Nexalin Technology, Inc. 10-Q

Item 1. Financial Statements NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2023 2022 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 361,397 $ 162,743 Short-term investments 3,575,805 6,831,192 Accounts receivable (Includes related party of $ 10,207 and $ 0 , respectively) 14,483 4,875 Inventory 158,619 154,370 Prepaid expenses and other current assets 153,045 272,282 Total Current Assets 4,263,349 7,425,462 ROU Asset 1,963 6,171 Equipment, net of accumulated depreciation of $ 2,583 and $ 2,181 , respectively 100 503 Patent, net of amortization 72,355 - Equity Method Investment 96,000 - Total Assets $ 4,433,767 $ 7,432,136 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable (Includes related party of $0 and $260,000, respectively) $ 72,549 $ 658,367 Accrued expenses 606,891 539,822 Lease liability, current portion 17,635 50,797 Loan payable - officer - 200,000 Note payable 500,000 500,000 Total Current Liabilities 1,197,075 1,948,986 Long-term Liabilities: Lease liability, net of current portion - 4,463 Total Liabilities 1,197,075 1,953,449 Commitments and Contingencies (Note 8) Stockholders’ Equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 7,436,562 and 7,286,562 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 7,437 7,287 Accumulated other comprehensive income 800 36,313 Additional paid in capital 79,485,835 77,824,427 Accumulated deficit ( 76,257,380 ) ( 72,389,340 ) Total Stockholders’ Equity 3,236,692 5,478,687 Total Liabilities and Stockholders’ Equity $ 4,433,767 $ 7,432,136 The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. 1 NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues, net (Includes related party of $ 0 and $ 520,000 for the three months ended and $ 10,207 and $ 1,183,367 for the nine months ended respectively) $ 24,113 $ 545,323 $ 90,212 $ 1,282,933 Cost of revenues 3,973 187,298 20,457 356,345 Gross profit 20,140 358,025 69,755 926,588 Operating expenses: Professional fees 127,202 7,632 405,949 486,197 Salaries and benefits 363,330 164,142 965,988 469,996 Selling, general and administrative 1,945,145 479,445 2,769,641 1,083,809 Total operating expenses 2,435,677 651,219 4,141,578 2,040,002 Loss from operations ( 2,415,537 ) ( 293,194 ) ( 4,071,823 ) ( 1,113,414 ) Other income (expense), net: Interest income (expense), net ( 5,330 ) ( 10,452 ) ( 19,685 ) ( 45,886 ) Gain on sale of short-term investments 82,943 - 180,593 - Other income 40,735 168,245 42,875 168,245 Other income - PPP loan forgiveness - - - 22,916 Total other income (expense), net 118,348 157,793 203,783 145,275 Net loss ( 2,297,189 ) ( 135,401 ) ( 3,868,040 ) ( 968,139 ) Other comprehensive income (loss): Unrealized loss from short-term investments ( 32,289 ) - ( 35,513 ) - Comprehensive loss $ ( 2,329,478 ) $ ( 135,401 ) $ ( 3,903,553 ) $ ( 968,139 ) Net loss per share attributable to common stockholders - Basic and Diluted $ ( 0.31 ) $ ( 0.03 ) $ ( 0.53 ) $ ( 0.19 ) Weighted Average Shares Outstanding - Basic and Diluted 7,415,366 5,186,692 7,330,128 4,994,797 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) Accumulated Other Comprehensive Gain Additional Total Stockholders’ Common Stock (Loss) on ST Paid-in Accumulated Equity Shares Amount Investments Capital Deficit (Deficit) Balance as January 1, 2022 4,879,923 $ 4,880 $ - $ 69,004,703 $ ( 70,691,524 ) $ ( 1,681,941 ) Stock issued for cash 850 1 - 5,099 - 5,100 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 Accumulated Other Comprehensive Gain Additional Total Common Stock (Loss) on ST Paid-in Accumulated Stockholders’ Shares Amount Investments Capital Deficit Equity Balance as of January 1, 2023 7,286,562 $ 7,287 $ 36,313 $ 77,824,427 $ ( 72,389,340 ) $ 5,478,687 Other comprehensive gain - - 4,756 - - 4,756 Net loss - - - - ( 748,414 ) ( 748,414 ) Balance as of March 31, 2023 7,286,562 $ 7,287 $ 41,069 $ 77,824,427 $ ( 73,137,754 ) $ 4,735,029 Other comprehensive loss - - ( 7,980 ) - - ( 7,980 ) Stock compensation - - - 88,388 - 88,388 Net loss - - - - ( 822,437 ) ( 822,437 ) Balance as of June 30, 2023 7,286,562 $ 7,287 $ 33,089 $ 77,912,815 $ ( 73,960,191 ) $ 3,993,000 Other comprehensive loss - - ( 32,289 ) - - ( 32,289 ) Stock compensation 150,000 150 - 1,573,020 - 1,573,170 Net loss - - - - ( 2,297,189 ) ( 2,297,189 ) Balance as of September 30, 2023 7,436,562 $ 7,437 $ 800 $ 79,485,835 $ ( 76,257,380 ) $ 3,236,692 The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. 3 NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 3,868,040 ) $ ( 968,139 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt - 11,175 Stock compensation 1,661,558 453,391 Depreciation 402 403 Amortization 2,105 - Forgiveness of interest expense - ( 168,361 ) Forgiveness of PPP Loan - ( 22,916 ) Non-cash lease expense 4,208 3,848 Gain on sale of short-term investments ( 180,593 ) - Changes in operating assets and liabilities: Accounts receivable ( 9,608 ) ( 5,224 ) Prepaid assets 119,237 ( 274,945 ) Inventory ( 4,249 ) ( 120,661 ) Accounts payable - related party ( 260,000 ) ( 149,320 ) Accounts payable ( 325,818 ) 93,819 Accrued expenses 67,069 1,785 Deferred revenue - ( 130,000 ) Lease liability ( 37,625 ) ( 34,097 ) Net cash (used) provided in operating activities ( 2,831,354 ) ( 1,309,242 ) Cash flows from investing activities: Sale of short-term investments 32,671,394 - Purchase of short-term investments ( 29,270,926 ) - Investment in Equity Method Investment ( 96,000 ) - Purchase of patents ( 74,460 ) - Net cash provided by investing activities 3,230,008 - Cash flows from financing activities: Sale of common stock for cash, net of financing fees - 8,545,270 Proceeds from exercise of warrants - 3,473 Payments on loan payable - shareholder - ( 37,200 ) Payments on notes payable - officer ( 200,000 ) - Net cash (used) provided in financing activities ( 200,000 ) 8,511,543 Net increase in cash and cash equivalents 198,654 7,202,301 Cash and cash equivalents - beginning of period 162,743 661,778 Cash and cash equivalents - end of period $ 361,397 $ 7,864,079 Non-cash investing and financing activities: Unrealized loss on short-term investments $ ( 35,513 ) $ - 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 and wholly owned subsidiary of NV Nexalin, was formed. Neuro-Health had no activity from December 6, 2019 (Inception) through September 30, 2023. On November 22, 2021, NV Nexalin entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nexalin Technology, Inc., a Delaware corporation (“Nexalin”, or the “Company”). Pursuant to the Merger Agreement, NV Nexalin merged with and into Nexalin with all shareholders of NV Nexalin receiving one common share of Nexalin in exchange for twenty shares of NV Nexalin held at the time of the Merger Agreement. NV Nexalin treated the transaction as a corporate reorganization with the historical consolidated financial statements of NV Nexalin becoming the historical consolidated financial statements of Nexalin. Nexalin had nominal assets and liabilities and did not conduct any operations prior to the reorganization other than its incorporation. NV Nexalin has retroactively applied the 20-for-1 exchange, effective on November 22, 2021, to share and per share amounts on the unaudited condensed consolidated financial statements for the nine months ended September 30, 2023 and 2022. NV Nexalin’s authorized shares of common stock were not affected as a result of the Merger Agreement. As a result of the Merger Agreement, NV Nexalin was dissolved, and Neuro-Health became a subsidiary of Nexalin. The Company completed its initial public offering on September 16, 2022. The initial public offering consisted of 2,315,000 units consisting of 2,315,000 shares of Common Stock and 2,315,000 accompanying warrants to purchase up to 2,315,000 shares of common stock. Each share of common stock was 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 $ 9,607,250 , before deducting underwriting discounts and offering expenses. In addition, the underwriters purchased 347,250 warrants for net proceeds of $ 3,473 . Our shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) on September 16, 2022, under the symbols “NXL” and “NXLIW”, respectively. Throughout this report, the terms “Nexalin,” “our,” “we,” “us,” and the “Company” refer to Nexalin Technology, Inc. Business Overview We design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic. We developed 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. Our original Gen-1 devices are cranial electrotherapy stimulation (CES) devices that emit waveform at 4 milliamps during treatment and are presently classified by the U.S. Food and Drug Administration (“FDA”) as a Class II device. 5 While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licensing fees and payments for the sale of electrodes. We have suspended marketing efforts for new sales of devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team makes a final decision on amending our existing 510(k) application at 4 milliamps. A new pre-sub document in preparation of a new 510(k) for our Gen-3 Halo headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments to our pre-sub document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023. Minutes of the meeting with the FDA were filed with the FDA on May 16, 2023. No additional comments have been received from the FDA at this time. We have designed and developed a new advanced wave form technology to be emitted at 15 milliamps through new and improved medical devices referred to as Generation 2 or Gen-2 and Generation 3 or Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that is intended to be prescribed by licensed medical professionals in a virtual clinic setting similar to existing Tele-health platforms. Preliminary data provided by the University of California San Diego supports the safety of utilizing our 15 milliamp waveform technology, however the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA. Additionally, we are currently designing clinical trial strategies for the use of Gen-3 for the treatment of substance use disorders including opiate, cocaine, and alcohol abuse. Recently the Gen-2 device was tested in pilot trials in China for the treatment of Alzheimer’s disease, and dementia. Continued pilot testing for Alzheimer’s and dementia, cognition and memory, and neurotransmitter changes is planned in China in 2023. On May 31, 2023, the Company formalized an agreement related to the formation of a joint venture established to engage in the clinical development, marketing, sale and distribution of Nexalin’s second generation transcranial Alternating Current Stimulation (“tACS”) devices (“Gen-2 devices”) in China and the greater Asia Pacific region. In connection with the formation of the joint venture, to be conducted through a company formed under the laws of Hong Kong (the “JV”), the Company entered into a Joint Venture Agreement (“JV Agreement”) with Wider Come Limited (“Wider”). Under the JV Agreement, the Company was issued a 48% minority interest in the JV. The investment in the JV is accounted for using the equity method of accounting. There has been no activity in the joint venture through September 30, 2023. The Incorporation Form (Company Limited by Shares) filed with the Companies Registry in Hong Kong originally reflected a 50%-50% ownership interest in the JV, but has been amended to properly reflect the 52%-48% ownership formalized in the JV agreement. The Company invested $ 96,000 in the joint venture in September 2023, while Wider contributed $104,000 bringing the Company’s ownership percentage to 48 % . There has been no operating activity in the joint venture through September 30, 2023. Emerging Growth Company We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s 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. 