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 included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission, or SEC on March 27, 2023. References in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “us,” “we,” “our,” and similar terms refer to Nexalin Technology, Inc. This discussion contains forward-looking statements as that term is defined within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. 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 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. Medical professionals in the United States have utilized the Gen-1 device to administer to patients in clinical settings. While the Gen-1 device had been cleared by the FDA to treat depression, anxiety, and insomnia, three prevalent and serious diseases, because 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. We are required to file a new application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the sales and marketing of our devices for the treatment of anxiety and insomnia. In the FDA’s December 2019 reclassification ruling, the treatment of depression with our device will require a Class III certification and require a new PMA (premarket approval) application to demonstrate safety and effectiveness. While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices in the United States. 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 and patient cables. 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 decision on amending our existing 510(k) application at 4 milliamps. A new pre-sub document in preparation of a new 510K for our Gen-3 Halo headset at 15 mAmps was filed with the FDA in January of 2023. Formal comments to our pre-sub document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023. Minutes of the meeting with the FDA were filed with the FDA on May 16, 2023. No additional comments have been received from the FDA at this time. 24 We have designed and developed a new advanced waveform technology to be emitted at 15 milliamps through new and improved medical devices referred to as Generation 2 or Gen-2 and Generation 3 or Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that will be prescribed by licensed medical professionals in a virtual clinic setting similar to existing Tele-health platforms. The Nexalin research team believes that the new 15 milliamp Gen-2 and Gen-3 devices can penetrate deeper into the brain and stimulate associated structures of mental illness, which we believe will generate enhanced patient response without any risk or unpleasant side effects. The Nexalin regulatory team has made a strategic decision to develop strategies for pilot trials in various mental health disease states. In addition, a new PMA application in the United States is in development for the treatment of depression utilizing both Gen-2 and Gen-3. The new Gen-3 device is also scheduled for additional pilot trials for anxiety and insomnia in the United States beginning in the fourth quarter of 2023. Preliminary data provided by the University of California San Diego supports the safety of utilizing our 15 milliamp waveform technology. However, the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA. 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 substance abuse/addiction and the treatment of Alzheimer’s disease and dementia. Continued pilot testing for Alzheimer’s and dementia is planned in China in 2023 and 2024. In part due to increasing incidence attributed to the devastating impacts of the COVID-19 pandemic, mental health and cognitive disorders are widespread across the globe and cause substantial health, social and economic losses, and hardships accordingly. Our focus is on the continued development of our innovative bioelectronic medical technologies and regulatory approval. We intend to help reverse these losses, and hardships of these losses, by safely and effectively treating various mental health disorders associated with post Covid and long Covid mental disease states. All our products are non-invasive, safe, undetectable to the human body and can provide relief to those afflicted with mental health issues without adverse side effects. We have a proprietary design that stabilizes currents, electromagnetic fields, and various frequencies — referred to collectively as waveform - particularly our proprietary, 15 milliamp patented symmetrical waveform. Our devices generate a high frequency carrier wave. It is applied to the brain with an array of electrodes on the forehead and behind each ear at the mastoid. The features of this proprietary waveform and the array of electrodes allow the application of the waveform to the entire brain rather than a small, targeted area of the brain. By increasing the power, our waveform can penetrate deeper into the brain and stimulate deep mid-brain structures associated with mental illness. Our research and clinical teams believe that a more powerful waveform will create a stronger response in the brain. A stronger response creates a higher level of efficacy. This entire proprietary technique allows Nexalin to provide a safe and comfortable treatment that is more powerful than any stimulation device in the market. Current pilot study protocols and randomized clinical trials have been designed and submitted to the FDA to provide feedback on final reports and data sets for the purpose of safety and efficacy evaluations in the future. Determinations of the safety and efficacy of our devices are solely within the authority of the FDA. Currently, the waveform that comprises the basis of Gen-2 and new Gen-3 headset devices has been tested in research settings to develop safety data that has been submitted for review by the FDA for safety evaluation and eventual marketing in the United States and around the world. Determinations of the safety and efficacy of our devices in the United States are solely within the authority of the FDA. We recognize that an additional barrier to treatment in today’s mental health treatment landscape -- beyond the concerns about safety, efficacy and side-effects that have been associated with conventional mental health treatments such as ECT (shock therapy), drugs and psychotherapy -- is stigma. We have received industry reports and feedback that many patients that struggle with mood disorders have the stigma of embarrassment associated with psychiatrists and psychotherapy (e.g., counselling with a therapist). Additional stigmas and other issues are associated with the side effects of medication prescribed by psychiatrists. When we researched the current pharmaceuticals model, public information highlighted the many side effects associated with these medications. Frequently, patients would stop taking the medication because of the uncomfortable side effects. Additional public information mentions dependency and withdrawal issues associated with medication for psychiatric disorders. 