Item 1. Financial Statements
Item 1. Financial Statements
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
2024
2023
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$
848,796
$
580,230
Short-term investments
-
2,368,203
Accounts receivable (Includes related party of $ 1,933 and $ 3,614 , respectively)
11,720
9,369
Inventory
145,141
156,420
Prepaid expenses and other current assets
176,486
315,670
Total Current Assets
1,182,143
3,429,892
ROU Asset
-
496
Intangible assets, net
226,077
105,528
Equity method investment
100,492
96,000
Other assets
54,414
-
Total Assets
$
1,563,126
$
3,631,916
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$
87,138
$
159,534
Accrued expenses
124,966
261,284
Lease liability, current portion
-
4,463
Total Current Liabilities
212,104
425,281
Total Liabilities
212,104
425,281
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common
stock, $ 0.001
par value; 100,000,000
shares authorized ; 7,586,562
shares issued and outstanding at June 30, 2024 and 7,436,852 issued and outstanding at December 31, 2023
7,587
7,437
Accumulated other comprehensive income (loss)
-
( 405
)
Additional paid in capital
80,707,134
80,237,652
Accumulated deficit
( 79,363,699
)
( 77,038,049
)
Total Stockholders’ Equity
1,351,022
3,206,635
Total Liabilities and Stockholders’ Equity
$
1,563,126
$
3,631,916
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
June 30,
Six Months Ended
June 30,
2024
2023
2024
2023
Revenues,
net (Includes related party of $ 0
and $ 10,207
for the three months ended and $ 0 and $ 10,207 for the six months ended, respectively)
$
26,840
$
35,540
$
105,511
$
66,100
Cost of revenues
7,247
9,374
16,403
16,484
Gross profit
19,593
26,166
89,108
49,616
Operating expenses:
Professional fees
240,967
120,147
468,796
278,747
Salaries and benefits
307,480
303,334
633,897
602,657
Selling, general and administrative
768,167
479,545
1,357,148
824,498
Total operating expenses
1,316,614
903,026
2,459,841
1,705,902
Loss from operations
( 1,297,021
)
( 876,860
)
( 2,370,733
)
( 1,656,286
)
Other income (expense), net:
Interest income (expense), net
66
( 5,518
)
370
( 14,355
)
Gain on sale of short-term investments
11,719
58,878
36,665
97,650
Other income
2,034
1,063
3,556
2,140
Total other income (expense), net
13,819
54,423
40,591
85,435
Loss before equity in net earnings of affiliate
( 1,283,202
)
( 822,437
)
( 2,330,142
)
( 1,570,851
)
Equity in net earnings of affiliate
( 1,291
)
-
4,492
-
Net loss
( 1,284,493
)
( 822,437
)
( 2,325,650
)
( 1,570,851
)
Other comprehensive income (loss):
Unrealized
gain (loss) from short-term investments
245
( 7,980
)
405
( 3,224
)
Comprehensive loss
$
( 1,284,248
)
$
( 830,417
)
$
( 2,325,245
)
$
( 1,574,075
)
Net loss per share attributable to common stockholders - Basic and Diluted
$
( 0.17
)
$
( 0.11
)
$
( 0.31
)
$
( 0.22
)
Weighted Average Shares Outstanding - Basic and Diluted
7,497,551
7,286,562
7,467,225
7,286,562
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 (Unaudited)
Common Stock
Accumulated
Other
Comprehensive
Additional
Paid-in
Accumulated
Total
Stockholders’
Shares
Amount
Gain (Loss)
Capital
Deficit
Equity
Balance as 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 gain
-
-
( 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
Common Stock
Accumulated
Other
Comprehensive
Additional
Paid-in
Accumulated
Total
Stockholders’
Shares
Amount
Gain (Loss)
Capital
Deficit
Equity
Balance as of January 1, 2024
7,436,562
$
7,437
$
( 405
)
$
80,237,652
$
( 77,038,049
)
$
3,206,635
Other comprehensive gain
-
-
160
-
-
160
Stock compensation
-
-
-
161,349
-
161,349
Net loss
-
-
-
-
( 1,041,157
)
( 1,041,157
)
Balance as of March 31, 2024
7,436,562
$
7,437
$
( 245
)
$
80,399,001
$
( 78,079,206
)
$
2,326,987
Other comprehensive gain
-
-
245
-
-
245
Stock
compensation
-
-
-
308,283
-
308,283
Shares issued
150,000
150
-
( 150
)
-
-
Net loss
-
-
-
-
( 1,284,493
)
( 1,284,493
)
Balance
as of June 30, 2024
7,586,562
$
7,587
$
-
$
80,707,134
$
( 79,363,699
)
$
1,351,022
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)
Six Months Ended
June 30,
2024
2023
Cash flows from operating activities:
Net loss
$
( 2,325,650
)
$
( 1,570,851
