Nexalin Technology, Inc. 10-Q

Item 1. Financial Statements NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2024 December 31, 2023 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 81,421 $ 580,230 Short-term investments 4,512,197 2,368,203 Accounts receivable (Includes related party of $ 540 and $ 3,614 , respectively) 15,171 9,369 Inventory 158,375 156,420 Prepaid expenses and other current assets 140,425 315,670 Total Current Assets 4,907,589 3,429,892 ROU Asset - 496 Intangible assets, net 248,942 105,528 Equity method investment 100,651 96,000 Total Assets $ 5,257,182 $ 3,631,916 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 166,542 $ 159,534 Accrued expenses 132,847 261,284 Lease liability, current portion - 4,463 Total Current Liabilities 299,389 425,281 Total Liabilities 299,389 425,281 Commitments and Contingencies (Note 7) Stockholders’ Equity: Common stock, $ 0.001 par value; 100,000,000 shares authorized; 12,861,605 shares issued and outstanding at September 30, 2024 and 7,436,852 shares issued and outstanding at December 31, 2023 12,862 7,437 Accumulated other comprehensive loss ( 325 ) ( 405 ) Additional paid in capital 86,757,212 80,237,652 Accumulated deficit ( 81,811,956 ) ( 77,038,049 ) Total Stockholders’ Equity 4,957,793 3,206,635 Total Liabilities and Stockholders’ Equity $ 5,257,182 $ 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenues, net (Includes related party of $ 868 and $ 0 for the three months ended and $ 3,102 and $ 10,207 for the nine months ended, respectively) $ 36,031 $ 24,113 $ 141,542 $ 90,212 Cost of revenues 12,694 3,973 29,097 20,457 Gross profit 23,337 20,140 112,445 69,755 Operating expenses: Professional fees 262,303 127,202 731,099 405,949 Salaries and benefits 294,175 363,330 928,072 965,988 Selling, general and administrative 1,975,376 1,945,145 3,332,524 2,769,641 Total operating expenses 2,531,854 2,435,677 4,991,695 4,141,578 Loss from operations ( 2,508,517 ) ( 2,415,537 ) ( 4,879,250 ) ( 4,071,823 ) Other income (expense), net: Interest income (expense), net 1,000 ( 5,330 ) 1,370 ( 19,685 ) Gain on sale of short-term investments 56,250 82,943 92,915 180,593 Other income 2,851 40,735 6,407 42,875 Total other income (expense), net 60,101 118,348 100,692 203,783 Loss before equity in net earnings of affiliate ( 2,448,416 ) ( 2,297,189 ) ( 4,778,558 ) ( 3,868,040 ) Equity in net earnings of affiliate 159 - 4,651 - Net loss ( 2,448,257 ) ( 2,297,189 ) ( 4,773,907 ) ( 3,868,040 ) Other comprehensive income (loss): Unrealized gain (loss) from short-term investments ( 325 ) ( 32,289 ) 80 ( 35,513 ) Comprehensive loss $ ( 2,448,582 ) $ ( 2,329,478 ) $ ( 4,773,827 ) $ ( 3,903,553 ) Net loss per share attributable to common stockholders - Basic and Diluted $ ( 0.23 ) $ ( 0.31 ) $ ( 0.55 ) $ ( 0.53 ) Weighted Average Shares Outstanding - Basic and Diluted 10,847,476 7,415,366 8,606,357 7,330,128 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) Accumulated Common Stock 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 loss - - ( 7,980 ) - - ( 7,980 ) Stock compensation - - - 88,388 - 88,388 Net loss - - - - ( 822,437 ) ( 822,437 ) Balance as of June 30, 2023 7,286,562 $ 7,287 $ 33,089 $ 77,912,815 $ ( 73,960,191 ) $ 3,993,000 Other comprehensive loss - - ( 32,289 ) - - ( 32,289 ) Stock compensation 150,000 150 - 1,573,020 - 1,573,170 Net loss - - - - ( 2,297,189 ) ( 2,297,189 ) Balance as of September 30, 2023 7,436,562 $ 7,437 $ 800 $ 79,485,835 $ ( 76,257,380 ) $ 3,236,692 Accumulated Common Stock 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 Other comprehensive loss - - ( 325 ) - - ( 325 ) Stock compensation 2,275,043 2,275 - 1,536,894 - 1,539,169 Shares issued in offering 3,000,000 3,000 - 4,513,184 - 4,516,184 Net loss - - - - ( 2,448,257 ) ( 2,448,257 ) Balance as of September 30, 2024 12,861,605 $ 12,862 $ ( 325 ) $ 86,757,212 $ ( 81,811,956 ) $ 4,957,793 The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. 