen-3 headset devices has been tested in research settings to develop safety data that has been submitted for review by the FDA for safety evaluation and eventual marketing in the United States and around the world. Determinations of the safety and efficacy of our devices in the market.United States are solely within the authority of the FDA.
We recognize that an additional barrier to treatment in today’s mental health treatment landscape -- beyond the concerns about safety, efficacy and side-effects that have been associated with conventional mental health treatments such as ECT (shock therapy), drugs and psychotherapy -- is stigma. We have received industry reports and feedback that many patients that struggle with mood disorders have the stigma of embarrassment associated with psychiatrists and psychotherapy (e.g., counselling with a therapist). Additional stigmas and other issues are associated with the side effects of medication prescribed by psychiatrists. When we researched the current pharmaceuticals model, public information highlighted the many side effects associated with these medications. Frequently, patients would stop taking the medication because of the uncomfortable side effects. Additional public information mentions dependency and withdrawal issues associated with medication for psychiatric disorders.
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To address the embarrassment stigma, we are developing a new virtual clinic that will allow the physician to diagnose a mental health issue in the privacy of a tele-psychiatry virtual platform. After diagnosis, the physician will prescribe the Nexalin Gen-3 headset to the patient for treatment. Next, the Gen-3 device will be shipped to the patient’s home. After the patient receives the device, they will pair the headset device with an app in the patient’s smart phone. The app will communicate with the Nexalin cloud servers to authorize the device for treatment according to the protocol designed by the physician. The physician will monitor treatment compliance and other health related issues in a private physician dashboard that connects through the Nexalin app and cloud servers. We believe that to preserve product safety and integrity for home use, the headset device will require physician oversight that will include a prescription for use with a monthly authorization provided by the physician after a monthly virtual visit. All appointments will be in a virtual setting to provide privacy and convenience for the physician and patient. The Nexalin virtual clinic will be provided in a proprietary virtual platform currently in the design stage.
Our China Gen-2 15 milliamp device was recently approved in China by the NMPA for the treatment of insomnia and depression in China. This device and all other clinical devices will include a single use electrode for long term revenue streams. The USA Gen-2 device iswill have a fresh and modern appearance that meets the technology standards of the digital tech world of 2023. Early adopters of the Gen-1 device will be able to access additional firmware upgrades which are planned to enhance the previously purchased devices to the new symmetric15-milliamp waveform. Our Gen-2 device will be equipped with Radio Frequency Identification (RFID)RFID technology that exchanges electrode usage data with a reader in the main device. The purpose of RFID is to track and maintain control of the proprietary single use electrode. Our electrode chip will be programmed to exchange data with the device and allow activation for a single treatment with a new electrode only. The use of a disposable RFIDThis ensures a recurring revenue stream on the device and protects against any generic knockoffs.knockoffs designed to avoid treatment costs. This upgrade in technology also ensures the proprietary nature of the electrodes that support treatment outcomes are sustained. The revenue projections in Phase 2 are based on device sales and recurring disposable electrode sales.
We will also be developing a new headset design for our products that will offer medical professionals the opportunity to prescribe the headset device — Gen-3 — for use in a patient’s home to increase access to mental health treatment.
We recognize that an additional barrier to treatment in today’s mental health treatment landscape — beyond the concerns of safety, efficacy and discomfort that have been associated with conventional mental health treatments such as drugs, psychotherapy and other forms of electrical stimulation — is stigma. We have received industry reports and feedback that many patients that struggle with mood disorders have a stigma of embarrassment associated with psychotherapy (e.g., counselling with a therapist). Additional barriers to treatment are the side effects of medication prescribed by psychiatrists. To address the embarrassment stigma, we are developing a new headset design to emit our waveform technology which will offer medical professionals the opportunity to prescribe the headset device for use in a patient’s home — referred to as Generation 3 or Gen-3 — to increase access to mental health treatment. We believe that in order to preserve product safety and integrity for home use, the headset device will require physician oversight including prescriptions for use, monthly authorization for continued patient use and monthly physician monitoring through our digital management platform.
According to Infinium Global Research, the global neurostimulation device market is projected to grow from approximately $4.7 billion in 2018 to approximately $9.8 billion for a CAGR of 10.9% from 2019-2025. There are several drivers of this growth. First, many mental health disorders are treated with psychotherapy or pharmaceutical intervention and have limited efficacy and, in the case of the latter increased awareness of the side effects of medication. Second, the rising number of geriatric patients, particularly with respect to Alzheimer’s disease, will increase demand for mental health treatments. Third, increased diagnosis of cases of anxiety, depression and various other mental health disorders in all age populations will contribute to market expansion. Doctors and patients will seek effective, safer and more cost-effective alternatives to current care standards. Advancements in neurostimulation techniques, such as those we are developing, will provide treatment options that address irregularities in the brain’s functional health. These functional brain health issues are believed to be the underlying cause of many mental health disorders and chronic diseases.
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Overall, we believe that our advanced waveform, technological upgrades and the development of a modern headset monitored with our IT management platform evidenced in our Gen-2 and Gen-3 devices, will position us with the opportunity to disrupt the traditional mental health treatment model. Our mission is to remove the stigma of expensive psychotherapy or pharmaceuticals with the attendant side effects and dependency issues and replace such stigma with clinically proven and cost-effective technology that is easily accessible in the privacy of the patient’s home and monitored by licensed healthcare providers.
Since our inception, we have generated significant losses,losses; we expect to continue to incur significant expenses and increasing operating losses for at least the next two years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures onfor other research and development activities. We expect our expenses will increase substantially over time as we:
● |
● | review and analyze the value of amending our previous 510(k) Application for anxiety and insomnia in accordance with the FDA and seek other regulatory approvals for any future products that successfully complete clinical trials; |
● | arrange for a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any product candidate for which we may obtain regulatory approval and intend to commercialize on our own; |
● | maintain, expand and protect our intellectual property portfolio; |
● | engage additional clinical, scientific, manufacturing and controls personnel; and |
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● | add additional |
Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
Recent Developments
Completion of Initial Public Offering; Use of ProceedsOffering
The Company completed its initial public offering on September 20,16, 2022. The initial public offering consisted of 2,315,000 units consisting of 2,315,000 shares of its Common Stock and 2,315,000 accompanying warrants to purchase up to 2,315,000 shares of common stock. Each share of common stock is beingwas sold together with one Warrant,warrant, each to purchase one share of common stock with an exercise price of $4.15 per share at a combined offering price of $4.15, for gross proceeds of approximately $9,607,000 million,$9,607,250 before deducting underwriting discounts and offering expenses. In addition, Nexalin granted the underwriters a 45-day option to purchase up to an additional 347,250 shares of common stock and/or Warrantswarrants to purchase up to 347,250 shares of common stock to cover over-allotments at the initial public offering price, less the underwriting discount. The underwriters exercised their option to purchase 347,250 warrants for net proceeds of $3,473.