25 To address the embarrassment stigma, we are developing a new virtual clinic that will allow the physician to diagnose a mental health issue in the privacy of a tele-psychiatry virtual platform. After diagnosis, the physician will prescribe the Nexalin Gen-3 headset to the patient for treatment. Next, the Gen-3 device will be shipped to the patient’s home. After the patient receives the device, they will pair the headset device with an app in the patient’s smart phone. The app will communicate with the Nexalin cloud servers to authorize the device for treatment according to the protocol designed by the physician. The physician will monitor treatment compliance and other health related issues in a private physician dashboard that connects through the Nexalin app and cloud servers. We believe that to preserve product safety and integrity for home use, the headset device will require physician oversight that will include a prescription for use with a monthly authorization provided by the physician after a monthly virtual visit. All appointments will be in a virtual setting to provide privacy and convenience for the physician and patient. The Nexalin virtual clinic will be provided in a proprietary virtual platform currently in the design stage. Our China Gen-2 15 milliamp device was recently approved in China by the NMPA for the treatment of insomnia and depression in China. This device and all other clinical devices will include a single use electrode for long term revenue streams. The USA Gen-2 device will have a fresh and modern appearance that meets the technology standards of the digital tech world of 2023. Early adopters of the Gen-1 device will be able to access additional firmware upgrades which are planned to enhance the previously purchased devices to the new symmetric15-milliamp waveform. Our Gen-2 device will be equipped with 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. This ensures a recurring revenue stream on the device and protects against any generic knockoffs designed to avoid treatment costs. This upgrade in technology also ensures the proprietary nature of the electrodes that support treatment outcomes are sustained. Overall, we believe that our advanced waveform, technological upgrades and the development of a modern headset monitored with our IT management platform 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 for other research and development activities. We expect our expenses will increase substantially over time as we: ● Continue the 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; and 26 ● add additional information systems including personnel to support our product development and planned future commercialization efforts. 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 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 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 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, 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 underwriters exercised their option to purchase 347,250 warrants for net proceeds of $3,473. The registration statement on Form S-1 (File No. 333-261989) for our initial public offering was filed with the Securities and Exchange Commission (“SEC”) and became effective on September 15, 2022. A final prospectus relating to the offering was filed with the SEC and is available on the SEC’s website at http://www.sec.gov . The offering was being made only by means of a prospectus forming part of the effective registration statement. The shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) in September 2022, under the symbols “NXL” and “NXLIW”, respectively. Impact of COVID-19 Pandemic We continue to be indirectly impacted by the Covid-19 pandemic because of our current dependence upon our distributor relationship with Wider Come Limited (“Wider”.) Wider acts as a distributor for the Company’s devices in China and Asia. Because of significant restrictions imposed by the Chinese government during the Covid pandemic, Wider’s ability to market and sell the Company’s devices has been negatively impacted, resulting in decreased revenue to the Company. Patients and salespeople are restricted in their movements resulting in a significant slowdown in the medical and other sectors. Fortunately, our Chinese distributor continues our strategy of multiple clinical studies in the major institution in Beijing in an array of brain related diseases. Very significant efforts and funds expended by our Chinese distributor has led to regulatory approval in China in both depression and insomnia thus far which has allowed for sales of our devices in China the past year. The extent of future impact will depend on future developments, including future activities by the Chinese government and other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others. In addition, the spread of an infectious disease, including COVID-19, may also result in the inability of our suppliers to deliver components or raw materials on a timely basis. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among other things. 27 Formalization of the Joint Venture; China Related Activities 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. 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. 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. 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. 