3 NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 4,773,907 ) $ ( 3,868,040 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock compensation 2,008,801 1,661,558 Depreciation - 402 Amortization 10,666 2,105 Non-cash lease expense 496 4,208 Gain on sale of short-term investments ( 92,915 ) ( 180,593 ) Share of net income from equity method investment ( 4,651 ) - Changes in operating assets and liabilities: Accounts receivable ( 5,262 ) ( 9,608 ) Accounts receivable - related party ( 540 ) - Prepaid assets 175,245 119,237 Inventory ( 1,955 ) ( 4,249 ) Accounts payable - related party - ( 260,000 ) Accounts payable 7,008 ( 325,818 ) Accrued expenses ( 128,437 ) 67,069 Lease liability ( 4,463 ) ( 37,625 ) Net cash used in operating activities ( 2,809,914 ) ( 2,831,354 ) Cash flows from investing activities: Sale of short-term investments 22,348,611 32,671,394 Purchase of short-term investments ( 24,399,610 ) ( 29,270,926 ) Purchase of patents ( 101,936 ) ( 96,000 ) Purchase of trademarks ( 52,144 ) ( 74,460 ) Net cash provided by (used in) investing activities ( 2,205,079 ) 3,230,008 Cash flows from financing activities: Payments on notes payable - officer - ( 200,000 ) Issuance of common stock 4,516,184 - Net cash provided by (used in) financing activities 4,516,184 ( 200,000 ) Net increase (decrease) in cash and cash equivalents ( 498,809 ) 198,654 Cash and cash equivalents - beginning of period 580,230 162,743 Cash and cash equivalents - end of period $ 81,421 $ 361,397 Non-cash investing and financing activities: Unrealized gain (loss) on short-term investments $ 80 $ ( 35,513 ) 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 September 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 net proceeds of approximately $ 4,720,000 . 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, 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 De Novo 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 process. 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 categories. 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 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 Nexilin’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 De Novo clearance from the FDA for our devices. 6 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. 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 $ 159 and $ 0 for the three months ended September 30, 2024 and 2023 and $ 4,651 and $ 0 for the nine months ended September 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 September 30, 2024 and December 31, 2023 the Company had an Equity Method Investment of $ 100,651 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). 7 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. On September 23, 2024, we received a notice from Nasdaq notifying us that we were not in compliance with the Minimum Bid Price Rule. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until March 24, 2025, to regain compliance with Nasdaq Listing Rule 5450(a)(1). To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days. On October 31, 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). 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 September 30, 2024, the Company had a significant accumulated deficit of approximately ( 81,811,956 ) $81.8 million. For the nine months ended September 30, 2024, the Company had a loss from operations of approximately ( 4,879,250 ) $4.9 million and negative cash flows from operations of approximately ( 2,809,914 ) $2.8 million. While the Company had a working capital surplus as of September 30, 2024 of approximately $ 4.6 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 . These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable perio d. 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. 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 September 30, 2024 and have concluded that we will not have sufficient cash and short-term investments to satisfy our anticipated cash requirements for the next twelve months from the issuance of these financial statements. 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. 8 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 nine months ended September 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. 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. 9 Disaggregated Revenues Major Revenue Streams Revenue consists of the following by service offering: Schedule of disaggregation of revenue Three Months Ended September 30, 2024 2023 Device sales $ - $ - Licensing fee 16,941 18,664 Equipment 18,802 5,179 Other 288 270 Total $ 36,031 $ 24,113 Nine Months Ended September 30, 2024 2023 Device sales $ 55,500 $ 9,600 Licensing fee 54,561 62,566 Equipment 30,423 16,679 Other 1,058 1,367 Total $ 141,542 $ 90,212 Major Geographic Locations Three Months Ended September 30, 2024 2023 U.S. sales $ 20,664 $ 24,113 International sales 15,367 - Total $ 36,031 $ 24,113 Nine Months Ended September 30, 2024 2023 U.S. sales $ 65,523 $ 80,005 International sales 76,019 10,207 Total $ 141,542 $ 90,212 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. 10 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 (loss.) 