6 Risks and Uncertainties Management continues to evaluate the impact of the economy and the capital markets and has concluded that, while it is reasonably possible that events could have negative effects on the Company’s financial position and results of its operations, the specific impacts are not readily determinable as of the date of these unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of uncertainties. The current challenging economic climate may lead to adverse changes in cash flows, working capital levels and/or debt balances, which may also have a direct impact on the Company’s operating results and financial position in the future. The ultimate duration and magnitude of the impact and the efficacy of government interventions on the economy has and may continue to indirectly impact the Company because of its current dependence upon its joint venture relationship with Wider Come Limited. Wider Come Limited, as part of its obligations under the JV Agreement, acts as a distributor for the Company’s devices in China and Asia. Because of significant restrictions imposed by the Chinese government during the COVID-19 pandemic through calendar year 2022 and into 2023, Wider’s ability to market and sell the Company’s devices has been negatively impacted, resulting in decreased revenue to the Company. Patients and salespeople have been restricted in their movements resulting in a significant slowdown in the medical and other sectors. 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 in 2022, and into 2023. The extent of future impact is dependent on future developments, including future activities by the Chinese government and other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others. The repercussions of this health crisis could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results. Continued Nasdaq Listing On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023. On November 7, 2023, the Company submitted a letter to NASDAQ requesting a second 180-day period in order to regain compliance with NASDAQ Rule 5550(a)(2). The Company stated in that letter that it believed it will be able to cure the deficiency and increase its stock price to above $1.00 per share pursuant to its plan to do so. On November 7, 2023, the Company received written notice from the Nasdaq Listing Qualifications Department (the “Staff”) that the Company was not eligible for an additional 180 calendar day compliance period because the Company no longer complied with Nasdaq’s $5 million minimum stockholders equity initial listing requirement. As of the filing date of this Quarterly Report, the Company has requested an appeal of the Staff’s determination and submitted a hearing request to the Nasdaq Hearings Panel (“Panel”). As a result of the request for the appeal to the Panel, and while the appeal process is pending, the suspension of trading of the Company’s common stock is stayed, and the Company’s common stock and warrants will continue to trade on Nasdaq until the hearing process concludes and the Panel issues a written decision. As part of the appeal process, the Company will be asked to provide the Panel with a plan to regain compliance with the minimum bid price and stockholder equity requirements. The Company’s plan will need to include a discussion of the events that the Company believes will enable it to timely regain compliance with such requirements. The Company intends to submit a plan that it believes will be sufficient to permit the Company to regain compliance with the minimum bid price requirement and stockholder equity requirements. There can be no assurance that the Panel will grant the Company a 180-day extension to regain compliance, or that Company will be able to regain compliance with such applicable Nasdaq listing requirements. If the Company’s common stock and warrants are delisted by Nasdaq, it could adversely affect the Company’s ability to attract new investors, decrease the liquidity of the outstanding shares of common stock, reduce the Company’s flexibility to raise additional capital, reduce the price at which the Company’s common stock and warrants trade, and increase the transaction costs inherent in trading such shares and warrants with overall negative effects for the stockholders. In addition, delisting of the Company’s common stock and warrants could deter broker-dealers from making a market in or otherwise seeking or generating interest in the Company’s common stock. Furthermore, the delisting of the Company’s common stock and warrants from The Nasdaq Stock Market could adversely affect the business, financial condition and results of operations of the Company. 7 NOTE 2 — LIQUIDITY AND GOING CONCERN The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we 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, 2023, we had a significant accumulated deficit of $76.3 76,257,380 million. For the three and nine months ended September 30, 2023, we had a loss from operations of $2.4 2,415,537 million and $4.1 4,071,823 million, respectively and negative cash flows used in operations of approximately $2.8 2,831,354 million for the nine months ended September 30, 2023. While we had a working capital surplus as of September 30, 2023 of approximately $ 3.1 million our operating activities consume most of our cash resources. We expect to continue to incur operating losses as we execute our development plans, as well as undertaking other potential strategic and business development initiatives through 2023 and through the twelve months from the date of this report. In addition, we have had and expect to have negative cash flows from operations, at least into the near future. We have previously funded these losses primarily through the sale of equity and issuance of convertible notes. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period. Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. These plans require the Company to place reliance on several factors including, favourable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, management does not believe we have sufficient cash for the next twelve months from the issuance of the financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS Basis of Presentation The accompanying unaudited condensed consolidated financial information has been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position and the operating results and cash flows. Operating results for the three and nine months ended September 30, 2023 and 2022 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, 2022. 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. The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee’s net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be another than-temporary loss in value. The Company’s equity method investment is its interest in the newly formed joint venture. The Company invested $ 96,000 in the joint venture in September 2023.There has been no operating activity in the joint venture through September 30, 2023. 8 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. 9 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 September 30, 2023 September 30, 2022 Device sales $ - $ 520,000 Licensing fee 18,664 21,113 Equipment 5,179 4,100 Other 270 110 Total $ 24,113 $ 545,323 Nine Months Ended September 30, 2023 September 30, 2022 Device sales $ 9,600 $ 1,164,500 Licensing fee 62,566 60,561 Royalty Fee - 9,702 Equipment 16,679 22,033 Other 1,367 26,137 Total $ 90,212 $ 1,282,933 10 Major Geographic Locations Three Months Ended September 30, 2023 September 30, 2022 U.S. sales $ 24,113 $ 25,323 China sales - 520,000 Total $ 24,113 $ 545,323 Nine Months Ended September 30, 2023 September 30, 2022 U.S. sales $ 80,005 $ 89,864 China sales 10,207 1,193,069 Total $ 90,212 $ 1,282,933 Contract Modifications There were no contract modifications during the nine months ended September 30, 2023 and 2022. Contract modifications are not routine in the performance of the Company’s contracts. Deferred Revenue The Company receives payment for equipment and devices in advance of shipping. The Company recognizes the revenue as being earned upon shipment. No deferred revenue was recognized as of September 30, 2023 and December 31, 2022. Cash and Cash Equivalents Cash held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions. Short-Term Investments The appropriate classification of marketable securities is determined at the time of purchase and evaluated as of each reporting balance sheet date. Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair value is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unrealized holding gains and losses for equity securities are recognized in earnings. Unrealized holding gains and losses for available for sale debt securities are recognized in other comprehensive income. Realized gains and losses and interest and dividends earned are included in other income (expense), net. For individual debt securities classified as available-for-sale securities, the company determines whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If the decline below amortized cost is a result of credit loss or the company will more likely than not be required to sell the security before recovery of its amortized cost basis, the company will recognize an impairment relating to the decline through an allowance for credit losses. There were no impairments recognized for the three and nine months ended September 30, 2023. 11 Accounts Receivable Accounts receivables are reported at their outstanding unpaid principal balances, net of allowances for credit loss. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for an allowance for credit loss based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts receivable against the allowance for credit loss when a balance is determined to be uncollectible. During the nine months ended September 30, 2023 and 2022, the Company wrote off accounts receivable of $ 0 and $ 11,175 , respectively. The Company did no t record an allowance for credit loss on September 30, 2023 and December 31, 2022, respectively. Inventory Inventory consists of finished goods and components stated at the lower of cost or net realizable value (NRV) with cost determined on a first-in first-out basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete quantities in excess of demand, or otherwise non-saleable items. Equipment Equipment is recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the related assets, generally five years. 