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 was recorded in selling, general and administrative expenses on the statement of operations and comprehensive loss. On July 13, 2023, the Company issued an additional 150,000 shares to certain designated Wider shareholders pursuant to the terms of the collaborative agreement between the Company and Wider. Under the terms of the collaborative agreement, designated shareholders of Wider are entitled to an additional 150,000 shares upon Wider’s achievement of certain milestones, which were considered probable of occurring during the three months ended September 30, 2023. As such, the company recognized the full $1,500,000 fair value of the remaining 300,000 shares during the three-month period ended September 30, 2023. 28 Results of Operations Comparison of the three months ended September 30, 2023 and 2022 Our financial results for the three months ended September 30, 2023 and 2022 are summarized as follows: Three Months Ended September 30, Change Change (1) 2023 2022 $ % Revenues, net $ 24,113 $ 545,323 $ (521,210 ) (96 )% Cost of revenues 3,973 187,298 (183,325 ) (98 )% Gross profit 20,140 358,025 (337,885 ) (94 )% Operating expenses: Professional fees 127,202 7,632 119,570 1567 % Salaries and benefits 363,330 164,142 199,188 121 % Selling, general and administrative 1,945,145 479,445 1,465,700 306 % Total operating expenses 2,435,677 651,219 1,784,458 274 % Loss from operations (2,415,537 ) (293,194 ) (2,122,343 ) 724 % Other income (expense), net: Interest income (expense), net (5,330 ) (10,452 ) 5,122 (49 )% Gain on sale of short-term investments 82,943 - 82,943 100 % Other income 40,735 168,245 (127,510 ) (76 )% Total other income (expense), net 118,348 157,793 (39,445 ) (25 )% Net loss $ (2,297,189 ) $ (135,401 ) $ (2,161,788 ) 1597 % Other comprehensive income (loss): Unrealized loss from short-term investments (32,289 ) - (32,289 ) 100 % Comprehensive loss $ (2,329,478 ) $ (135,401 ) $ (2,194,077 ) 1620 % (1) Percentages may not foot due to rounding. Revenues For the three months ended September 30, 2023 and 2022, we generated $24,113 and $545,323 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. We also derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales. The decrease in revenue for 2023 compared to 2022 was primarily due to the decrease in device sales as a result of the difficulties encountered by our distribution network given the Covid restrictions in China. Cost of Revenues and Gross Profit For the three months ended September 30, 2023 and 2022, cost of revenues was $3,973 and $187,298, respectively, yielding a gross profit of $20,140 and $358,025 respectively, or 84% and 66%, respectively. Such increase in gross margin was due to the change in our sources of revenue. Our revenue for the quarter ended September 30, 2023 was primarily from license fees which have a greater gross margin than our other revenues. 29 Operating Expenses Total operating expenses for the three months ended September 30, 2023 and 2022 were $2,435,677 and $651,219, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in professional fees of approximately $120,000, an increase in salaries and benefits of approximately $199,000, an increase in insurance of approximately $60,000 and an increase in research and development costs of approximately $1,525,000 and an increase in travel of approximately $27,000. The increases in research and development and consulting costs are attributable to the development of our Gen-2 and Gen-3 devices primarily related to $1,500,000 in non-employee stock compensation expense classified in R&D. The increases in professional fees and insurance are a result of being a public company. The increase in salaries and benefits is primarily due to the hiring of our Senior VP and other staff. These amounts were offset by a decrease in consulting fees of approximately $27,000 primarily due to an increase in staff and a reduction in stock compensation expense of approximately $111,000 (due to the amount recognized during the current quarter being classified as research and development expense). Other Income (Expense), Net Other income (expense), net for the three months ended September 30, 2023 and 2022 was $118,348 and $157,793, respectively, consisting of interest and dividend income and gain on the sale of short-term investments offset by interest expense. Comparison of the Nine Months ended September 30, 2023 and 2022 Our financial results for the nine months ended September 30, 2023 and 2022 are summarized as follows: Nine Months Ended September 30, Change Change (1) 2023 2022 $ % Revenues, net $ 90,212 $ 1,282,933 $ (1,192,721 ) (93 )% Cost of revenues 20,457 356,345 (335,888 ) (94 )% Gross profit 69,755 926,588 (856,833 ) (92 )% Operating expenses: Professional fees 405,949 486,197 (80,248 ) (17 )% Salaries and benefits 965,988 469,996 495,992 106 % Selling, general and administrative 2,769,641 1,083,809 1,685,832 156 % Total operating expenses 4,141,578 2,040,002 2,101,576 103 % Loss from operations (4,071,823 ) (1,113,414 ) (2,958,409 ) 266 % Other income (expense), net: Interest income (expense), net (19,685 ) (45,886 ) 26,201 (57 )% Gain on sale of short-term investments 180,593 - 180,593 100 % Other income 42,875 168,245 (125,370 ) (75 )% Other income - PPP loan forgiveness - 22,916 (22,916 ) (100 )% Total other income (expense), net 203,783 145,275 58,508 40 % Net loss $ (3,868,040 ) $ (968,139 ) $ (2,899,901 ) 300 % Other comprehensive income (loss): Unrealized loss from short-term investments (35,513 ) - (35,513 ) 100 % Comprehensive loss $ (3,903,553 ) $ (968,139 ) $ (2,935,414 ) 303 % (1) Percentages may not foot due to rounding. 