)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation
469,632
88,388
Depreciation
-
268
Amortization
6,454
1,352
Non-cash lease expense
496
2,774
Gain on sale of short-term investments
( 36,665
)
( 97,650
)
Share of net income from equity method investment
( 4,492
)
-
Changes in operating assets and liabilities:
Accounts receivable
( 418
)
( 9,447
)
Accounts receivable - related party
( 1,933
)
-
Prepaid assets
139,184
31,371
Inventory
11,279
( 5,637
)
Other assets
( 54,414
)
-
Accounts payable - related party
-
( 260,000
)
Accounts payable
( 72,396
)
( 349,866
)
Accrued expenses
( 136,318
)
63,811
Lease liability
( 4,463
)
( 24,773
)
Net cash used in operating activities
( 2,009,704
)
( 2,130,260
)
Cash flows from investing activities:
Sale of short-term investments
9,169,596
21,155,143
Purchase of short-term investments
( 6,764,323
)
( 18,694,446
)
Purchase of patents
( 80,120
)
( 61,458
)
Purchase of trademarks
( 46,883
)
-
Net cash provided by investing activities
2,278,270
2,399,239
Cash flows from financing activities:
Payments on notes payable - officer
-
( 200,000
)
Net cash used in financing activities
-
( 200,000
)
Net increase in cash and cash equivalents
268,566
68,979
Cash and cash equivalents - beginning of period
580,230
162,743
Cash and cash equivalents - end of period
$
848,796
$
231,722
Non-cash investing and financing activities:
Unrealized gain on short-term investments
$
405
$
( 3,224
)
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
4
NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF THE ORGANIZATION AND BUSINESS
Corporate History
Nexalin Technology, Inc. (“NV Nexalin”) was formed on October 19, 2010 as a Nevada corporation. The Company’s principal offices are located at 1776 Yorktown, Suite 550, Houston, Texas 77056.
On September 6, 2019, Neuro-Health International,
Inc. (“Neuro-Health”), a Nevada corporation, a wholly owned subsidiary of NV Nexalin, was formed. Neuro-Health had no activity
from December 6, 2019 (Inception) through June 30, 2024.
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.
On July 1, 2024, we consummated a follow-on public
offering of an aggregate of 3,000,000 shares of the Common Stock for an offering price of $ 1.75 per share, resulting in aggregate gross
proceeds of approximately $ 5,250,000 . The Company intends to use the net proceeds of such offering primarily for general corporate purposes,
which may include, but is not limited to, working capital, operating expenses, and capital expenditures.
Throughout this report, the terms “Nexalin,” “our,” “we,” “us,” and the “Company” refer to Nexalin Technology, Inc.
Business Overview
Nexalin is headquartered, and maintains its base
of management and operations, in Houston, Texas. 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 and depression, 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 (the “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)
and/or a new Denovo 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
decides on a new 510(k) application at 4 milliamps based on FDA comments expected to be received in late 2024. Our regulatory team
continues to inform the FDA of the suspension of the marketing and sale of the Gen-1 products to new providers. We are currently
analyzing whether to proceed with an amended application with the FDA for Gen-1 devices for the treatment of insomnia and
anxiety.
5
The waveform that comprises the basis of our “Generation
2” or “Gen-2” and new “Generation 3” or “Gen-3” headset devices is in pre-submission for review
by the FDA for safety evaluation and eventual marketing in the United States. Determinations of the safety and efficacy of our devices
in the United States are solely within the authority of the FDA. We plan to conduct decentralized clinical trials for the Gen-3 device
in the U.S. and we continue to consult with the FDA as part of the pre-submission meetings. If and when we obtain FDA clearance for the
Gen-3 device, we intend to extend the development and commercialization of our devices for sale in the U.S. and other territories, given
the potential unmet demand for the treatment of mental health conditions with our device.