The registration statement on Form S-1 (File No. 333-261989) for our initial public offering was filed with the Securities and Exchange Commission (“SEC”) and became effective on September 15, 2022. A final prospectus relating to the offering was filed with the SEC and is available on the SEC’s website at http://www.sec.gov. The offering was being made only by means of a prospectus forming part of the effective registration statement.
The shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) onin September 20, 2022, under the symbols “NXL” and “NXLIW”, respectively.
The Company received net proceeds of $8,543,645 (after underwriting and offering expenses of $1,067,078) from its initial public offering. As of November 1, 2022, we have utilized the net proceeds to support our daily operations and as follows:
$74,000 to fund clinical trial research, trials, and development work for future product candidates
$237,419 to pay past due service fees to U.S. Asian Consulting Group, LLC
$16,000 for regulatory and certification costs, and
$285,000 for legal, accounting and administrative expenses.
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Impact of COVID-19 Pandemic
We continue to monitor how the COVID-19 pandemic is affecting our employees, business and clinical trials. Such pandemic has delayed our clinical trials and our receipt of marketing approvals from the FDA. Such pandemic also might have reduced, and continue to reduce, participation in our clinical trials, due to both travel restrictions and a general unwillingness of subjects to travel. We cannot presently predict the scope and severity of any other potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including the suppliers, clinical trial sites, regulators and other third parties with whom we conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted.
We continue to be indirectly impacted by the Covid-19 pandemic because of our current dependence upon our distributor relationship with Wider.Wider Come Limited (“Wider”.) Wider acts as a distributor for the Company’s devices in China and Asia. Because of significant restrictions imposed by the Chinese government during the Covid pandemic, Wider’s ability to market and sell the Company’s devices has been negatively impacted, resulting in decreased revenue to the Company. Patients and salespeople are restricted in their movements resulting in a significant slowdown in the medical and other sectors. Fortunately, our Chinese distributor continues our strategy of multiple clinical studies in the major institution in Beijing in an array of brain related diseases. Very significant efforts and funds expended by our Chinese distributor has led to regulatory approval in China in both depression and insomnia thus far which has allowed for sales of our devices in China this yearthe past year. The extent of future impact will depend on future developments, including future activities by the Chinese government and other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others.
In addition, the spread of an infectious disease, including COVID-19, may also result in the inability of our suppliers to deliver components or raw materials on a timely basis. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among other things.
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Formalization of the Joint Venture; China Market and Potential Wider Come Joint Venture RelationshipRelated Activities
On SeptemberDecember 21, 2018, the Company entered into the first of a series of preliminary agreements providing for the establishment of a joint venture (“JV”) agreement (the “JV Agreement”) with Wider Come Limited, a China company (“Wider”) for the purpose of marketing, sale and distribution of the Company’s proprietary devices for the treatment of (i) anxiety, depression and insomnia (“ADI”) and (ii) Alzheimer’s and dementia (“AD”) in the applicable territories. Wider has an experienced medical technology team in China and whenChina. The parties formalized the JV on May 31, 2023. The joint venture is to be conducted through a company formed under the Joint Venturelaws of Hong Kong.
The JV will design and implement a comprehensive business model and distribution plan for our devices in China, Hong Kong, Macau and Taiwan. The Joint Venture will be formed followingembodiment of the agreed-upon terms and conditions of the JV in the formalized JV Agreement follows Wider’s completion of certain funding, clinical study, and publication milestones, which Wider has agreedas well as the resolution of certain regulatory concerns in China.
The Company granted the JV a license to undertake but not yet completed. Following its formation,commercialize and exploit certain of the Joint VentureCompany’s products and technologies in specified designated territories, and the JV will design and implement a comprehensive business model and distribution plan for ourthese products and devices in China, Hong Kong, Macau and Taiwan. The first phase of distribution in China includes implementation of a sales strategy bysuch designated territories.
Under the JV Agreement, Wider is obligated to fund all operations for mainland China and other territories serviced by Wider.
As originally contemplated, eachthe initial 12-month period of the parties to the joint venture would hold a 50% interest in the equity, profits and losses, shareholder voting, management control and rights to use production capacity of the facility. The Company will provide a global exclusive technology license for ADI treatment to the JV, after which Nexalin and Wider will contribute funding forplan to jointly fund the design and execution of Company approved clinical studies, which we had estimated at the time of our initial public offering would have cost the Company approximately $4,800,000 if the clinical studies had been undertaken by usJV’s operating expenses in the United States. The Company will also provide the Joint Venture (the “JV”)accordance with a license for exclusive distribution of its technology for the treatment of ADI in additional territories. their pro rata ownership.
The JV if completed, will beentity is controlled by an equally representeda Board of Directors in which Wider is to have sole representation but neither entitythe Company nor Wider has soleexclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin will own 52% and 48% of the JV, respectively. The Incorporation Form (Company Limited by Shares) filed with the Companies Registry in Hong Kong currently originally reflected a 50%-50% ownership interest in the JV, but has been amended to properly reflect the 52%-48% ownership formalized in the JV agreement.
On April 6, 2020,Under the preceding terms of the collaborative arrangement between the Company entered into a three-year service agreement withand Wider, pursuant to which Wider agreed to perform clinical trials associated with the formationserved as an authorized distributor of the JV. InCompany’s Gen-2 devices in Asia. As part of the consideration for Wider’s performance of its obligations to the Company prior to the recent formalization of the JV, the Company and certain designated Wider shareholders entered into stock issuance agreements for the issuance of 450,000 shares of the Company’s common stock, and simultaneously with the execution of thethis service agreement, Wider contributed $200,000 to the Company. During the year ended December 31, 2020, the Company issued 150,000 shares to affiliates of Wider in satisfaction of the obligation. The fair value of the 150,000 shares issued (less the contributed $200,000 in cash) resulted in a charge to stock-based compensation of $550,000 and iswas recorded in selling, general and administrative expenses on the statement of operations. The remaining 300,000operations and comprehensive loss. On July 13, 2023, the Company issued an additional 150,000 shares will be issued in the following schedule upon Wider’s successful completion of the following milestones (i) 50% upon successful completion of the fourth of four clinical trialsto certain designated Wider shareholders pursuant to the terms and conditions of the service agreementscollaborative agreement between the Company and (ii) 50%Wider. Under the terms of the collaborative agreement, designated shareholders of Wider are entitled to an additional 150,000 shares upon all four trials being submitted for publication in international medical journals satisfactory toWider’s achievement of certain milestones, which were considered probable of occurring during the Company. As of December 31, 2021 andthree months ended September 30, 2022, these milestones have not been met.2023. As such, the company recognized the full $1,500,000 fair value of the remaining 300,000 shares during the three-month period ended September 30, 2023.