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 nine months ended September 30, 2024 and 2023, respectively. 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 $ 10,666 and $ 2,105 for the nine months ended September 30, 2024 and 2023, respectively. Amortization expense was $ 4,211 and $ 753 for the three months ended September 30, 2024 and 2023, respectively. The following table summarizes the gross carrying amount, amortization and the net carrying value at September 30, 2024 and December 31, 2023. Schedule of patents Gross Carrying Amount Accumulated Amortization Net Carrying Value September 30, 2024 Patents $ 200,906 $ ( 10,680 ) $ 190,226 Trademarks 62,717 ( 4,001 ) 58,716 Total September 30, 2024 $ 263,623 $ ( 14,681 ) $ 248,942 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 September 30, 2024 and December 31, 2023, the Company had a full valuation allowance applied against its net tax assets. 11 Fair Value Measurements As defined in ASC 820, Fair Value Measurements and Disclosures , fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement. ● Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. ● Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. ● Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. Fair Value of Financial Instruments The carrying value of cash, short-term investments, accounts receivable, inventory, prepaids, accounts payable and accrued expenses, and other current liabilities approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the loans payable approximates the estimated fair value for this financial instrument as management believes that such debt and interest payable on the note approximates the Company’s incremental borrowing rate. The following table summarizes the amortized cost, unrealized gain (loss) and the fair value at September 30, 2024 and December 31, 2023. Schedule of unrealized loss on investments Amortized Cost Unrealized Gain (Loss) Fair Value September 30, 2024 Short-term investments $ 4,512,522 $ ( 325 ) $ 4,512,197 Total September 30, 2024 $ 4,512,522 $ ( 325 ) $ 4,512,197 December 31, 2023 Short-term investments $ 2,368,608 $ ( 405 ) $ 2,368,203 Total December 31, 2023 $ 2,368,608 $ ( 405 ) $ 2,368,203 12 The following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of September 30, 2024 and December 31, 2023. Schedule of fair value, assets measured on recurring basis Carrying Value Level 1 Level 2 Level 3 September 30, 2024 U.S. Treasury Notes $ 4,512,197 $ 4,512,197 $ - $ - December 31, 2023 U.S. Treasury Notes $ 2,368,203 $ 2,368,203 $ - $ - 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 September 30, 2024 and 2023. Net Loss per Common Share The following table summarizes the securities that would be excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less than the most recent fair value of the common shares: Schedule of antidilutive shares Three Months Ended September 30, 2024 2023 Warrants 2,662,250 2,662,250 Stock options 2,863,129 - Total 5,525,379 2,662,250 Nine Months Ended September 30, 2024 2023 Warrants 2,662,250 2,662,250 Stock options 2,863,129 - Total 5,525,379 2,662,250 13 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. Research and Development Research and development costs are charged to operations as incurred. For the nine months ended September 30, 2024 and 2023, the Company recorded $ 453,643 and $ 1,842,341 , respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2024 and 2023, the Company recorded $ 178,565 and $ 1,638,508 , respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss. 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, 2023, 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. 14 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 September 30, 2024 December 31, 2023 Accrued – other 43,517 21,954 Accrued settlement liabilities 89,330 89,330 Accrued bonuses - 150,000 $ 132,847 $ 261,284 NOTE 5 — RELATED PARTY TRANSACTIONS 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 agreement was amended effective as of July 1, 2024 to expand the services. The two members of U.S. Asian are shareholders in the Company including Marilyn Elson who is Nexalin’s Controller. Pursuant to the consulting agreement, U.S. Asian provides consulting services to the Company with regard to, among other things, corporate development, financing arrangements and international operations. The Company was paying U.S. Asian $ 10,000 per month for services rendered pursuant to the consulting agreement. The amended agreement calls for a monthly fee of $ 16,667 , a onetime stock grant and a semi-annual share award