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 Gen-2 and 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 and/or pivotal trials in various mental health disease states.
In addition, a new PMA application in the United States is in strategic development for the treatment of depression utilizing both Gen-2
and Gen-3. We plan to schedule additional pilot trials and/or pivotal trials for the new Gen-3 device for anxiety and insomnia in the
United States and China beginning in the late third quarter or early fourth quarter of 2024. Preliminary data provided by The University
of California, San Diego and recent published data from Asia 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.
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.
A new pre-submission document in preparation of
a new 510(k) and/or de novo application for our Gen-3 HALO headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments
to our pre-submission document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023.
A second FDA pre-submission document was submitted
on February 13, 2024. FDA comments to this second pre-submission document were received on April 26, 2024. A formal teleconference was
held with the FDA on April 30, 2024. The Nexalin regulatory team and the FDA came to a consensus on the Anxiety and Insomnia Clinical
research protocols.
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 other countries in the region. The Joint Venture is registered in Hong Kong.
Under the Joint Venture Agreement, Wider Come
Limited (“Wider”), a related party, is obligated to fund all operations for the initial 12-month period of the Joint Venture,
after which Nexalin and Wider plan to jointly fund the Joint Venture’s operating expenses in accordance with their pro rata ownership.
The Joint Venture conducts research, development and clinical studies of our devices, which supplements similar activities being conducted
by Nexalin in the United States. The Joint Venture is responsible for funding all clinical trial and development costs incurred in China.
We share associated economic responsibility for these expenses under the terms of the Joint Venture Agreement. The Joint Venture may provide
the financial resources for, and– together with our clinical studies conducted in the U.S. - serve as an important regulatory precursor
towards the advancement of our efforts in securing 510(k) and/or Denovo clearance from the FDA for our devices.
As of the date of this Quarterly Report on Form
10-Q, we have no employees or office in China and none of our operations are conducted in China. The Joint Venture does not maintain any
variable interest entity structure or operate any data center in China.
6
The Joint Venture 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 own 52 % and 48 % of the Joint Venture, respectively. In accordance with ASC 323
Investments - Equity Method and Joint Ventures (“ASC 323”) and ASC 810 - Consolidations (“ASC 810”), the Company
recognized $ ( 1,291 ) and $ 0 for the three months ended June 30, 2024 and 2023 and $ 4,492 and $ 0 for the six months ended June 30, 2024
and 2023 of equity method investment income from the Joint Venture on a one-quarter reporting lag, on the condensed consolidated statements
of operations and comprehensive loss.
The investment in the Joint Venture is accounted
for using the equity method of accounting. As of June 30, 2024 and December 31, 2023 the Company had an Equity Method
Investment of $ 100,492 and
$ 96,000 ,
respectively, recorded on the condensed consolidated balance sheets. The Company invested $ 96,000 in
the joint venture in September 2023 which is recorded on the consolidated balance sheet at December 31, 2023 as an Equity
Method Investment. Wider invested$ 104,000 . In accordance with ASC 323, the Company uses the equity method of accounting for its
investment in the Joint Venture, an unconsolidated entity over which it does not have a controlling interest. The equity method of
accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of
equity in the unconsolidated entity’s earnings or losses. The Company evaluates the carrying amount of this investment in the
Joint Venture for impairment in accordance with ASC 323. If the Company determines that a loss in the value of the investment is
other than temporary, the Company writes down the investment to its estimated fair value. Any such losses are recorded to equity in
income of unconsolidated entities in the Company’s consolidated statements of operations and comprehensive loss. The Company
has made an election to classify distributions received from the Joint Venture using the nature of the distribution approach.
Distributions received are classified as cash inflows from operating activities based on the nature of the activities of the
unconsolidated entity.
Continued Nasdaq Listing
Our common stock is currently listed on The Nasdaq
Stock Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards,
including the Minimum Bid Price Rule and Minimum Stockholder Equity Rule (each as discussed below) and those regarding director independence
and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. There can be
no assurances that we will be able to comply with the applicable listing standards.