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In March 2022, we entered into a second supplement to the Joint Venture agreement with Wider, whereby the parties confirmed that the Joint Venture had not yet been established and is subject to further review and analysis of regulatory issues in China and the United States, trade and political issues between the two countries and potential changes in the use and market for the Company’s products and technology. Pursuant to the second supplement, the parties agreed to use their commercial efforts to complete documentation by September 30, 2022. In light of general economic conditions in China and the United States and the continued impact of regulatory issues in China and the United States and trade and political issues between the two counties, the parties determined to further extend the time frame to complete establishment of the joint venture to September 30, 2023 and entered into a supplement 3 to the Joint Venture Agreement to memorialize such extension. The parties intend to continue to work together to complete the establishment prior to such extended time. Although Wider continues its efforts on clinical trials in various areas of brain related diseases, it is not possible at this time to estimate when normal sales activities for our devices will resume.
As of September 30, 2022, the joint venture has not been established.
During the first nine months of 2022, we sold Gen-2 devices in China through Wider which agreed to act as a distributor on a limited basis pursuant to a separate agreement entered into in May 2019, pending formation of the Joint Venture. During the nine months ended September 30, 2022, we derived revenue of approximately $1,183,367 from this distribution relationship. As a result of the Covid pandemic and the China government’s implementation of severe restrictions on businesses and people, we anticipate that we will incur a significant and material negative impact on sales and revenue from the China market in the fourth quarter of 2022. As with all other economic activities in China, at this point it is impossible to predict when orders will again commence.
In September of 2021, the NMPA, the equivalent of the United States FDA, approved the Gen-2 device for marketing and sale in China for the treatment of insomnia and depression. These treatment indications and clearances from the NMPA have allowed us to market and sell the Gen-2 device in China for the treatment of insomnia and depression. The significant cost of studies and the approval process in China has been borne by Wider.
We do not believe that any other regulatory or governmental approvals are required for the sale of our devices, including the sales made to date, by Wider in China, Hong Kong, Macau and Taiwan. If and when the potential Joint Venture is formed and it completes sales of our devices in China, there are no regulatory or other restrictions that would restrict either (i) the transfer from China of any proceeds resulting from such sales by Wider to the potential Joint Venture in Hong Kong, other than standard compliance with China’s State Administration of Foreign Exchange policies and approval process, or (ii) our receipt of our share of such proceeds from Hong Kong to us in the United States, which is not subject to SAFE’s policies and approval process.
According to the SAFE guidelines on foreign exchange management of trade in goods (implemented on August 1, 2012) and the PRC guidelines on foreign exchange business under current account (2020 version) implemented on August 28 2020, there are no restrictions on the transfer of sales proceeds by Chinese domestic companies to Hong Kong companies or foreign companies as long as a company is in standard compliance with the SAFE’s policies and approval process. The current standard SAFE procedures are as follows:
Although there can be no assurance in light of recent worldwide events such as the Russia and Ukraine war and continuing changes within the China legal system, we expect to consummate the formation of the potential Joint Venture by the third quarter 2023.
As noted elsewhere in this Form 10-Q, China’s economy continues to be impacted by the COVID pandemic. The government of the People’s Republic of China has been and apparently will continue to impose lockdowns on businesses and the society in general in China. These lockdowns adversely impact the ability of businesses to conduct business in China and throughout the Asian region. As a result, the ability of our distributor, Wider, to conduct its business, including the distribution of our devices, has been adversely impacted. Therefore, our ability to generate revenue through the potential and actual sale of our devices in China has been adversely affected.
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Results of Operations
Comparison of the Quartersthree months ended September 30, 20222023 and 20212022
Our financial results for the quarterthree months ended September 30, 20222023 and 20212022 are summarized as follows:
Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | Change | Change | Three Months Ended September 30, | Change | Change(1) | ||||||||||||||||||||||||||
$ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||
Revenues, net | $ | 545,323 | $ | 55,970 | $ | 489,353 | 874 | % | $ | 24,113 | $ | 545,323 | $ | (521,210 | ) | (96 | )% | |||||||||||||||
Cost of revenue | 187,298 | 9,306 | 177,992 | 1913 | % | |||||||||||||||||||||||||||
Cost of revenues | 3,973 | 187,298 | (183,325 | ) | (98 | )% | ||||||||||||||||||||||||||
Gross profit | 358,025 | 46,664 | 311,361 | 667 | % | 20,140 | 358,025 | (337,885 | ) | (94 | )% | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Professional fees | 7,632 | 152,851 | (145,219 | ) | -95 | % | 127,202 | 7,632 | 119,570 | 1567 | % | |||||||||||||||||||||
Salaries and benefits | 164,142 | 67,662 | 96,480 | 143 | % | 363,330 | 164,142 | 199,188 | 121 | % | ||||||||||||||||||||||
Selling, general and administrative | 479,445 | 1,621,600 | (1,142,155 | ) | -70 | % | 1,945,145 | 479,445 | 1,465,700 | 306 | % | |||||||||||||||||||||
Total operating expenses | 651,219 | 1,842,113 | (1,190,894 | ) | -65 | % | 2,435,677 | 651,219 | 1,784,458 | 274 | % | |||||||||||||||||||||
Loss from operations | (293,194 | ) | (1,795,449 | ) | 1,502,255 | -84 | % | (2,415,537 | ) | (293,194 | ) | (2,122,343 | ) | 724 | % | |||||||||||||||||
Other (income) expense: | ||||||||||||||||||||||||||||||||
Interest expense, net | 10,452 | 27,175 | (16,723 | ) | -62 | % | ||||||||||||||||||||||||||
Other income (expense), net: | ||||||||||||||||||||||||||||||||
Interest income (expense), net | (5,330 | ) | (10,452 | ) | 5,122 | (49 | )% | |||||||||||||||||||||||||
Gain on sale of short-term investments | 82,943 | - | 82,943 | 100 | % | |||||||||||||||||||||||||||
Other income | (168,245 | ) | - | (168,245 | ) | - | 40,735 | 168,245 | (127,510 | ) | (76 | )% | ||||||||||||||||||||
PPP loan forgiveness | - | (22,916 | ) | 22,916 | -100 | % | ||||||||||||||||||||||||||
Total other (income) expense | (157,793 | ) | 4,259 | (162,052 | ) | -3805 | % | |||||||||||||||||||||||||
Total other income (expense), net | 118,348 | 157,793 | (39,445 | ) | (25 | )% | ||||||||||||||||||||||||||
Net loss | $ | (135,401 | ) | $ | (1,799,708 | ) | $ | 1,664,307 | -92 | % | $ | (2,297,189 | ) | $ | (135,401 | ) | $ | (2,161,788 | ) | 1597 | % | |||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Unrealized loss from short-term investments | (32,289 | ) | - | (32,289 | ) | 100 | % | |||||||||||||||||||||||||
Comprehensive loss | $ | (2,329,478 | ) | $ | (135,401 | ) | $ | (2,194,077 | ) | 1620 | % |
(1) | Percentages may not foot due to rounding. |
Revenues
For the three months ended September 30, 2023 and 2022, we generated $24,113 and $545,323 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. We also derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales. The decrease in revenue for 2023 compared to 2022 was primarily due to the decrease in device sales as a result of the difficulties encountered by our distribution network given the Covid restrictions in China.
