Nexalin Technology, Inc. 10-Q

ITEM 1. Financial Statements NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2022 2021 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 7,864,079 $ 661,778 Accounts receivable (Includes related party of $ 6,912 and $ - , respectively) 10,352 16,303 Inventory 152,071 31,410 Prepaid expenses 318,113 43,168 Total Current Assets 8,344,615 752,659 ROU Asset 7,512 - Equipment, net of accumulated depreciation of $ 30,265 and $ 29,862 , respectively 636 1,039 Total Assets $ 8,352,763 $ 753,698 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current Liabilities: Accounts payable (Includes related party of $ 250,000 and $ 399,320 , respectively) $ 788,293 $ 843,794 Accrued expenses 442,501 611,795 Lease liability 49,562 40,845 Loan payable - shareholder - 37,200 Loan payable - officer 200,000 200,000 Note payable 500,000 500,000 Deferred revenue - 130,000 Total Current Liabilities 1,980,356 2,363,634 Long-term Liabilities: Lease liability - net of current portion 17,634 49,089 PPP Loan payable - 22,916 Total Liabilities 1,997,990 2,435,639 Commitments and Contingencies Stockholders’ Equity (Deficit): Common stock, $ 0.001 par value; 100,000,000 shares authorized; 7,279,961 and 4,879,923 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 7,280 4,880 Additional paid in capital 78,007,156 69,004,703 Accumulated deficit ( 71,659,663 ) ( 70,691,524 ) Total Stockholders’ Equity (Deficit) 6,354,773 ( 1,681,941 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 8,352,763 $ 753,698 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 (Unaudited) Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 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 Gross profit 358,025 46,664 926,588 97,618 Operating expenses: Professional fees 7,632 152,851 486,197 455,213 Salaries and benefits 164,142 67,662 469,996 164,187 Selling, general and administrative 479,445 1,621,600 1,083,809 4,919,330 Total operating expenses 651,219 1,842,113 2,040,002 5,538,730 Loss from operations ( 293,194 ) ( 1,795,449 ) ( 1,113,414 ) ( 5,441,112 ) Other (income) expense: Interest expense, net 10,452 27,175 45,886 63,880 Other income ( 168,245 ) - ( 168,245 ) - Forgiveness of PPP Loan - ( 22,916 ) ( 22,916 ) ( 22,916 ) Total other (income) expense ( 157,793 ) 4,259 ( 145,275 ) 40,964 Net loss $ ( 135,401 ) $ ( 1,799,708 ) $ ( 968,139 ) $ ( 5,482,076 ) 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’ Common Stock Paid-in Accumulated Equity Shares Amount 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 ) Stock issued for cash 850 1 5,099 - 5,100 Stock compensation 24,390 24 97,476 - 97,500 Net loss - - - ( 393,249 ) ( 393,249 ) Balance as of March 31, 2022 4,905,163 4,905 69,107,278 ( 71,084,773 ) ( 1,972,590 ) Stock compensation - - 171,600 - 171,600 Net loss - - - ( 439,489 ) ( 439,489 ) Balance as of June 30, 2022 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 compensation 59,798 60 184,231 - 184,291 Related party foregone interest - - 2,718 - 2,718 Warrants issued for cash - - 3,473 - 3,473 Net loss - - - ( 135,401 ) ( 135,401 ) Balance as of September 30, 2022 7,279,961 $ 7,280 $ 78,007,156 $ ( 71,659,663 ) $ 6,354,773 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 September 30, 2022 September 30, 2021 Cash flows from operating activities: Net Loss $ ( 968,139 ) $ ( 5,482,076 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt 11,175 - Stock compensation 453,391 4,358,033 Amortization of debt discount - 58 Forgiveness of Interest Expense ( 168,361 ) - Forgiveness of PPP loan ( 22,916 ) ( 22,916 ) Depreciation 403 403 Non-cash lease expense 3,848 - Changes in operating assets and liabilities: Accounts receivable ( 5,224 ) ( 10,268 ) Prepaid assets ( 274,945 ) ( 5,942 ) Inventory ( 120,661 ) 6,842 Accounts payable 93,819 245,548 Accounts payable - related party ( 149,320 ) 140,000 Accrued expenses 1,785 - Deferred revenue ( 130,000 ) 130,000 Lease liability ( 34,097 ) ( 27,382 ) Net cash used in operating activities ( 1,309,242 ) ( 667,700 ) Cash flows from financing activities: Sale of common stock for cash, net of financing fees 8,545,270 671,407 Proceeds from exercise of warrants - 35,967 Proceeds from sale of warrants 3,473 - Proceeds from PPP loans - 22,916 Payments on loan payable - shareholder ( 37,200 ) ( 4,600 ) Net cash provided by financing activities 8,511,543 725,690 Net increase in cash and cash equivalents 7,202,301 57,990 Cash and cash equivalents - beginning of period 661,778 78,436 Cash and cash equivalents - end of period $ 7,864,079 $ 136,426 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 ROU asset and lease liability recorded $ 11,359 - 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. 4 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-owned subsidiary of NV Nexalin, was formed. Neuro-Health had no activity from September 6, 2019 (Inception) through the nine months ended September 30, 2022. 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, 2022 and 2021. NV Nexalin’s authorized shares of common stock was not affected as a result of the Merger. As a result of the Merger, NV Nexalin was dissolved and Neuro-Health became a subsidiary of Nexalin. 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 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. The shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) on September 20, 2022, under the symbols “NXL” and “NXLIW”, respectively. Business Overview The Company is a medical device company that designs and develops innovative neurostimulation products to help uniquely and effectively 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-milliamp device and the advanced device may be referred to as the “Nexalin Device” or “Nexalin Therapy” and, collectively, “Nexalin”. The Company has received approval from the China National Medical Products 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. 