We are required to maintain a minimum bid price of $1.00 per share. 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.
The Company requested a second 180-day period
in order to regain compliance with Nasdaq Rule 5550(a)(2). On January 18, 2024, the Nasdaq Hearing Panel granted the Company a temporary
exception to regain compliance with the Minimum Bid Price Rule until March 27, 2024, which date was further extended by the Panel until
April 25, 2024.
On April 23, 2024, the Company received notice
from Nasdaq notifying the Company that it has regained compliance with Nasdaq’s minimum bid price requirement under Nasdaq Rule
5550(a)(2).
Under the Nasdaq listing rules, we are also required
to maintain stockholders’ equity of at least $2,500,000 (the “Minimum Stockholder Equity Rule”). In our Form 10-Q for
the period ending March 31, 2024, we reported stockholders’ equity of $2,326,987. On May 16, 2024, we received a letter from the
Listing Qualifications Department of Nasdaq notifying the Company that its stockholders’ equity as reported in such Quarterly Report
did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market.
Pursuant to the Notice, the Company had 45 calendar
days from the date of the Notice to submit a plan to regain compliance. On July 1, 2024, the Company submitted a plan to Nasdaq. As described
in the Company’s submission to Nasdaq, and as set forth in the Current Report on Form
8-K filed by the Company on July 3, 2024 , the Company consummated the public offering of 3 million shares of the Company’s
Common Stock for total aggregate gross proceeds of approximately $ 5,250,000 On July 23, 2024, the Company received written notification
from the Listing Qualifications Department of NASDAQ, confirming that, based on the information contained in the Company’s Form
8-K, filed with the SEC on July 16, 2024, the Company is now in compliance with the Minimum Stockholder Equity Rule.
7
NOTE 2 — LIQUIDITY
The accompanying unaudited condensed
consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which
contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2024, the
Company had a significant accumulated deficit of approximately ( 79,363,699 )
$79.4 million. For the six months ended June 30, 2024, the Company had a loss from operations of approximately ( 2,370,733 )
$2.4 million and negative cash flows from operations of approximately ( 2,009,704 ) $2.0
million. While the Company had a working capital surplus as of June 30, 2024 of approximately $ 1.0
million, the Company’s operating activities consume most of its cash resources.
The Company expects to continue to incur operating
losses as it executes its development plans, as well as undertaking other potential strategic and business development initiatives through
2024 and through the twelve months from the date of this report. In addition, the Company has had and expects to have negative cash flows
from operations, at least into the near future. We previously funded these losses primarily through the sale of equity. The accompanying
unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue
as a going concern.
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. On July 1,
2024, the Company consummated the public offering of an aggregate of 3,000,000 shares of the Company’s common stock resulting in
aggregate gross proceeds of approximately $5.25 million. The proceeds from the offering increased the Company’s stockholders’
equity by approximately $4.55 million, making the Company's stockholders’ equity approximately $6.9 million as of July 1, 2024.
Although no assurances can be given as to our ability to deliver on our revenue plans or that unforeseen expenses may arise, management
has evaluated the significance of the conditions as of June 30, 2024 and have concluded that we have sufficient cash and short-term investments
in the amount of approximately $5.2 million on hand on August 6, 2024 to satisfy our anticipated cash requirements for the next twelve
months from the issuance of these financial statements.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”).
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 six months ended June 30, 2024 and 2023 are not necessarily indicative of the results that may be expected for any other subsequent
interim period. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance
with GAAP have been omitted pursuant to the rules of 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,
2023.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Nexalin and its wholly owned subsidiary Neuro-Health. Intercompany accounts and transactions have been eliminated in consolidation.
8
Use of Estimates
The preparation of the unaudited condensed consolidated 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 consolidated 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , 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 our 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. We receive revenue from the sale in China of our Devices to our distributor and from the sale of products relating to the use of those Devices. We derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with our China sales.