Cost of Revenues and Gross Profit
For the three months ended September 30, 2023 and 2022, cost of revenues was $3,973 and $187,298, respectively, yielding a gross profit of $20,140 and $358,025 respectively, or 84% and 66%, respectively. Such increase in gross margin was due to the change in our sources of revenue. Our revenue for the quarter ended September 30, 2023 was primarily from license fees which have a greater gross margin than our other revenues.
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Operating Expenses
Total operating expenses for the three months ended September 30, 2023 and 2022 were $2,435,677 and 2021,$651,219, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in professional fees of approximately $120,000, an increase in salaries and benefits of approximately $199,000, an increase in insurance of approximately $60,000 and an increase in research and development costs of approximately $1,525,000 and an increase in travel of approximately $27,000. The increases in research and development and consulting costs are attributable to the development of our Gen-2 and Gen-3 devices primarily related to $1,500,000 in non-employee stock compensation expense classified in R&D. The increases in professional fees and insurance are a result of being a public company. The increase in salaries and benefits is primarily due to the hiring of our Senior VP and other staff.
These amounts were offset by a decrease in consulting fees of approximately $27,000 primarily due to an increase in staff and a reduction in stock compensation expense of approximately $111,000 (due to the amount recognized during the current quarter being classified as research and development expense).
Other Income (Expense), Net
Other income (expense), net for the three months ended September 30, 2023 and 2022 was $118,348 and $157,793, respectively, consisting of interest and dividend income and gain on the sale of short-term investments offset by interest expense.
Comparison of the Nine Months ended September 30, 2023 and 2022
Our financial results for the nine months ended September 30, 2023 and 2022 are summarized as follows:
Nine Months Ended September 30, | Change | Change(1) | ||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Revenues, net | $ | 90,212 | $ | 1,282,933 | $ | (1,192,721 | ) | (93 | )% | |||||||
Cost of revenues | 20,457 | 356,345 | (335,888 | ) | (94 | )% | ||||||||||
Gross profit | 69,755 | 926,588 | (856,833 | ) | (92 | )% | ||||||||||
Operating expenses: | ||||||||||||||||
Professional fees | 405,949 | 486,197 | (80,248 | ) | (17 | )% | ||||||||||
Salaries and benefits | 965,988 | 469,996 | 495,992 | 106 | % | |||||||||||
Selling, general and administrative | 2,769,641 | 1,083,809 | 1,685,832 | 156 | % | |||||||||||
Total operating expenses | 4,141,578 | 2,040,002 | 2,101,576 | 103 | % | |||||||||||
Loss from operations | (4,071,823 | ) | (1,113,414 | ) | (2,958,409 | ) | 266 | % | ||||||||
Other income (expense), net: | ||||||||||||||||
Interest income (expense), net | (19,685 | ) | (45,886 | ) | 26,201 | (57 | )% | |||||||||
Gain on sale of short-term investments | 180,593 | - | 180,593 | 100 | % | |||||||||||
Other income | 42,875 | 168,245 | (125,370 | ) | (75 | )% | ||||||||||
Other income - PPP loan forgiveness | - | 22,916 | (22,916 | ) | (100 | )% | ||||||||||
Total other income (expense), net | 203,783 | 145,275 | 58,508 | 40 | % | |||||||||||
Net loss | $ | (3,868,040 | ) | $ | (968,139 | ) | $ | (2,899,901 | ) | 300 | % | |||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized loss from short-term investments | (35,513 | ) | - | (35,513 | ) | 100 | % | |||||||||
Comprehensive loss | $ | (3,903,553 | ) | $ | (968,139 | ) | $ | (2,935,414 | ) | 303 | % |
(1) | Percentages may not foot due to rounding. |
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Revenues
For the nine months ended September 30, 2023 and 2022, we generated $545,323$90,212 and $55,970,$1,282,933, respectively, of revenue primarily from the sale of devices, supplies and from the reimbursement of costs. In addition, we generated income from licensing and treatment fee agreements with our customers by charging a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derive revenue from equipment by selling electrodes to customers for use with our device. The increase in revenue for 2022 compared to 2021 was primarily due to the sale of 100 devices in 2022. There were no sales of devices in 2021.
Cost of Revenue and Gross Profit
For the quarter ended September 30, 2022 and 2021, cost of revenues were $187,298 and $9,306, respectively, yielding a gross profit of $358,025 and $46,664, respectively, or 65.65% and 83.37%, respectively. Such decrease in gross margin was due to the change in our sources of revenue. In 2021 our revenue was from licensing fees and the sales of electrodes and cables. The licensing fees have no related costs. Our cost of revenue in 2021 included shipping supplies and the cost of the electrodes and cables. In 2022 our revenue was primarily from sales of equipment. The equipment has higher related costs of revenue and related shipping costs.
Operating Expenses
Total operating expenses for the quarter ended September 30, 2022 and 2021 were $651,218 and $1,842,113, respectively. The decrease was primarily due to the decrease of approximately $1,312,000 in stock-based compensation for the issuance of our common stock to various employees and consultants for services, and a decrease in professional fees for legal and accounting of approximately $145,000 offset by an increase in salaries of approximately $96,000, an increase in research and development costs of approximately $80,000, an increase in consulting costs of approximately $38,000 and an increase in regulatory and compliance costs of $30,000. The decrease in legal and accounting fees are primarily due to the treatment of costs relating to our initial public offering as a direct cost of the offering. The increase in salary is primarily due to hiring of a chief financial officer. The increases in research and development, consulting costs and regulatory and compliance are attributable to the development of our Gen-2 and Gen-3 devices.
