Nexalin Technology, Inc. 10-Q

Item 2. Management’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 our Registration Statement on Form S-1 as filed with the SEC with respect to our initial public offering completed on September 20, 2022. (SEC File number 333-261989). 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 . 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 of devices are based upon cranial electrotherapy stimulation (CES). Our original Gen-1 devices emit a waveform at 4 milliamps during treatment and are now classified by the FDA, as of December 2019 as a Class II device. Medical professionals 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 result 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, we are required to file an amended application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the marketing and sales 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 ruling, the treatment of depression with our device will remain a class III 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. 22 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 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 license fees and payment for the sale of electrodes to clinical providers of our technology. We have suspended marketing and sales efforts in the United States on the Gen-1 device for treatment of anxiety and insomnia. Additionally, our regulatory team has informed FDA inspectors that we continue to support the operations of clinical providers that were using our Gen-1 devices prior to the December 2019 ruling by the FDA. We are currently making strategic plans for clinical trials for the use of Gen-2 for the treatment of substance use disorders, opiates additions, chronic pain, Alzheimer’s disease, and dementia. 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. Our focus is on the continued development of our innovative bioelectronic medical technologies and rapid regulatory approval to help reverse these losses and hardships by safely and effectively treating various mental health disorders. All our products are non-invasive and undetectable and, critically, can provide relief to those afflicted with mental health issues without adverse side effects. We have a proprietary design of varying voltages, currents, electromagnetic fields and various frequencies — referred to collectively as waveform — particularly our proprietary, patented symmetrical alternating current waveform. Our devices generate a high frequency charge balanced electrical current waveform that is applied to three electrodes on the head. The features of this waveform make the application of the stimulation undetectable to the human body. This technique is proprietary to our devices, which enables the use of a higher current than all other devices in the market. Our Gen-2 device is equipped with Radio Frequency Identification (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 RFID ensures a recurring revenue stream on the device and protects against any generic knockoffs. 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. 23 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, 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 on other research and development activities. We expect our expenses will increase substantially over time as we: ● continue our ongoing and planned preclinical and clinical development of our products; ● 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; ● add additional operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts. ● seek to discover and develop additional products; and ● initiate preclinical studies and clinical trials for any additional products that we may pursue in the future; 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 Proceeds 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 $9,607,000 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) 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”) on 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. 24 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 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 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 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. China Market and Potential Wider Come Joint Venture Relationship 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. 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 the 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 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. 25 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: (1) a Chinese domestic company shall first apply to the local foreign exchange bureau for directory registration by presenting an application form and business license; and (2) after the domestic company is registered in the directory and provides documentation to prove the authenticity of the business transaction between the parties, such as the contract for the transaction, banks in China will approve the transfer of the sales proceeds. 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. 26 Results of Operations Comparison of the Quarters ended September 30, 2022 and 2021 Our financial results for the quarter ended September 30, 2022 and 2021 are summarized as follows: Three Months Ended September 30, 2022 September 30, 2021 Change Change $ % Revenues, net $ 545,323 $ 55,970 $ 489,353 874 % Cost of revenue 187,298 9,306 177,992 1913 % Gross profit 358,025 46,664 311,361 667 % Operating expenses: Professional fees 7,632 152,851 (145,219 ) -95 % Salaries and benefits 164,142 67,662 96,480 143 % Selling, general and administrative 479,445 1,621,600 (1,142,155 ) -70 % Total operating expenses 651,219 1,842,113 (1,190,894 ) -65 % Loss from operations (293,194 ) (1,795,449 ) 1,502,255 -84 % Other (income) expense: Interest expense, net 10,452 27,175 (16,723 ) -62 % Other income (168,245 ) - (168,245 ) - PPP loan forgiveness - (22,916 ) 22,916 -100 % Total other (income) expense (157,793 ) 4,259 (162,052 ) -3805 % Net loss $ (135,401 ) $ (1,799,708 ) $ 1,664,307 -92 % Revenues For the quarter ended September 30, 2022 and 2021, we generated $545,323 and $55,970, 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. 27 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. The increase in revenue for 2022 compared to 2021 was primarily due to the sale in 2022 of 220 devices, there were no sales of devices in 2021, and to our cost reimbursements from Wider. Cost of Revenue and Gross Profit For the nine months ended September 30, 2022 and 2021, cost of revenues were $356,345 and $22,448, respectively, yielding a gross profit of $926,588 and $97,618, respectively, or 72.22% and 81.30%, 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 nine months ended September 30, 2022 and 2021 were $2,040,002 and $5,538,730, respectively. The decrease was primarily due to the decrease of approximately $4,183,000 in stock-based compensation for the issuance of our common stock to various employees 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, an increase in research and development of approximately $43,000 and an increase in regulatory and compliance of approximately $69,000. 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. Other (Income) Expense Other (income) expense for the nine months ended September 30, 2022 and 2021 was ($145,275) and $40,964, respectively, consisting of interest expense net of the PPP loan forgiveness, accrued interest forgiveness and interest income. 28 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 ) Current assets increased for the nine months ended September 30, 2022 increased primarily as a result of the proceeds of the Initial Public Offering. Current liabilities decreased for the nine months ended September 30, 2022 decreased primarily as a result of the settlement of accrued interest and a decrease in deferred revenue. Cash Flows The following table summarizes our consolidated cash flows for the nine months ended September 30, 2022 and 2021: September 30, 2022 December 31, 2021 Net cash used in operating activities (1,309,242 ) (667,700 ) Net cash provided by financial activities 8,511,543 725,690 Net Cash Provided by Operating Activities Net cash used in operating activities was $1,309,242 for the nine months ended September 30, 2022, as compared to $667,700 for the respective period in 2021, primarily due to the net loss of $968,139 and $5,482,076, respectively, as well as an increase in prepaid assets and inventory. These amounts were also offset by approximately $453,391 and $4.4 million of stock compensation during the periods, respectively. Net Cash Provided by Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2022 and 2021 was $8,511,543 and $725,690, respectively, which was primarily due to the sale of common stock for cash in 2022 and 2021. 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, 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; 29 ● 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 RESOURCES At September 30, 2022, the Company had a significant accumulated deficit of $71.7 million. For the nine months ended September 30, 2022, the Company had a loss from operations of $1.1 million and negative cash flows from operations of $1.31 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. It anticipates that it will continue to incur operating losses as it executes its development plans through 2022, 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. 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, 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. 30 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. While our significant accounting policies are described in more detail in Note 3 to our unaudited condensed consolidated financial statements appearing elsewhere in this 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. 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 our future results to be affected. Revenue Recognition We recognize revenue when our performance obligations with our customers have been satisfied. At contract inception, we determine if the contract is within the scope of ASC Topic 606 and then we evaluate 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. We only recognize revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. We have existing licensing and treatment fee agreements with our customers for the use of our 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. We also sell products related to the provision of services. We also sell our Gen-2 devices in China through our acting distributor. 31 Revenue Streams We derive revenues from our 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 derive revenues from equipment by selling electrodes and supplies to our existing customers for use with our device. We derive revenue from the sale to our acting distributor (Wider), of our Gen-2 device in China. We derive revenue from the reimbursement of certain costs from Wider. We derive revenue as a royalty fee from the China based manufacturer for electrodes ordered in China in connection with our 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. 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 — 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 Arrangements 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. 32 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 effective for us for interim and annual periods in fiscal years beginning after December 15, 2022. We believe the adoption will modify the way we analyze financial instruments, but we do not anticipate a material impact on results of operations. We are in the process of determining the effects adoption will have on its consolidated financial statements. Contractual Obligations See Note 9 – 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. 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. 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. 33