Performance Obligations
Management identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied if 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 equipment and Devices are shipped to the customer. The Company does not offer a warranty on the equipment 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 royalty revenue has one performance obligation. The performance obligation is satisfied at the time the Electrode manufacturer notifies the Company that it has invoiced the distributor for the sale to the 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 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
June 30,
2024
2023
Device sales
$
-
$
9,600
Licensing fee
16,064
20,033
Equipment
10,108
5,100
Other
668
807
Total
$
26,840
$
35,540
Six Months Ended
June 30,
2024
2023
Device sales
$ 55,500
$ 9,600
Licensing fee
37,621
43,903
Equipment
11,621
11,500
Other
769
1,097
Total
$ 105,511
$ 66,100
10
Major
Geographic Locations
Three Months Ended
June 30,
2024
2023
U.S. sales
$
21,688
$
25,333
International sales
5,152
10,207
Total
$
26,840
$
35,540
Six Months Ended
June 30,
2024
2023
U.S. sales
$ 44,858
$ 55,893
International sales
60,653
10,207
Total
$ 105,511
$ 66,100
Contract Modifications
There were no contract modifications during the
six months ended June 30, 2024 and 2023. 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 June 30, 2024 and December 31, 2023.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances with, 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 deemed permanent impairments
for the three and six months ended June 30, 2024 and 2023 respectively,
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 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 did no t record an allowance for credit loss on June 30, 2024 and December 31, 2023, respectively.
11
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. At June 30, 2024 and December 31, 2023, the Company did no t
write down inventory.
Patents and Trademarks
Patents and trademarks are amortized over their
useful lives and are reviewed for impairment when warranted by economic conditions. Amortization expense was $ 6,454 and $ 1,352 for the
six months ended June 30, 2024 and 2023, respectively. Amortization expense was $ 3,792 and $ 692 for the three months ended June 30, 2024
and 2023, respectively.
The following table summarizes the gross carrying amount, amortization and the net carrying value at June 30, 2024 and December 31, 2023.
Schedule of patents
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
June 30, 2024
Patents
$
179,090
$
( 8,036
)
$
171,054
Trademarks
57,456
( 2,433
)
55,023
Total June 30, 2024
$
236,546
$
( 10,469
)
$
226,077
December 31, 2023
Patents
$
98,970
$
( 3,751
)
$
95,219
Trademarks
10,573
( 264
)
10,309
Total December 31, 2023
$
109,543
$
( 4,015
)
$
105,528
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 June 30, 2024 and December 31, 2023, 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.
12
●
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.
The following table summarizes the amortized cost, unrealized gain (loss) and the fair value at June 30, 2024 and December 31, 2023.
Schedule of unrealized loss on investments
Amortized
Cost
Unrealized
Gain (Loss)
Fair Value
June 30, 2024
Short-term investments
$
-
$
-
$
-
Total March 31, 2024
$
-
$
-
$
-
December 31, 2023
Short-term investments
$
2,368,608
$
( 405
)
$
2,368,203
Total December 31, 2023
$
2,368,608
$
( 405
)
$
2,368,203
The following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of June 30, 2024 and December 31, 2023.
Schedule of fair value, assets measured on recurring basis
Carrying
Value
Level 1
Level 2
Level 3
June 30, 2024
U.S. Treasury Notes
$
-
$
-
$
-
$
-
December 31, 2023
U.S. Treasury Notes
$
2,368,203
$
2,368,203
$
-
$
-
Net Loss per Common Share
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 for the three months ended June 30, 2024 and 2023.
13
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
June 30,
2024
2023
Warrants
2,662,250
2,662,250
Stock options
2,281,879
-
Total
4,944,129
2,662,250
Six Months Ended
June 30,
2024
2023
Warrants
2,662,250
2,662,250
Stock options
2,281,879
-
Total
4,944,129
2,662,250
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 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 and restricted shares 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
Research and development costs are charged to
operations as incurred. For the six months ended June 30, 2024 and 2023, the Company recorded $ 275,077 and $ 211,834 respectively, in
selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss.
For the three months ended June 30, 2024 and 2023, the Company recorded $ 169,409 and $ 146,000 respectively, in selling, general and administrative
expenses on the unaudited condensed consolidated statements of operations and comprehensive loss.
14
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 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 be recorded as a noncurrent asset with a related liability. The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from short-term leases for any class of underlying asset.
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 on a one-quarter reporting lag.