Other (Income) Expense
Other (income) expense for the quarter ended September 30, 2022 and 2021 were ($157,793) and $4,259, respectively, consisting of interest expense net of the PPP loan forgiveness, accrued interest forgiveness and interest income.
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Comparison of the Nine Months ended September 30, 2022 and 2021
Our financial results for the nine months ended September 30, 2022 and 2021 are summarized as follows:
Nine Months Ended | ||||||||||||||||
September 30, 2022 | September 30, 2021 | Change | Change | |||||||||||||
$ | % | |||||||||||||||
Revenues, net | $ | 1,282,933 | $ | 120,066 | $ | 1,162,867 | 969 | % | ||||||||
Cost of revenue | 356,345 | 22,448 | 333,897 | 1487 | % | |||||||||||
Gross profit | 926,588 | 97,618 | 828,970 | 849 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Professional fees | 486,197 | 455,213 | 30,984 | 7 | % | |||||||||||
Salaries and benefits | 469,996 | 164,187 | 305,809 | 186 | % | |||||||||||
Selling, general and administrative | 1,083,809 | 4,919,330 | (3,835,521 | ) | -78 | % | ||||||||||
Total operating expenses | 2,040,002 | 5,538,730 | (3,498,728 | ) | -63 | % | ||||||||||
Loss from operations | (1,113,414 | ) | (5,441,112 | ) | 4,327,698 | -80 | % | |||||||||
Other (income) expense: | ||||||||||||||||
Interest expense, net | 45,886 | 63,880 | (17,994 | ) | -28 | % | ||||||||||
Other income | (168,245 | ) | - | (168,245 | ) | - | ||||||||||
PPP loan forgiveness | (22,916 | ) | (22,916 | ) | - | 0 | % | |||||||||
Total other (income) expense | (145,275 | ) | 40,964 | (186,239 | ) | -455 | % | |||||||||
Net loss | $ | (968,139 | ) | $ | (5,482,076 | ) | $ | 4,513,937 | -82 | % |
Revenues
For the nine months ended September 30, 2022 and 2021, we generated $1,282,933 and $120,066, respectively, of revenue primarily from the sale of devices, supplies and from the reimbursement of costs. In addition, we generated income from licensing and treatment fee agreements with our customers by charging a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we also derive revenues from equipment by selling electrodes to customers for use with our device and from royalties from the manufacturer of our electrodes. We also derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales. The increasedecrease in revenue for 20222023 compared to 20212022 was primarily due to the saledecrease in 2022device sales as a result of 220 devices, there were no sales of devicesthe difficulties encountered by our distribution network given the Covid restrictions in 2021, and to our cost reimbursements from Wider.China.
Cost of Revenue and Gross Profit
For the nine months ended September 30, 20222023 and 2021,2022, cost of revenues were $356,345$20,457 and $22,448,$356,345, respectively, yielding a gross profit of $926,588$69,755 and $97,618,$926,588, respectively, or 72.22%77% and 81.30%72%, respectively. Such decreaseincrease in gross margin was due to the change in our sources of revenue. In 2021 our revenue was from licensing fees and the sales of electrodes and cables. The licensing fees have no related costs. Our cost of revenue in 2021 included shipping supplies and the cost of the electrodes and cables. In 2022 our revenue was primarily from sales of equipment. The equipment has higher related costs of revenue and related shipping costs.
Operating Expenses
Total operating expenses for the nine months ended September 30, 2023 and 2022 were $4,141,578 and 2021 were $2,040,002, and $5,538,730, respectively. The decreaseincrease of approximately $496,000 in salaries and benefits was primarily due to the decrease of approximately $4,183,000 in stock-based compensation for the issuancehiring of our common stock to various employeesCFO, Senior VP and consultants for services, offset by the increases in professional fees for legal and accounting of approximately $31,000, an increase in salaries of approximately $306,000, and increase in consulting of approximately $146,000,other staff. There was an increase in research and development costs of approximately $43,000 and$1,688,000, an increase in regulatory and compliance costs of approximately $69,000.$22,000, an increase in insurance of approximately $211,000, an increase in travel of approximately $103,000 and an increase in taxes of approximately $40,000. The increase in legal and accounting fees are primarily due to costs relating to our initial public offering. The increase in salary is due primarily to hiring of a chief financial officer. The increases in research and development consulting costs and regulatory and compliance are attributable to the development of our Gen-2 and Gen-3 devices.devices, primarily related to $1,500,000 in non-employee stock compensation expense classified in R&D. The increase in insurance is a result of being a public company. The increase in travel is primarily due to team members traveling to the home office and the cost of trips to work with and solidify our relationship with our JV partner. The increase in taxes is due to the Delaware Franchise Tax. These amounts are offset by a decrease in professional fees of approximately $80,000 primarily due to large fees in 2022 relating to the public offering, a reduction in consulting fees of approximately $116,000 primarily due to an increase in staff and a reduction in stock compensation of $254,000.
Other (Income) ExpenseIncome (Expense), Net
Other (income) expenseincome (expense), net for the nine months ended September 30, 2023 and 2022 was $203,783 and 2021 was ($145,275) and $40,964,$145,275, respectively, consisting of interest and dividend income and gain on the sale of short-term investments offset by interest expense net of the PPP loan forgiveness, accrued interest forgiveness and interest income.forgiveness.
Liquidity and Capital Resources
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Liquidity and Capital Resources
Working Capital
As of | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
Current Assets | $ | 8,344,615 | $ | 752,659 | ||||
Current Liabilities | 1,980,356 | 2,363,634 | ||||||
Working Capital | $ | 6,364,259 | $ | (1,610,975 | ) |
September 30, 2023 | December 31, 2022 | |||||||
Current assets | $ | 4,263,349 | $ | 7,425,462 | ||||
Current liabilities | 1,197,075 | 1,948,986 | ||||||
Working capital | $ | 3,066,274 | $ | 5,476,476 |
Current assets increaseddecreased for the nine months ended September 30, 2022 increased2023 primarily as a result of funding operations and the proceedspaydown of the Initial Public Offering.debt. Cash and cash equivalents increased approximately $199,000. Short-term investments decreased approximately $3.3 million, and prepaid and other current assets decreased approximately $119,000.
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Current liabilities decreased for the nine months ended September 30, 2022 decreased2023 primarily as a result of the settlementreduction of accounts payable and repayment of a loan payable to an officer of the Company. Accounts payable decreased approximately $586,000, accrued interestexpenses increased approximately $67,000, lease liability – current portion decreased approximately $33,000, and a decrease in deferred revenue.loan payable - officer decreased by $200,000.