5 Emerging Growth Company The Company is 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. COVID-19 Pandemic In March 2020, the World Health Organization (the “WHO”) characterized the outbreak of the novel strain of coronavirus, specifically identified as COVID-19, as a global pandemic. This has resulted in governments enacting emergency measures to combat the spread of the virus. These measures, which include the implementation 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. 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 distributor relationship with Wider Come Limited. Wider Come Limited 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. 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. 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. 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 to COVID-19, the Company has implemented working practices to address potential impacts to its operations, employees and customers, and will take further measures in the future if and as required. At present, we do not believe there has been any appreciable impact on the Company specifically associated with COVID-19. 6 NOTE 2 — GOING CONCERN AND LIQUIDITY The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company 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 Company had a significant accumulated deficit of $71.7 71,659,663 million. For the nine months ended September 30, 2022, the Company 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 deficit of approximately $ 1.6 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. During the nine months ended September 30, 2022, the Company sold devices in China to its acting distributor. The Company expects to continue to incur operating losses as it executes its development plans through 2023, as well as undertaking 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. 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 $ 4.15 per Unit and $ 0.01 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 revenue from the proposed joint venture and obtain U.S. approval for the sale 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. 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 nine months ended September 30, 2022 and 2021 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. Principles of Consolidation The consolidated financial statements include the accounts of Nexalin and its wholly-owned subsidiary Neuro-Health. Intercompany accounts and transactions have been eliminated in consolidation. 7 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 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. The Company also sells products related to the provision of services. The Company sells its Devices in China to its acting 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. 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. The Company receives revenue from the sale in China of its Devices to its acting distributor and from the sale of products relating to the use of those 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 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 Devices are shipped to the customer. The Company does not offer a warranty on the electrodes and 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. 8 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 invoice — the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date the Company may recognize revenue in the amount to which the entity has a right to invoice. Disaggregated Revenues Major Revenue Streams Revenue consists of the following by service offering: Schedule of disaggregation of revenue Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Device Sales $ 520,000 $ - $ 1,164,500 $ - Licensing Fee 21,113 27,329 60,561 83,266 Royalty Fee - - 9,702 - Equipment 4,100 28,078 22,033 36,058 Other 110 563 26,137 742 Total $ 545,323 $ 55,970 $ 1,282,933 $ 120,066 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 Contract Modifications There were no contract modifications during the nine months ended September 30, 2022 and 2021. Contract modifications are not routine in the performance of the Company’s contracts. 9 Deferred Revenue The Company receives payment for equipment and devices in advance of shipping. The Company recognizes the revenue as being earned upon shipment. Deferred revenue of $ 0 and $ 130,000 was recognized as of September 30, 2022 and December 31, 2021, respectively. 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. Accounts Receivable Accounts receivables are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances for doubtful receivables 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 accounts when a balance is determined to be uncollectible. During the nine months ended September 30, 2022 and 2021, the Company wrote off $ 11,175 and $ - , respectively, in accounts receivable. During the three months ended September 30, 2022 and 2021, the Company wrote off $ - and $ - , respectively, in accounts receivable. The Company did no t record an allowance for doubtful accounts on September 30, 2022 and December 31, 2021, respectively. Inventory Inventory consists of finished goods and components stated at the lower of cost or net realizable value 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 no t record a reserve for obsolete inventory at September 30, 2022 and December 31, 2021. Equipment Equipment are 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 are removed from the consolidated balance sheets, with the resulting gain or loss, if any, reflected in operations in that period. 10 Impairment of Long-Lived Assets The Company reviews long-lived assets 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 determined 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 were $ 18,345 and $ 25,470 for the nine months ended September 30, 2022 and 2021, respectively. Advertising and marketing expenses were $ 12,435 and $ 3,592 for the three months ended September 30, 2022 and 2021, respectively. All advertising and marketing expenses are recorded in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations. 