Recent Accounting Pronouncements
In August of 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (“JV”) Formations: Recognition and Initial Measurement. The guidance requires newly formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and does not expect them to have a material effect on the consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment
Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures
by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included
within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim
disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required
for public entities with a single reportable segment. The ASU is effective on a retrospective basis for fiscal years beginning after December
15, 2024, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of
adopting this ASU on its consolidated financial statements and disclosures.
In December of 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, establishes incremental disaggregation of income tax disclosures pertaining to the effective tax rate reconciliation and income taxes paid. This standard is effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this standard on our disclosures.
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
June 30,
2024
December 31,
2023
Accrued – other
35,636
21,954
Accrued settlement liabilities
89,330
89,330
Accrued bonuses
-
150,000
Total
$
124,966
$
261,284
15
NOTE 5 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS
Formalized Joint Venture
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 other countries in the region. The Joint Venture is registered in Hong Kong.
As of the date of this Quarterly Report on Form 10-Q, (i) our operations are carried on outside of China; and (ii) the Joint Venture does not maintain any variable interest entity structure or operate any data center in China.
Under the Joint Venture Agreement, Wider is obligated to fund all operations for the initial 12-month period of the Joint Venture, after which Nexalin and Wider plan to jointly fund the Joint Venture’s operating expenses in accordance with their pro rata ownership.
The Joint Venture 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 own 52% and 48% of the Joint Venture, respectively. In accordance
with ASC 323 Investments - Equity Method and Joint Ventures (“ASC 323”) and ASC 810 - Consolidations (“ASC
810”), the Company recognized $ ( 1,291 ) and $ 0 for the three months ended June 30, 2024 and 2023 and $ 4,492
and $ 0
for the six months ended June 30, 2024 and 2023 of equity method investment income from the Joint Venture on a one-quarter reporting
lag, on the condensed consolidated statements of operations
and comprehensive loss.
During the six months ended June 30, 2024, the Company issued 150,000 shares of common stock to affiliates of Wider in satisfaction of
obligations pursuant to their collaborative agreement. A charge to research and development was recorded in 2023 at the time the Company
recognized its obligation to issue these shares.
The investment in the Joint Venture is accounted for using the equity method of accounting. The Company
invested $ 96,000
in the joint venture in September 2023 which is recorded on the consolidated balance sheet at December 31, 2023 as an
Equity Method Investment. Wider invested $ 104,000 .
In accordance with ASC 323, Investments - Equity Method and Joint Ventures (“ASC 323”), the Company uses the equity
method of accounting for its investment in the Joint Venture, an unconsolidated entity over which it does not have a controlling
interest. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the
Company’s share of equity in the unconsolidated entity’s earnings or losses. The Company evaluates the carrying amount
of this investment in the Joint Venture for impairment in accordance with ASC 323. If the Company determines that a loss in the
value of the investment is other than temporary, the Company writes down the investment to its estimated fair value. Any such losses
are recorded to equity in income of unconsolidated entities in the Company’s consolidated statements of income. The Company
has made an election to classify distributions received from the Joint Venture using the nature of the distribution approach.
Distributions received are classified as cash inflows from operating activities based on the nature of the activities of the
unconsolidated entity.
U.S. Asian Consulting Group, LLC
On May 9, 2018, the Company entered into a five-year consulting agreement with U.S. Asian Consulting Group, LLC (“U.S. Asian”). The consulting agreement was extended 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. Marilyn Elson is the Company’s Controller.
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 $ 60,000
for each of the six months ended June 30, 2024 and 2023, respectively, and $ 30,000
for each of the three months ended June 30, 2024 and 2023, respectively, on the Company’s unaudited condensed
consolidated statements of operations and comprehensive loss.
16
Officers
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-and service-based stock option awards 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 1,387,024 shares of the Company’s common stock with
an exercise price of $.894 per share subject to certain time and performance- and time-based vesting conditions.
Under the terms of his service agreement, Dr. Owens is entitled to (i) a sign-on/retention bonus consisting of a grant of nonqualified stock options to purchase 654,362 shares of the Company’s common stock with an exercise price of $.894 per share subject to certain time- and performance-based vesting conditions.