Cash Flows
The following table summarizes our consolidated cash flows for the nine months ended September 30, 20222023 and 2021:2022:
September 30, 2022 | December 31, 2021 | September 30, 2023 | September 30, 2022 | |||||||||||||
Net cash used in operating activities | (1,309,242 | ) | (667,700 | ) | $ | (2,831,354 | ) | $ | (1,309,242 | ) | ||||||
Net cash provided by financial activities | 8,511,543 | 725,690 | ||||||||||||||
Net cash provided by investing activities | $ | 3,230,008 | $ | - | ||||||||||||
Net cash provided by (used in) financing activities | $ | (200,000 | ) | $ | 8,511,543 |
Net Cash Provided byUsed In Operating Activities
Net cash used in operating activities was $1,309,242$(2,831,354) for the nine months ended September 30, 2022,2023, as compared to $667,700$(1,309,242) for the respective period in 2021,2022, primarily due to the net loss of $968,139 and $5,482,076, respectively,$3,868,040, as well as an increasea combined decrease in accounts payable and accounts payable-related party of approximately $585,000. Offset by increases in stock compensation of approximately $1.7 million, of which $1.5 million was classified as research and development expense, and prepaid assets and inventory. These amounts were also offset byof approximately $453,391 and $4.4 million of stock compensation during the periods, respectively.$119,000.
Net Cash Provided By Investing Activities
Net cash provided by investing activities during the nine months ended September 30, 2023, and 2022 was $3,230,008 and $0 respectively, which was due to short-term investment sales of approximately $32.7 million offset by purchases of $29.2 million of short-term investments, the purchase of patents of approximately $74,000 and an investment in our equity method investment of $96,000.
Net Cash Provided By (Used In) Financing Activities
Net cash provided by (used in) financing activities during the nine months ended September 30, 2023 and 2022 was $(200,000) and 2021 was $8,511,543 and $725,690, respectively, which was due to payment of note payable to an officer of the Company of $200,000 in the current period and primarily due to the sale of common stock for cash in 2022 and 2021.2022.
Uses and Availability of Additional Funds
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, manufacturing development costs, legal and other regulatory expenses, and general administrative costs. Although we have produced Gen-2, which is selling in China where it is approved for certain utilizations by medical practitioners, the successful development of our future products is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the clinical development of Gen-3 and obtain regulatory approvals. We are also unable to predict when, if ever, net cash inflows from revenues will enable us to be cash flow positive. This is due to the numerous risks and uncertainties associated with developing products, including, among others, the uncertainty of:
● | successful enrolment in, and completion of clinical trials; |
● | performing preclinical studies and clinical trials in compliance with the FDA or any comparable regulatory authority requirements; |
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● | the ability of collaborators to manufacture sufficient quantity of product for development, clinical trials and/ or potential commercialization; |
● | obtaining and maintaining patent, trademark and trade secret protection for our products; |
● | making arrangements with third parties for manufacturing; |
● | scaling the commercial sales of products, if and when approved, whether alone or in collaboration with others; |
● | acceptance of existing therapies, and future therapies, if and when approved, by healthcare providers, physicians, clinicians, patients and third-party payors; |
● | competing effectively with other therapies; |
● | obtaining and maintaining healthcare coverage and adequate reimbursement; |
● | protecting our rights in our intellectual property portfolio; and |
● | maintaining a continued acceptable safety profile of our products following approval. |
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
AtAs of September 30, 2022,2023, the Company had a significant accumulated deficit of $71.7$76.3 million. For the nine months ended September 30, 2022,2023, the Company had a loss from operations of $1.1$4.1 million and negative cash flows from operations of $1.31$2.8 million. The Company’s operating activities consume the majority of its cash resources. The Company will continue to service existing customers in the United States. The Company sold devices in China to its acting distributor. ItThe Company anticipates that it will continue to incur operating losses as it executes its development plans through 2022,2023, as well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company previously funded these losses primarily through the sale of equity and issuance of convertible notes. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period. As of September 30, 2023, the Company had cash and cash equivalents on hand of approximately $361,000 and short-term investments of approximately $3.6 million.
Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. These plans require the Company to place reliance on several factors including, favourable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, management does not believe we have sufficient cash for the next twelve months from the issuance of the financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
At the closing on September 20,16, 2022, the Company sold 2,315,000 Units and 347,250 of Warrants in an Initial Public Offering (the “Initial Public Offering”) at a price of $4.15 per Unit and $0.01 per Warrant for a total of $9,610,723. The Company incurred offering costs of $1,067,078, consisting of $878,858 of underwriting fees and expenses and $188,220 of costs related to the Initial Public Offering.
Although no assurances can be given as to the Company’s ability to deliver on its revenue plans or that unforeseen expenses may arise, management has evaluated the significance of the conditions and has concluded that because of the completion of the Initial Public Offering the Company has sufficient cash on hand to satisfy its anticipated cash requirements for the next twelve to fifteen months. The substantial doubt about the Company’s ability to continue as a going concern for more than twelve months from the date of these financial statements has been alleviated.
Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our unaudited condensed consolidated 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 under different assumptions or conditions.
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While our significant accounting policies are described in more detail in Note 3 to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements.
Use of Estimates
Revenue Recognition
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure of contingent liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ from these estimates which may cause our future results to be affected.
Revenue Recognition
We recognizerecognizes revenue when ourits performance obligations with ourits customers have been satisfied. At contract inception, we determinethe Company determines if the contract is within the scope of ASC Topic 606 and then we evaluateevaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. WeThe Company only recognizerecognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
We haveThe Company has existing licensing and treatment fee agreements with ourits customers for the use of ourthe Nexalin device in their practices. These agreements generally have terms of one year with automatic renewal if certain requirements are met and amounts due per these agreements are billed monthly. WeThe Company also sellsells products related to the provision of services. We also sell our Gen-2The Company sells its devices in China through ourto its acting distributor.distributor and sells products relating to the use of the devices. The Company has a Royalty Agreement whereby the manufacturer of the Company’s electrodes will pay a royalty to the Company for a three-year period beginning January 1, 2022. The amount of the Royalty is equal to 20% of the amount that the manufacturer invoices to the acting distributor for the sale of the electrodes.
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Revenue Streams
We deriveThe Company derives revenues from ourits license agreements by charging a monthly licensing fee for the duration of the agreement. We derive revenues from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. We deriveThe Company derives revenues from equipment by selling additional individual electrodes and suppliespatient cables to our existing customers for use with ourthe Nexalin device. We deriveThe Company receives revenue from the sale in China of its devices to ourits acting distributor (Wider), of our Gen-2 device in China. We derive revenueand from the reimbursementsale of certain costs from Wider. We deriveproducts relating to the use of those devices. The Company derives revenue as a royalty fee from the China basedChina-based manufacturer for electrodes ordered in China in connection with ourthe Company’s China sales.