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 is removed from the consolidated balance sheets, with the resulting gain or loss, if any, reflected in operations in that period. Patents Patents are amortized over their useful lives and are reviewed for impairment when warranted by economic conditions. Amortization expense was $ 2,105 and $ 0 for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense was $ 753 and $ 0 for the three months ended September 30, 2023 and 2022, respectively. The following table summarizes the gross carrying amount, amortization and the net carrying value at September 30, 2023 and December 31, 2022. Schedule of patents Gross Carrying Amount Accumulated Amortization Net Carrying Value September 30, 2023 Patents $ 74,460 $ ( 2,105 ) $ 72,355 Total September 30, 2023 $ 74,460 $ ( 2,105 ) $ 72,355 December 31, 2022 Patents $ - $ - $ - Total December 31, 2022 $ - $ - $ - 12 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. At September 30, 2023 and December 31, 2022, the Company had a full valuation allowance applied against its net tax assets. Fair Value Measurements As defined in ASC 820, Fair Value Measurements and Disclosures , fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement. ● Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. ● Level 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. Fair Value of Financial Instruments The carrying value of cash, short-term investments, accounts receivable, inventory, prepaids, accounts payable and accrued expenses, and other current liabilities approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the loans payable approximates the estimated fair value for this financial instrument as management believes that such debt and interest payable on the note approximates the Company’s incremental borrowing rate. 13 The following table summarizes the amortized cost, unrealized gains and the fair value at September 30, 2023 and December 31, 2022. Amortized Cost Unrealized Gain Fair Value September 30, 2023 Short-term investments $ 3,575,005 $ 800 $ 3,575,805 Total September 30, 2023 $ 3,575,005 $ 800 $ 3,575,805 December 31, 2022 Short-term investments $ 6,794,879 $ 36,313 $ 6,831,192 Total December 31, 2022 $ 6,794,879 $ 36,313 $ 6,831,192 The unrealized loss of $ 35,513 for the nine months ended September 30, 2023 is included in the table above as a reduction in the total unrealized gain. The following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of September 30, 2023 and December 31, 2022. Schedule of fair value, assets measured on recurring basis Carrying Value Level 1 Level 2 Level 3 September 30, 2023 U.S. Treasury Notes $ 3,575,805 $ 3,575,805 $ - $ - December 31, 2022 U.S. Treasury Notes $ 6,831,192 $ 6,831,192 $ - $ - Net Loss per Common Share Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The dilutive effect, if any, of warrants is calculated using the treasury stock method. All outstanding convertible notes, if any, are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the warrants have been excluded from the Company’s computation of net loss per common share for the three and nine months ended September 30, 2023 and 2022. The following table summarizes the securities that would be excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less than the most recent fair value of the common shares: Schedule of antidilutive shares Three Months Ended September 30, 2023 2022 Warrants 2,662,250 2,503,850 Total 2,662,250 2,503,850 Nine Months Ended September 30, 2023 2022 Warrants 2,662,250 2,503,850 Total 2,662,250 2,503,850 14 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 unaudited condensed consolidated statements of operations and comprehensive loss. For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. 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. Warrant Accounting The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all its financial instruments, including issued private and public 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. Research and Development All research and development costs are charged to operations as incurred. For the nine months ended September 30, 2023 and 2022, the Company recorded $ 1,842,341 and $ 154,722 , respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2023 and 2022, the Company recorded $ 1,638,508 and $ 113,617 respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss. Leases A lease is defined as an agreement that conveys the right to control the use of identified property, plant or equipment (right of use asset or “ROU asset”) for a period of time in exchange for consideration. The Company accounts for its 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 9, Leases, for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures. ROU assets include any initial direct costs and prepaid lease payments and exclude any lease incentives. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option. 15 Equity Method Investments The company accounts for its investments in common stock or in-substance common stock that give it the ability to exercise significant influence over as an equity method investment in accordance with the guidance in ASC 323, Equity Method and Joint Ventures . Specifically, the company initially recognizes its investment in investees as an asset at cost. Further, the company subsequently measures its investment by recognizing its share of earnings or losses of the investee in the period in which they are reported. Recent Accounting Pronouncements In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments are in effect for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The adoption on January 1, 2023 modified the way the Company analyzes financial instruments, but it did not have a material impact on our 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. NOTE 4 — ACCRUED EXPENSES Accrued expenses consist of the following amounts: Schedule of accrued expenses September 30, 2023 December 31, 2022 Accrued interest $ 110,001 $ 111,501 Accrued – other 15,136 2,321 Accrued settlement liabilities 336,000 336,000 Accrued research and development expense 145,754 90,000 Total $ 606,891 $ 539,822 NOTE 5 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS Formalized Joint Venture On December 21, 2018, the Company entered into the first of a series of