Under
the terms of his employment agreement Mr. Nketiah is entitled to nonqualified stock option grants to purchase 100,671 shares of
the Company’s common stock with an exercise price of $.894 subject to certain time and performance-based vesting conditions. See Note 9, on July
29, 2024, Michael Nketiah submitted his resignation effective August 16, 2024. He will continue to serve the Company in his current
capacity until such effective date.
A portion of the nonqualified stock options granted to Messrs. White, Owens and Nketiah that are subject to future vesting are contingent upon the approval of the stockholders to increase the 2023 Plan capacity so as to authorize additional shares of common stock reserved for issuance under the 2023 Plan.
In addition to the retention payments, stock awards and nonqualified option grants described above, Messrs. White and Nketiah are receiving cash compensation and each of Messrs. White and Nketiah are eligible for performance-based cash bonuses. The 2023 performance-based milestones regarding Mr. White’s incentive compensation have been met for 2023, and he was awarded a cash bonus of $120,000 and 313,199 nonqualified stock options with a vesting date of July 1, 2024. The 2023 performance-based milestones regarding Mr. Nketiah’s incentive compensation have been met for 2023, and he was awarded a cash bonus of $50,000 and 218,121 nonqualified stock options with a vesting date of July 1, 2024.
The reported amounts are calculated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 718, “Compensation — Stock Compensation (“ASC 718”). ASC 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as the options issued under our 2023 Plan.
Leases
Our principal 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 costs for each of the three months
ended June 30, 2024 and 2023 were $ 13,500
and $ 13,500 .
Our lease costs for each of the six months ended June 30, 2024 and 2023 were $ 27,000 and $ 27,000 . The initial sub-leases expired in
January of 2024. The Company has entered into a new one year sublease for 4,000 square feet of office space under an operating
lease. Pursuant to the sublease, the Company pays and will 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.
17
NOTE 6 — STOCKHOLDERS’ EQUITY
Issuance of Common Stock
During the six months ended June 30, 2024, the Company issued 150,000 shares of common stock to affiliates of Wider in satisfaction of
obligations pursuant to their collaborative agreement. A charge to research and development was recorded in 2023 at the time the Company
recognized its obligation to issue these shares.
During the six months ended June 30, 2023, the
Company issued no shares of common stock.
Options
Nexalin’s 2023 Equity Incentive Plan (the “2023 Plan”) was approved by our stockholders on November 10, 2023. The Plan provides that maximum number of shares of Common Stock available for the grant of awards under the Plan shall be 1,500,000, subject to adjustment for stock dividends, stock splits or similar events. The 2023 Plan is administered by the Compensation Committee of the Board of Directors, which may in turn delegate administrative authority to one or more of our executive officers. Under the terms of the 2023 Plan, the Compensation Committee may grant equity awards, including nonqualified stock options and restricted stock to employees, officers, directors, consultants, agents, advisors and independent contractors.
On July 1, 2023, the Company entered into amended employment agreements with the three executives. In addition to the cash compensation included in their employment contracts, the three executives were granted one-time bonus stock options (that were immediately vested) and performance-based stock options that would be triggered based on certain performance criteria being achieved. The amount expensed during the three months ended June 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $ 44,060 and $ 0 respectively. The amount expensed during the six months ended June 30, 2024 and 2023 in the unaudited condensed consolidated statements
of operations and comprehensive loss was $ 88,120 and $ 0 respectively.