Performance Obligations
Management identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied as long as the licensing contract remains valid and is not terminated. The licensing revenue is invoiced monthly and is recognized at a point in time in which the invoice is sent to the customer.
Management identified that the Company’sour equipment and Device revenue has one performance obligation. That performance obligation is satisfied when the equipment and Devices are shipped. The Company recognizes revenue at a point in time in which the electrodes and Devicesdevices are shipped to the customer. The Company doesWe do not offer a warranty on the electrodes and Devices.or devices.
Management identified that treatment fee revenue has one performance obligation. The performance obligation is satisfied upon the completion of individual treatments on patients by customers.
Management identified that our royalty revenuefee has one performance obligation. The performance obligation is satisfied atas long as the timeroyalty agreement remains valid and is not terminated. The royalty revenue is invoiced when the Electrode manufacturer invoicesadvises the acting distributor forCompany that the saleinvoice has been sent to the acting distributor.customer.
See Note 8 to the consolidated financial statements contained in this report for more information regarding our commitments and contingencies.
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Practical Expedients
As part of ASC 606, the Company has adopted several practical expedients including:
● | Significant Financing Component — we do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between when we transfer a promised goods or services to the customer and when the customer pays for that service will be one year or less. |
● | Unsatisfied Performance Obligations — for all performance obligations related to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in ASC Topic 606 and therefore, are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. |
● | Shipping and Handling Activities — we elected to account for shipping and handling activities as a fulfilment cost rather than as a separate performance obligation. |
● | Right to invoice — we have the right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date we may recognize revenue in the amount to which the entity has a right to invoice. |
Off-Balance Sheet Commitments and ArrangementsRecent Accounting Pronouncements
As of September 30, 2022, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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Recent Accounting Pronouncements
For discussion of new accounting standards, see Note 3 to the Financial Statements, “Summary of Significant Accounting Policies and New Accounting Standards,” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effectiveare in effect for usthe Company for interim and annual periods in fiscal years beginning after December 15, 2022. We believe theThe adoption will modifyon January 1, 2023 modified the way we analyzethe Company analyzes financial instruments, but we doit did not anticipatehave a material impact on results of operations. We are in the process of determining the effects adoption will have on itsour consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
Contractual Obligations
See Note 98 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a summary of our contractual obligations.
Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile. We may take advantage of these exemptions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if any of the following events occur prior to the end of such five-year period, (i) our annual gross revenue exceeds $1.07 billion, (ii) we issue more than $1.0 billion of non-convertible debt in any three-year period or (iii) we become a “large accelerated filer,” (as defined in Rule 12b-2 under the Exchange Act), we will cease to be an emerging growth company prior to the end of such five-year period. We will be deemed to be a “large accelerated filer” at such time that we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Exchange Act, for a period of at least twelve months and (c) have filed at least one annual report pursuant to the Exchange Act. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
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Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.
Continued Nasdaq Listing
On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023.
On November 7, 2023, the Company submitted a letter to NASDAQ requesting a second 180-day period in order to regain compliance with NASDAQ Rule 5550(a)(2). The Company stated in that letter that it believed it will be able to cure the deficiency and increase its stock price to above $1.00 per share pursuant to its plan to do so.
On November 7, 2023, the Company received written notice from the Nasdaq Listing Qualifications Department (the “Staff”) that the Company was not eligible for an additional 180 calendar day compliance period because the Company no longer complied with Nasdaq’s $5 million minimum stockholder equity initial listing requirement.
As of the filing date of this Quarterly Report, the Company has requested an appeal of the Staff’s determination and submitted a hearing request to the Nasdaq Hearings Panel (“Panel”). As a result of the request for the appeal to the Panel, and while the appeal process is pending, the suspension of trading of the Company’s common stock is stayed, and the Company’s common stock and warrants will continue to trade on Nasdaq until the hearing process concludes and the Panel issues a written decision. As part of the appeal process, the Company will be asked to provide the Panel with a plan to regain compliance with the minimum bid price and stockholder equity requirements. The Company’s plan will need to include a discussion of the events that the Company believes will enable it to timely regain compliance with such requirements. The Company intends to submit a plan that it believes will be sufficient to permit the Company to regain compliance with the minimum bid price requirement and stockholder equity requirements.
There can be no assurance that the Panel will grant the Company a 180-day extension to regain compliance, or that the Company will be able to regain compliance with such applicable Nasdaq listing requirements.
Any delisting of our common stock from The Nasdaq Stock Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. Furthermore, the delisting of our common stock from The Nasdaq Stock Market could adversely affect our business, financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.
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Item 4. Disclosure Controls and Procedures
Evaluation of Disclosure ControlsWe have adopted and Procedure
Disclosuremaintain disclosure controls areand procedures that are designed with the objective of ensuringto provide reasonable assurance that information required to be disclosed in ourthe reports filed under the Securities Exchange Act, of 1934,such as amended (“The Exchange Act”),this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time frameperiods specified in the SEC’s rules of the SEC. Our disclosure controls and forms. Disclosure controlsprocedures are also designed with the objective of ensuringto ensure that such information is accumulated and communicated to our management including the chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. OurAs required under Exchange Act Rule 13a-15, our management, evaluated, with the participationincluding our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of our current chief executive officer and principal financial officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of September 30, 2022, pursuant to Rule 13a-15(b) under the Exchange Act.end of the period covered by this report. Based upon that evaluation, management identified material weaknesses in our Certifying Officers effectiveness concluded that, as of September 30, 2022, our disclosure controls and procedures were not effective.
The Company does not have an effective control environment because we do not yet have formalized internal control policies and procedures as it relatesover financial reporting. The material weaknesses identified to financial reporting and review and approvaldate include: (i) lack of journal entries. In addition, the Company does not yet have sufficient resources necessary to provide appropriateadequate segregation of duties related to the preparation and review of financial information used in financial reporting as well asand review of controls over the financial statement reporting process. The Company also does not have sufficientprocess, including documentation of review/approval of journal entries and reconciliations; and (ii) insufficient IT controls thatwhich are effectively designed and implemented.implemented, specifically related to user/superuser access to the Company’s financial reporting system.