preliminary agreements providing for the establishment of a joint venture (“JV”) agreement (the “JV Agreement”) with Wider Come Limited, a China company (“Wider”) for the purpose of marketing, sale and distribution of the Company’s proprietary devices for the treatment of (i) anxiety, depression and insomnia and (ii) Alzheimer’s and dementia in the applicable territories. Wider has an experienced medical technology team in China. The parties formalized the JV on May 31, 2023. The joint venture is to be conducted through a company formed under the laws of Hong Kong. The JV will design and implement a comprehensive business model and distribution plan for our devices in China, Hong Kong, Macau and Taiwan. The embodiment of the agreed-upon terms and conditions of the JV in the formalized JV Agreement follows Wider’s completion of certain funding, clinical study, and publication milestones, as well as the resolution of certain regulatory concerns in China. The Company granted the JV a license to commercialize and exploit certain of the Company’s products and technologies in specified designated territories., and the JV will design and implement a comprehensive business model and distribution plan for these products and devices in such designated territories. 16 Under the JV Agreement, Wider is obligated to fund all operations for the initial 12-month period of the JV, after which Nexalin and Wider plan to jointly fund the JV’s operating expenses in accordance with their pro rata ownership. The JV entity is controlled by a Board of Directors in which Wider is to have sole representation but neither the Company nor Wider has exclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin will own 52 % and 48 % of the JV, respectively. There has been no activity in the joint venture through September 30, 2023. The Incorporation Form (Company Limited by Shares) filed with the Companies Registry in Hong Kong currently originally reflected a 50%-50% ownership interest in the JV, but has been amended to properly reflect the 52%- 48% ownership formalized in the JV agreement. During the three months ended September 30, 2023 the company contributed $96,000 to the joint venture, which was recognized as an asset on the Company’s unaudited condensed consolidated balance sheet. As of September 30, 2023, the joint venture has not generated any earnings or losses. Under the preceding terms of the collaborative arrangement between the Company and Wider, Wider served as an authorized distributor of the Company’s Gen-2 devices in Asia. As part of the consideration for Wider’s performance of its obligations to the Company prior to the recent formalization of the JV, the Company and certain designated Wider shareholders entered into stock issuance agreements for the issuance of 450,000 shares of the Company’s common stock, and simultaneously with the execution of 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. Under the terms of the collaborative agreement, designated shareholders of Wider are entitled to an additional 300,000 shares upon Wider’s achievement of certain milestones. The fair value of the 150,000 shares issued during the year ended December 31, 2020 (less the contributed $200,000 in cash) resulted in a charge to stock-based compensation of $ 550,000 and was recorded in selling, general and administrative expenses on the consolidated statement of operations and comprehensive loss. During the three months ended September 30, 2023, the Company issued an additional 150,000 shares to affiliates of Wider in satisfaction of obligations pursuant to the collaborative agreement and also recognized its obligation to issue an additional 150,000 shares. The grant date fair value of the 300,000 shares issued and to be issued resulted in a charge to research and development of $ 1,500,000 and was recorded in selling, general and administrative expenses on the unaudited condensed consolidated statement of operations and comprehensive loss. During the nine months ended September 30, 2023 and 2022, the Company recorded $ 10,207 and $ 1,183,367 in revenue, respectively, from Wider on the unaudited condensed consolidated statements of operations and comprehensive loss. During the three months ended September 30, 2023 and 2022, the Company recorded $ 0 and $ 520,000 in revenue, respectively, from Wider on the unaudited condensed consolidated statements of operations and comprehensive loss. U.S. Asian Consulting Group, LLC On May 9, 2018, the Company entered into a five-year consulting agreement with U.S. Asian Consulting Group, LLC (“U.S. Asian”). In March, 2021, the Company agreed to extend the consulting agreement for an additional period of eight years upon the closing of our initial public offering. The two members of U.S. Asian are shareholders in the Company, with Marilyn Elson having been appointed Chief Financial Officer of the Company on January 11, 2022. Effective November 1, 2023 Ms. Elson stepped down from her position as CFO. Please refer to the company’s Form 8-k filed on September 21, 2023 for additional information. Pursuant to the consulting agreement, U.S. Asian provides consulting services to the Company with regard to, among other things, corporate development and financing arrangements. The Company pays U.S. Asian $ 10,000 per month for services rendered pursuant to the consulting agreement. The Company recorded consulting expenses related to the consulting agreement of $90,000 for each of the nine months ended September 30, 2023 and 2022, respectively, and $ 30,000 for each of the three months ended September 30, 2023 and 2022, respectively, on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss. At September 30, 2023 and December 31, 2022, U.S. Asian was owed $ 0 and $ 260,000 , respectively, for accrued and unpaid services. 