The following table presents a summary of stock
option award activity during the six months ended June 30, 2024:
Schedule of stock option award activity
Number of
options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
In Years
Outstanding
December 31, 2023
2,281,879
$
0.89
9.00
Issued
-
-
-
Exercised
-
-
-
Expired or cancelled
-
-
-
Outstanding June 30, 2024
2,281,879
$
0.89
9.00
The following table provides additional information about stock options that are outstanding and exercisable at June 30, 2024:
Schedule of additional information about stock options
Exercise Price
Outstanding
Number of
Options
Weighted Average
Remaining Life
In Years
Exercisable
Number
of Options
$
0.89
2,281,879
$
9.00
587,248
2,281,879
$
9.00
587,248
18
The fair value of these stock option awards is estimated as of the grant date using a Black-Scholes option pricing model and the following assumptions: A risk-free interest rate based on the U.S. Treasury yield curve at the date of grant; an expected or contractual term; and expected volatility based on an evaluation of comparable public companies’ measures of volatility. The Company does not anticipate declaring dividends on common shares now or in the near future and has therefore assumed no dividend rate. The following table discloses the assumptions, utilized for stock options as follows:
Schedule of assumptions
June 30,
2024
December 31,
2023
Volatility
99.0
%
99.0
%
Expected dividends
$
-
$
-
Risk-free interest rate
4.61
%
4.61
%
Expected term (years)
9.00
9.5
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, 2023
2,662,250
$
4.15
Issued
-
-
Exercised
-
-
Expired or cancelled
-
-
Outstanding June 30, 2024
2,662,250
$
4.15
The following table summarizes information about warrants to purchase shares of the Company’s common stock outstanding and exercisable at June 30, 2024:
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
1.25
$
4.15
2,135,000
$
4.15
347,250
1.25
4.15
347,250
2,662,250
1.25
$
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.
19
NOTE 7 — COMMITMENTS AND CONTINGENCIES
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 November 18, 2024, with mediation scheduled for October 10, 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 was 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. The EDD approved a significant downward adjustment in our
outstanding employment tax liability to approximately $40,000 as reflected on its Statement of Account dated November 30, 2023.
We plan to further negotiate with the EDD and proceed with a settlement offer. The
Company has accrued $40,000 and $40,000 on the consolidated balance sheets as of June 30, 2024 and December 31,
2023, respectively. The reduction in the amount accrued was recognized as other income on the consolidated statement of operations
and comprehensive loss for the year ended December 31, 2023. The Company believes it has adequately accrued for this
matter.
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. The Company and the University of Arizona agreed on the terms of a settlement for the amounts claimed by the University, whereby the Company paid an aggregate of approximately $69,000 (in three equal monthly payments) in full satisfaction of amounts the University claims it is owed. The settlement amount was paid in full as of December 31, 2023.
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NOTE 8 — CONCENTRATION OF CREDIT RISK
Revenues
Six customers accounted for 90 % of revenues for the three months ended June 30, 2024, as set forth below:
Concentration of credit risk
Customer A
25
%
Customer B
15
%
Customer C
14
%
Customer D
14
%
Customer E
11
%
Customer F
11
%
Two customers accounted for 67 % of revenues for the six months ended
June 30, 2024, as set forth below:
Customer A
56 %
Customer B
11 %
Three customers accounted for 65 % and 54 % of revenues
for the three and six months ended June 30, 2023, respectively as set forth below:
Three Months Ended
June 30,
2023
Six Months Ended
June 30,
2023
Customer A - related party
29 %
15 %
Customer B
21 %
23 %
Customer C
15 %
16 %
Accounts Receivable
Four customers accounted for 84 % of accounts receivable at June 30, 2024, as set forth below:
Customer A
35
%
Customer B
25
%
Customer C - related party
12
%
Customer D
12
%
Five customers accounted for 97 % of accounts receivable at December 31, 2023.
Customer A - related party
39
%
Customer B
21
%
Customer C
15
%
Customer D
12
%
Customer E
10
%
21
NOTE 9 — SUBSEQUENT EVENTS
Management evaluated subsequent events and transactions
that occurred after the balance sheet date, up to the date that the unaudited condensed consolidated financial statements were issued.
On July 1, 2024, the Company, consummated a public offering (the “Offering”) of an aggregate of 3,000,000 shares of the Company’s
Class common stock, $ 0.001 par value per share, resulting in aggregate gross proceeds of approximately $ 5,250,000 . The Company
filed a registration statement on Form S-1 (the “Registration Statement”) relating to the Offering (File No. 333-279684) was
initially filed with U.S. Securities and Exchange Commission (the “SEC”) on May 23, 2024, as amended, and was declared effective
by the SEC on June 27, 2024.
On July 29, 2024, Michael Nketiah submitted
his resignation as Senior Vice President of Quality, Clinical and Regulatory of the Company. Mr. Nketiah’s resignation has
an effective date of August 16, 2024. He will continue to serve the Company in his current capacity until such effective date.
Management did not identify any additional subsequent
events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.