Since becoming a public reporting company effectiveAs of September 30, 2023, based on September 15, 2022, we have begun planning to establish policiesevaluation of these disclosure controls and procedures, for timelymanagement concluded that our disclosure controls and accurateprocedures were not effective. To address our material weakness, we intend to engage an outside firm to advise on our financial reporting upgradeprocesses and intend to implement new financial accounting controls and processes. We intend to continue to take steps to remediate the material weakness described above through implementing enhancements and controls within our internal accounting systems, and make various other effortssubject to budget limitations. We will not be able to remediate these weaknessescontrol deficiencies until these steps have been completed and have been operating effectively for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively. The redesign and implementation of improvements to our accounting and proprietary systems and controls may be costly and time consuming and the cost to remediate may impair our results of operations in the future.
In light of the conclusion that our disclosure controls and procedures were not effective at September 30, 2023, we have applied particular procedures and processes as necessary to ensure the reliability of our financial reporting with respect to this quarterly report. Accordingly, we believe, based on our knowledge that: (i) this quarterly report does not contain any untrue statement of material fact or omit a statement of material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this quarterly report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control. Management understandscontrol over financial reporting (as such term is defined in Rules 13a-15(f) and appreciates15d-15(f) of the needExchange Act) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to rapidly establish an effective system ofmaterially affect, our internal controlscontrol over financial reporting.
We have not performed an evaluation of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act, and therefore, our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our second Annual Report on Form 10-K. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” and not being a smaller reporting company.
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PART II—OTHER INFORMATION
| Item 1. Legal Proceedings |
None
None
Item 1A. Risk Factors.
|
Our material risk factors are disclosed in “Risk Factors” in our Registration Statement on Form S-1 (SEC File Number 333-261989) as declared effective by the Securities and Exchange Commission on September 15, 2022 and the Prospectus contained therein.therein, as updated in our Form 10-K filed on March 27, 2023.
Other than as set forth below, thereThere have been no material changes from the risk factors previously disclosed in such filing. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risks could arise that may also affect our business or ability to consummate an initial business combination. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.filings.
The current economic downturn may lead to increased difficulty in completing our initial business combination.
Our ability to expand our business in Asia and elsewhere, which is part of our business plan, will depend, in part, on worldwide economic conditions. In recent months, we have observed increased economic uncertainty in the United States and abroad, including China. Impacts of such economic weakness include:
These developments could lead to inflation, higher interest rates, and uncertainty about business continuity, which may adversely affect the business of our potential joint venture partner Wider Come Limited and potential customers.
The situation in China given the results of the extensive lockdowns related to Covid-19 has dramatically worsened the present economic environment. Patients and salespeople are restricted in their movements resulting in a significant slowdown in the medical and other sectors. Fortunately, our Chinese distributor continues our strategy of multiple clinical studies in the major institution in Beijing in an array of brain related diseases. Very significant efforts and funds expended by our Chinese distributor has led to regulatory approval in both depression and insomnia thus far which has allowed for sales of our devices in China this year. Given the lockdowns, we have been notified that there will be no fourth quarter order from our Chinese distributor. Our clinical studies and statistical analysis will however continue in various areas of Brain disease. The sales efforts, however, are stymied at this time. As with all other economic activities in China, at this point it is impossible to predict when orders will again commence.
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Continued Impact of COVID Pandemic upon the Chinese Economy may Result in Adverse Effect on our Revenue and Income
The situation in China related to Covid-19 pandemic has dramatically worsened the present economic environment. Patients and salespeople are restricted in their movements resulting in a significant slowdown in the medical and other sectors. We continue to be indirectly impacted because of our current dependence upon our distributor relationship with Wider. Wider acts as a distributor for the Company’s devices in China and Asia. Because of the restrictions in China, we expect to incur a significant and material negative impact on sales and revenue from the China market in the fourth quarter. As with all other economic activities in China, at this point it is impossible to predict when orders will again commence. The extent of any future impact will depend on future developments, including future activities by the Chinese government and other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of Covid-19, or any of its variants, and actions taken to address its impact.
Recent volatility in capital markets and lower market prices for our securities may affect our ability to obtaining financing for expansion through potential sales of shares of our common stock or issuance of indebtedness.
With uncertainty in the capital markets and other factors, and the decrease in our stock price from our initial public offering completed in September 2022 we may incur difficulty in undertaking and completion and subsequent financings. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may limit the operations and growth of the surviving company of our initial business combination. If we are unable to obtain adequate financing or financing on terms satisfactory to us, we could face significant limitations on our ability to complete our initial business combination.
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities |
The Company completed its initial public offering on September 20, 2022. The initial public offering consisted of 2,315,000 units consisting of 2,315,000 shares of its Common Stock and 2,315,000 accompanying warrants to purchase up to 2,315,000 shares of common stock. Each share of common stock is being sold together with one Warrant, each to purchase one share of common stock with an exercise price of $4.15 per share at a combined offering price of $4.15, for gross proceeds of approximately $9,607,250 million, before deducting underwriting discounts and offering expenses. In addition, Nexalin granted the underwriters a 45-day option to purchase up to an additional 347,250 shares of common stock and/or Warrants to purchase up to 347,250 shares of common stock to cover over-allotments at the initial public offering price, less the underwriting discount.
The Company received net proceeds of $8,543,645 (after underwriting and offering expenses of $1,067,078) from its initial public offering. As of November 1, 2022, we have utilized the net proceeds as follows:
$74,000 to fund clinical trial research, trials, and development work for future product candidates
$237,419 to pay past due service fees to U.S. Asian Consulting Group, LLC
$16,000 for regulatory and certification costs, and
$285,000 for legal, accounting and administrative expenses.
There have been no issuances of securities by the company since its initial public offering
None
| Item 3. Defaults Upon Senior Securities |
None.
None.
Item 4. Mine Safety Disclosures
|
Not applicable.
Item 5. Other Information
|
None.
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Item 6. Exhibits |
Exhibits and Financial Statement Schedules.
(a) | Exhibits. |
* | Previously filed as an exhibit to Form S-1 as declared effective by the SEC on September 15, 2022 (SEC File Number 333-261989). |
** | Previously filed as an exhibit to Form 8-K as filed with the SEC on September 20, |
*** | Previously filed as an exhibit to Form 8-K/A as filed with the SEC on September 20, 2022. |
**** | Previously filed as an exhibit to Form 10-Q as filed with the SEC on May 10, 2023. | |
***** | Previously filed as an exhibit to Form 10-Q as filed with the SEC on August 10, 2023. |
⸹ | Filed as an exhibit to this Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized on the 10th13th day of November, 2022.2023.
NEXALIN TECHNOLOGY, INC. | ||
By: | /s/ Mark White | |
Mark White | ||
Chief Executive Officer | ||
Principal Executive Officer | ||
Principal Financial Officer |
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