17 Officers On January 11, 2022, the Company entered into an employment agreement with Marilyn Elson to serve as Chief Financial Officer of the Company for a three-year term with an option for the Company and Ms. Elson to extend the term for an additional two years. On September 21, 2023, Ms. Elson provided the Company notice that she will step down as Chief Financial Officer effective November 1, 2023. After this date, Ms. Elson will continue as Controller for Nexalin Technology. Ms. Elson is the spouse of the other member of U.S. Asian. On July 1, 2023, the Company entered into a new employment agreement with Mark White to serve as Chief Executive Officer, a new services agreement with David Owens, M.D. to serve as Chief Medical Officer and a new employment agreement with Michael Nketiah to serve as Senior Vice President, Quality, Regulatory and Clinical Affairs. Each of the foregoing agreements are governed by three-year terms and provide compensation in the form of performance-based stock option awards, subject to and contingent upon approval and adoption of the Board of Directors, as well as approval of the stockholders and, in all cases, based on the closing price of the Company’s publicly-traded common stock on the applicable date of grant. Under the terms of his employment agreement, Mr. White is entitled to (i) a sign-on/retention bonus consisting of a one-time lump-sum payment of $50,000 and a grant of nonqualified stock options to purchase shares of the Company’s common stock with an exercise price equal to $400,000 (subject to shareholder approval), and (ii) stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $840,000 (subject to shareholder approval.) Under the terms of his service agreement, Mr. Owens is entitled to (i) a sign-on/retention bonus consisting of a grant of nonqualified stock options to purchase shares of the Company’s common stock with an exercise price equal to $125,000 (subject to shareholder approval) and (ii) stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $585,000 (subject to shareholder approval.) Under the terms of his employment agreement Mr. Nketiah is entitled to stock option grants to purchase shares of the Company’s common stock with an exercise price equal to $90,000 (subject to shareholder approval.) In addition to the payments stock and option grants described above, each of Messrs. White, Owens and Nketiah are receiving cash compensation and are eligible for additional cash bonuses . Pursuant to the guidance in ASC 718 a grant date has not been established for the stock option awards “granted” to the senior employees as 1) shareholder approval for the awards, which is not a formality or perfunctory, has not been obtained and 2) the specific performance criteria has not been established. Once a grant date has been established the company plans to recognize and measure the awards in accordance with ASC 718. Loan Payable – Officer On November 1, 2021, the Company received $ 200,000 as a loan from the Company’s Chief Executive Officer. The loan had 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. The note was amended as of January 1, 2023 to extend the due date to March 17, 2023 and to provide that interest payable on the maturity date will be $ 39,000 less any interest payments previously made. Total interest expense on this note was $ 18,000 and $ 13,500 for the nine months ended September 30, 2023 and 2022, respectively. The December 31, 2022 outstanding principal balance of $ 200,000 was satisfied by a payment on March 17, 2023. The March 31, 2023 outstanding interest balance of $ 34,500 was satisfied by a payment on April 26, 2023. Leases Our principle executive office is located at 1776 Yorktown, Suite 550, Houston, Texas 77056. Under ASC 842 “ Leases ”, we have two separate sub-leases (through IIcom Strategic Inc. controlled and owned by our Chief Executive Officer) totaling approximately 4,000 square feet of office space under operating leases. Management and supporting staff are hosted at this location. Our lease payments for fiscal year 2022 were $ 54,000 . Our lease costs for each of the nine months ended September 30, 2023 and 2022 were $ 40,500 . The sub-leases are due to expire in 2024. Pursuant to the sublease, we pay the third-party landlord (not the sub landlord) all direct and indirect rent costs under the primary lease directly for the leased premises. No additional payments are made to the Chief Executive Officer or the entity controlled by him. 18 NOTE 6 — LOANS PAYABLE 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, 2023, this promissory note is in default. The Company recorded $ 15,000 and $ 15,000 of interest expense for the nine months ended September 30, 2023 and 2022, respectively. The Company recorded $ 5,000 and $ 5,000 of interest expense for the three months ended September 30, 2023 and 2022, respectively. The amount outstanding at September 30, 2023 and December 31, 2022 was $ 500,000 . NOTE 7 — STOCKHOLDERS’ EQUITY (Deficit) Issuance of Common Stock During the three 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 . 