30 Revenues For the nine months ended September 30, 2023 and 2022, we generated $90,212 and $1,282,933, respectively, of revenue primarily from the sale of devices, supplies and from the reimbursement of costs. In addition, we generated income from licensing and treatment fee agreements with our customers by charging a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. We also derive revenues from equipment by selling electrodes to customers for use with our device and from royalties from the manufacturer of our electrodes. We also derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales. The decrease in revenue for 2023 compared to 2022 was primarily due to the decrease in device sales as a result of the difficulties encountered by our distribution network given the Covid restrictions in China. Cost of Revenue and Gross Profit For the nine months ended September 30, 2023 and 2022, cost of revenues were $20,457 and $356,345, respectively, yielding a gross profit of $69,755 and $926,588, respectively, or 77% and 72%, respectively. Such increase in gross margin was due to the change in our sources of revenue Operating Expenses Total operating expenses for the nine months ended September 30, 2023 and 2022 were $4,141,578 and $2,040,002, respectively. The increase of approximately $496,000 in salaries and benefits was due to the hiring of our CFO, Senior VP and other staff. There was an increase in research and development costs of approximately $1,688,000, an increase in regulatory and compliance costs of approximately $22,000, an increase in insurance of approximately $211,000, an increase in travel of approximately $103,000 and an increase in taxes of approximately $40,000. The increase in research and development costs are attributable to the development of our Gen-2 and Gen-3 devices, primarily related to $1,500,000 in non-employee stock compensation expense classified in R&D. The increase in insurance is a result of being a public company. The increase in travel is primarily due to team members traveling to the home office and the cost of trips to work with and solidify our relationship with our JV partner. The increase in taxes is due to the Delaware Franchise Tax. These amounts are offset by a decrease in professional fees of approximately $80,000 primarily due to large fees in 2022 relating to the public offering, a reduction in consulting fees of approximately $116,000 primarily due to an increase in staff and a reduction in stock compensation of $254,000. Other Income (Expense), Net Other income (expense), net for the nine months ended September 30, 2023 and 2022 was $203,783 and $145,275, respectively, consisting of interest and dividend income and gain on the sale of short-term investments offset by interest expense net of the PPP loan forgiveness. Liquidity and Capital Resources Working Capital September 30, 2023 December 31, 2022 Current assets $ 4,263,349 $ 7,425,462 Current liabilities 1,197,075 1,948,986 Working capital $ 3,066,274 $ 5,476,476 Current assets decreased for the nine months ended September 30, 2023 primarily a result of funding operations and the paydown of debt. Cash and cash equivalents increased approximately $199,000. Short-term investments decreased approximately $3.3 million, and prepaid and other current assets decreased approximately $119,000. 31 Current liabilities decreased for the nine months ended September 30, 2023 primarily as a result of the reduction of accounts payable and repayment of a loan payable to an officer of the Company. Accounts payable decreased approximately $586,000, accrued expenses increased approximately $67,000, lease liability – current portion decreased approximately $33,000, and loan payable - officer decreased by $200,000. Cash Flows The following table summarizes our consolidated cash flows for the nine months ended September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Net cash used in operating activities $ (2,831,354 ) $ (1,309,242 ) Net cash provided by investing activities $ 3,230,008 $ - Net cash provided by (used in) financing activities $ (200,000 ) $ 8,511,543 Net Cash Used In Operating Activities Net cash used in operating activities was $(2,831,354) for the nine months ended September 30, 2023, as compared to $(1,309,242) for the respective period in 2022, primarily due to the net loss of $3,868,040, as well as a combined decrease in accounts payable and accounts payable-related party of approximately $585,000. Offset by increases in stock compensation of approximately $1.7 million, of which $1.5 million was classified as research and development expense, and prepaid assets of approximately $119,000. Net Cash Provided By Investing Activities Net cash provided by investing activities during the nine months ended September 30, 2023, and 2022 was $3,230,008 and $0 respectively, which was due to short-term investment sales of approximately $32.7 million offset by purchases of $29.2 million of short-term investments, the purchase of patents of approximately $74,000 and an investment in our equity method investment of $96,000. Net Cash Provided By (Used In) Financing Activities Net cash provided by (used in) financing activities during the nine months ended September 30, 2023 and 2022 was $(200,000) and $8,511,543 respectively, which was due to payment of note payable to an officer of the Company of $200,000 in the current period and primarily due to the sale of common stock for cash in 2022. Uses and Availability of Additional Funds Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, manufacturing development costs, legal and other regulatory expenses, and general administrative costs. Although we have produced Gen-2, which is selling in China where it is approved for certain utilizations by medical practitioners, the successful development of our future products is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the clinical development of Gen-3 and obtain regulatory approvals. We are also unable to predict when, if ever, net cash inflows from revenues will enable us to be cash flow positive. This is due to the numerous risks and uncertainties associated with developing products, including, among others, the uncertainty of: ● successful enrolment in, and completion of clinical trials; ● performing preclinical studies and clinical trials in compliance with the FDA or any comparable regulatory authority requirements; 32 ● 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 As of September 30, 2023, the Company had a significant accumulated deficit of $76.3 million. For the nine months ended September 30, 2023, the Company had a loss from operations of $4.1 million and negative cash flows from operations of $2.8 million. The Company’s operating activities consume the majority of its cash resources. The Company will continue to service existing customers in the United States. The Company sold devices in China to its acting distributor. The Company anticipates that it will continue to incur operating losses as it executes its development plans through 2023, as well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company previously funded these losses primarily through the sale of equity and issuance of convertible notes. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period. As of September 30, 2023, the Company had cash and cash equivalents on hand of approximately $361,000 and short-term investments of approximately $3.6 million. Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. These plans require the Company to place reliance on several factors including, favourable market conditions, to access additional capital in the future. These plans were therefore determined not to be sufficient to overcome the presumption of substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, management does not believe we have sufficient cash for the next twelve months from the issuance of the financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. At the closing on September 16, 2022, the Company sold 2,315,000 Units and 347,250 of Warrants in an Initial Public Offering (the “Initial Public Offering”) at a price of $4.15 per Unit and $0.01 per Warrant for a total of $9,610,723. The Company incurred offering costs of $1,067,078, consisting of $878,858 of underwriting fees and expenses and $188,220 of costs related to the Initial Public Offering. 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. 33 While our significant accounting policies are described in more detail in Note 3 to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. Revenue Recognition 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 and patient cables 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 our equipment revenue has one performance obligation. That performance obligation is satisfied when the electrodes and devices are shipped to the customer. We do not offer a warranty on the electrodes or devices. Management identified that treatment fee revenue has one performance obligation. The performance obligation is satisfied upon the completion of individual treatments on patients by customers. Management identified that our royalty fee has one performance obligation. The performance obligation is satisfied as long as the royalty agreement remains valid and is not terminated. The royalty revenue is invoiced when the manufacturer advises the Company that the invoice has been sent to the customer. See Note 8 to the consolidated financial statements contained in this report for more information regarding our commitments and contingencies. 34 Practical Expedients As part of ASC 606, the Company has adopted several practical expedients including: ● Significant Financing Component — we do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between when we transfer a promised goods or services to the customer and when the customer pays for that service will be one year or less. ● Unsatisfied Performance Obligations — for all performance obligations related to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in ASC Topic 606 and therefore, are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. ● Shipping and Handling Activities — we elected to account for shipping and handling activities as a fulfilment cost rather than as a separate performance obligation. ● Right to invoice — we have the right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date we may recognize revenue in the amount to which the entity has a right to invoice. 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. Contractual Obligations See Note 8 – 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. 35 Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations. Continued Nasdaq Listing On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023. On November 7, 2023, the Company submitted a letter to NASDAQ requesting a second 180-day period in order to regain compliance with NASDAQ Rule 5550(a)(2). The Company stated in that letter that it believed it will be able to cure the deficiency and increase its stock price to above $1.00 per share pursuant to its plan to do so. On November 7, 2023, the Company received written notice from the Nasdaq Listing Qualifications Department (the “Staff”) that the Company was not eligible for an additional 180 calendar day compliance period because the Company no longer complied with Nasdaq’s $5 million minimum stockholder equity initial listing requirement. As of the filing date of this Quarterly Report, the Company has requested an appeal of the Staff’s determination and submitted a hearing request to the Nasdaq Hearings Panel (“Panel”). As a result of the request for the appeal to the Panel, and while the appeal process is pending, the suspension of trading of the Company’s common stock is stayed, and the Company’s common stock and warrants will continue to trade on Nasdaq until the hearing process concludes and the Panel issues a written decision. As part of the appeal process, the Company will be asked to provide the Panel with a plan to regain compliance with the minimum bid price and stockholder equity requirements. The Company’s plan will need to include a discussion of the events that the Company believes will enable it to timely regain compliance with such requirements. The Company intends to submit a plan that it believes will be sufficient to permit the Company to regain compliance with the minimum bid price requirement and stockholder equity requirements. There can be no assurance that the Panel will grant the Company a 180-day extension to regain compliance, or that the Company will be able to regain compliance with such applicable Nasdaq listing requirements. Any delisting of our common stock from The Nasdaq Stock Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. Furthermore, the delisting of our common stock from The Nasdaq Stock Market could adversely affect our business, financial condition and results of operations.