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, 2022 and December 31, 2021, the Company had a full valuation allowance applied against its deferred 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. 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 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. 11 Fair Value of Financial Instruments The carrying value of cash, 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. Net Loss per Common Share 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 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, 2022 and 2021. These shares were included in the basic and diluted net loss per common share on the unaudited condensed consolidated statements of operations. 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, 2022 2021 Warrants 2,503,850 40,800 Total 2,503,850 40,800 Stock - 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 statements of operations. 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. 12 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, 2022 and 2021, the Company recorded $ 154,722 and $ 111,440 , respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations. For the three months ended September 30, 2022 and 2021, the Company recorded $ 113,617 and $ 33,474 , respectively in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations. 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 it 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 — 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. Paycheck Protection Program The Company’s policy is to account for the PPP loan as debt. The Company continued to record the loan as debt until either (1) the loan was partially or entirely forgiven and the Company had been legally released, at 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). 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 effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its unaudited condensed 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. 13 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 $ 4.15 per Unit and $ 0.01 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 Accrued interest $ 106,501 $ 232,952 Accrued – other - 42,843 Accrued settlement liabilities 336,000 336,000 Accrued expenses $ 442,501 $ 611,795 NOTE 6 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS Potential Joint Venture On September 21, 2018, the Company entered into the first of a series of agreements providing for the establishment of a joint venture 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 when formed, the Joint Venture 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 following the completion of certain funding, clinical study, and publication milestones, which Wider has agreed to undertake but not yet completed. Following its formation, the Joint Venture will design and implement a comprehensive business model and distribution plan for our devices in China, Hong Kong, Macau and Taiwan. The first phase of distribution in China includes implementation of a sales strategy by Wider for mainland China and other territories serviced by Wider. 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 be controlled by an equally represented Board of Directors in which neither entity has sole decision-making ability over day-to-day or significant operational decisions. 14 As of September 30, 2022, the joint venture has not been established. On May 22, 2019, the Company entered into a supplementary agreement to the JV Agreement (the “Supplementary Agreement”). At the time 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 450,000 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 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 is recorded in selling, general and administrative expenses on the statement of operations. The remaining 300,000 shares will be issued in accordance with the following schedule upon Wider’s successful completion of the following milestones (i) 50% upon successful completion of the fourth of four clinical trials pursuant to the terms and conditions of the service agreements and (ii) 50% upon all four trials being submitted for publication in international medical journals satisfactory to the Company. As 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 venture During the nine months ended September 30, 2022 and 2021, the Company recorded $ 1,183,367 and $ 26,132 in 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. During the three months ended September 30, 2022 and 2021, the Company recorded $ 520,000 and $ 26,132 in revenue, respectively, from Wider on the unaudited condensed consolidated statements of operations. 15 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”). The two members of U.S. Asian are shareholders in the Company and include Marilyn Elson who is the Chief Financial Officer of the Company. Pursuant to the consulting agreement, U.S. Asian will provide consulting services to the Company with regards to, among other things, corporate development and financing arrangements. The Company is to pay U.S. Asian $ 10,000 per month for services rendered and, on October 24, 2018, the Company issued 249,750 shares of the Company’s common stock to U.S. Asian. The Company recorded consulting expenses related to the consulting agreement of $ 90,000 and $ 90,000 for the nine months ended September 30, 2022 and 2021, respectively, on the Company’s unaudited condensed consolidated statements of operations. The Company recorded consulting expenses related to the consulting agreement of $ 30,000 and $ 30,000 for the three months ended September 30, 2022 and 2021, respectively. At September 30, 2022 and December 31, 2021, U.S. Asian was owed $ 250,000 and $ 399,320 , 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. 