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 and comprehensive loss was $ 453,391 which included $120,000 related to shares not yet issued. During the three months ended September 30, 2023, the Company issued 150,000 shares of common stock to Wider pursuant to the service agreement resulting in $750,000 of stock-based compensation expense. Under the service agreement the Company has an obligation to issue an additional 150,000 shares to Wider resulting in an additional $750,000 of stock-based compensation. Due to the nature of the payment the amount was classified in research and development expense. Warrants The issuance of warrants to purchase shares of the Company’s common stock are summarized as follows: Schedule of warrants Number of warrants Weighted Average Exercise Price Outstanding December 31, 2022 2,662,250 $ 4.15 Issued - - Exercised - - Expired or cancelled - - Outstanding September 30, 2023 2,662,250 $ 4.15 19 The following table summarizes information about warrants to purchase shares of the Company’s common stock outstanding and exercisable at September 30 2023: 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 $ 4.15 2,315,000 2 $ 4.15 2,135,000 $ 4.15 347,250 2 4.15 347,250 2,662,250 2 $ 4.15 2,662,250 The compensation expense attributed to the issuance of the warrants, if required to be recognized on the nature of the transaction, was recognized as they vested/earned. These warrants are exercisable up to three years from the date of grant. All are currently exercisable. NOTE 8 — 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. Although the parties are seeking mediation, the court has set a trial in this matter for March 18, 2024. Management’s intent is to contest the allegations vigorously and, as of the date of this report, is unable to provide an evaluation of the potential outcome of the litigation within the probable or remote range or to provide an estimate of the amount of or a range of potential loss that might be incurred by the Company. 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 total amount involved is approximately $300,000. Management has petitioned for reassessment and believes the hired workers at issue were indeed actual contractors and not employees. We have no business in California other than one part time and one full 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 $ 300,000 and, as such, has accrued this amount on the unaudited condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 and believes it has adequately accrued for this matter. 20 Demand Letter from The University of Arizona On December 8, 2022, the Company received a demand letter from the University of Arizona seeking payment of $111,094 purportedly due on an Investigator Initiated Cooperative Study Agreement, dated as of September 25, 2017 (the “2017 Study”). The Company believes that the 2017 Study was not completed and no payment was due. In fact, for a number of months prior to receipt of the demand letter, the Company had had discussions with the person at the University of Arizona who was to conduct the 2017 Study concerning updating the 2017 Study and completing an updated study and related work. After receipt of the demand letter, the Company has had discussions with the University of Arizona concerning resuming an updated study and receipt of credit for some or all the monies claimed to be due for the 2017 Study. As of October 13, 2023, the Company and the University of Arizona agreed on the terms of a settlement for the amounts claimed by the University, whereby the Company will pay an aggregate of approximately $ 69,000 (in three equal monthly payments) in full satisfaction of amounts the University claims it is owed. NOTE 9 — 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 % . Operating leases are included in the consolidated balance sheets as follows: Schedule of operating leases Classification September 30, 2023 December 31, 2022 Lease assets Operating lease cost ROU assets Assets $ 1,963 $ 6,171 Total lease assets $ 1,963 $ 6,171 Lease liabilities Operating lease liabilities, current Current liabilities $ 17,635 $ 50,797 Operating lease liabilities, non-current Liabilities - 4,463 Total lease liabilities $ 17,635 $ 55,260 21 The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations and comprehensive loss, were as follows: Schedule of lease cost Three Months Ended September 30, 2023 2022 Leases costs Operating lease costs $ 13,500 $ 13,500 Total lease costs $ 13,500 $ 13,500 Nine Months Ended September 30, 2023 2022 Leases costs Operating lease costs $ 40,500 $ 40,500 Total lease costs $ 40,500 $ 40,500 Future minimum payments under non-cancellable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2023: Future minimum payments under non-cancelable leases for operating leases Fiscal Year Operating Leases Remainder of 2023 $ 13,467 2024 4,496 Total future minimum lease payments 17,963 Amount representing interest ( 328 ) Present value of net future minimum lease payments $ 17,635 Additional information related to leases is presented as follows: Schedule of additional information related to leases September 30, 2023 December 31, 2022 Leases Weighted average remaining lease term .25 1.00 Weighted average discount rate 9.9 % 9.9 % 22 NOTE 10 — CONCENTRATION OF CREDIT RISK Revenues Three customers accounted for 70 % and 55 % of revenues for the three and nine months ended September 30, 2023, respectively as set forth below: Concentration of credit risk Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Customer A 27 % 24 % Customer B 23 % 18 % Customer C 20 % 13 % One customer, a related party, accounted for 92 % and 95 % of revenue for the three and nine months ended September 30, 2022, respectively. Accounts Receivable One customer, a related party, accounted for 70 % of accounts receivable at September 30, 2023, as set forth below: September 30, 2023 Customer A - related party 70 % Four customers accounted for 84 % of accounts receivable at December 31, 2022, as set forth below: December 31, 2022 Customer A 29 % Customer B 20 % Customer C 20 % Customer D 15 % NOTE 11 — SUBSEQUENT EVENTS Management did not identify any additional subsequent events that would have required adjustment or disclosure in the unaudited consolidated condensed financial statements. 23