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. 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. Loan Payable – Officer On November 1, 2021, the Company received $ 200,000 from the Company’s Chief Executive Officer. The loan has a principal of $ 200,000 , an interest rate of 9 %, and a maturity date of the earlier of (i) October 31, 2022 or (ii) the date of the consummation of the initial public offering. Total interest expense on this note was $ 4,500 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, 2022 and 2021, respectively. Total interest expense on this note was $ 119 and $ 370 for the three months ended September 30, 2022 and 2021, respectively. 16 NOTE 7 — 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 4 % per annum and a maturity date of December 31, 2017 . As of September 30, 2022, this promissory note is in default. The Company recorded $ 15,000 and $ 15,000 of interest expense for the nine months ended September 30, 2022 and 2021, respectively. The Company recorded $ 5,000 and $ 5,000 of interest expense for the three months ended September 30, 2022 and 2021, respectively. The amount outstanding at September 30, 2022 and December 31, 2021 was $ 500,000 . NOTE 8 — STOCKHOLDERS’ EQUITY (DEFICIT) Issuance of Common Stock During the three months and nine months ended September 30, 2021, the Company issued an aggregate of 13,550 and 151,426 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 81,461 and 635,357 shares of common stock with a fair value of $ 5.00 and $ 5.00 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 0 and 10,507 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 2,315,000 and 2,315,850 shares of common stock to investors for net proceeds of $ 8,540,171 and $ 8,545,171 . 17 During the three months ended September 30, 2022, the Company issued 59,798 shares of common stock for services in lieu of cash of which 24,600 was to outside consultants, 17,699 to U.S. Asian (a related party) and 17,499 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 $ 184,291 which included $ 60,000 related to shares not yet issued. During the nine months ended September 30, 2022, the Company issued 84,188 shares of common stock for services in lieu of cash of which 48,990 was to outside consultants, 17,699 to U.S. Asian (a related party) and 17,499 shares to the members of the Board of Directors for their services as Board Members. The amount expensed during the nine months ended September 30, 2022 in the unaudited condensed consolidated statement of operations was $ 453,391 which included $ 120,000 related to shares not yet issued. 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 Outstanding, December 31, 2021 21,600 $ 10.00 Issued 2,482,250 4.15 Exercised - - Expired or cancelled - - Outstanding September 30, 2022 2,503,850 $ 4.20 The following table summarizes information about warrants to purchase shares of the Company’s common stock outstanding and exercisable at September 30, 2022: Summary information about warrants to purchase 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 2,135,000 3.00 4.15 2,135,000 $ 4.15 347,250 3.00 4.15 347,250 2,503,850 3.00 $ 4.15 2,503,850 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 year 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 $ 240,000 in shares of the Company’s common stock. During the nine months ended September 30, 2022, an aggregate of $ 180,000 of stock-based compensation was recorded in the unaudited condensed consolidated statement of operations. As of September 30, 2022, the shares were not issued. 18 NOTE 9 — 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. The court has set a jury trial in this matter for April 24, 2023. 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 EDD 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 believe the hired workers at issue were indeed actual contractors and not employees. All our business in California has been closed and moved out of the state. We have one part 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 and, as such, has accrued this amount on the unaudited condensed consolidated balance sheets at September 30, 2022 and December 31, 2021. NOTE 10 — 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 9 %. 19 Operating leases are included in the condensed consolidated balance sheets as follows: Schedule of Operating leases Classification 9/30/2022 12/31/2021 Lease assets Operating lease cost ROU assets Assets $ 7,512 $ - Total lease assets $ 7,512 $ - Lease liabilities Operating lease liabilities, current Current liabilities $ 49,562 $ 40,845 Operating lease liabilities, non-current Liabilities 17,634 49,089 Total lease liabilities $ 67,196 $ 89,934 The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows: Schedule of Lease costs Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Leases costs Operating lease costs $ 13,500 $ 12,000 $ 40,500 $ 36,000 Total lease costs $ 13,500 $ 12,000 $ 40,500 $ 36,000 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: Future minimum payments under non-cancelable leases for operating leases Fiscal Year Operating Leases Remainder of 2022 $ 13,341 2023 53,675 2024 4,496 Total future minimum lease payments 71,512 Amount representing interest 4,316 Present value of net future minimum lease payments $ 67,196 Additional information related to leases is presented as follows: Schedule of additional information related to leases September 30, 2022 December 31, 2021 Leases Weighted average remaining lease term 1.25 2.00 Weighted average discount rate 9.9 % 10 % 20 NOTE 11 — 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 % Accounts Receivable Two customers accounted for 86 % or accounts receivable at September 30, 2022. Customer A 19 % Customer B – related party 67 % Three customers accounted for 67 % of the accounts receivable as of December 31, 2021, as set forth below: Customer A 37 % Customer B 18 % Customer C 12 % 21