equal to $ 100,000 with the issuance and delivery of shares to take place following the termination of the consulting agreement. The Company recorded consulting expenses related to the consulting agreement of $ 110,000 and stock compensation expense of $ 146,000 for the nine months ended September 30, 2024 and $ 90,000 of consulting expenses for the nine months ended September 30, 2023, respectively. The Company recorded $ 30,000 related to the consulting agreement for each of the three months ended September 30, 2024 and 2023, respectively, on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss. Leonard Osser was issued 200,000 shares of Company stock as compensation for his services on the Advisory Board. The Company recorded $ 144,000 and $ 0 of stock compensation expense for the nine months ended September 30, 2024 and September 30, 2023 respectively. 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. On July 29, 2024, Michael Nketiah submitted his resignation effective August 16, 2024. 15 Effective September 16, 2024, the Company entered into an agreement with Ms. Carolyn Shelton to serve as Senior Vice President, Quality, Regulatory and Clinical Affairs. 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-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 was 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. Under the terms of her agreement Ms. Shelton is entitled to nonqualified stock option grants to purchase 90,620 shares of the Company’s common stock with an exercise price of $.6621, subject to certain time and performance-based vesting conditions. Such options were not granted as of September 30, 2024. 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 33,557 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) totalling 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 September 30, 2024 and 2023 were $ 13,500 and $ 13,500 . Our lease costs for each of the nine months ended September 30, 2024 and 2023 were $ 40,500 and $ 40,500 . 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. 16 NOTE 6 — STOCKHOLDERS’ EQUITY Issuance of Common Stock During the nine months ended September 30, 2024, the Company issued an aggregate of 5,425,043 shares of its common stock, as follows: ● 150,000 shares of common stock were issued to affiliates of Wider in satisfaction of obligations pursuant to their collaborative agreement. A charge to research and development of $750,000 was recorded in 2023 at the time the Company recognized its obligation to issue these shares. ● 3,000,000 shares of common stock were issued to investors for net proceeds of $ 4,516,184 . ● 2,275,043 shares of common stock were issued for services in lieu of cash of which 1,232,357 were issued to outside consultants, 200,000 to a related party, 542,500 to certain employees of the Company, and 300,186 to current and former members of the Board of Directors for their services as Board Members. During the nine months ended September 30, 2023, the Company issued 150,000 shares of its common stock to Wider pursuant to their collaborative agreement resulting in a charge to research and development of $ 750,000 . Options Nexalin’s 2023 Equity Incentive Plan (the “2023 Plan”) was approved by our stockholders on November 10, 2023 and an amendment thereto, increasing the number of shares reserved for issuance under the 2023 Plan, was approved by our stockholders on August 26, 2024. The 2023 Plan provides that maximum number of shares of Common Stock available for the grant of awards thereunder shall be 6,000,000, subject to adjustment for stock dividends, stock splits or similar events. The 2023 Plan is administered by 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 September 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $ 0 and $ 0 respectively. The amount expensed during the nine months ended September 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $ 88,120 and $ 0 respectively. Certain employees and certain members of the Board of Directors were issued options to purchase an aggregate of 581,250 shares of common stock. The options vested immediately upon grant. The amount expensed during the three months ended September 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $ 434,194 and $ 0 respectively. The amount expensed during the nine months ended September 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $ 434,194 and $ 0 respectively. 17 The following table presents a summary of stock option award activity during the nine months ended September 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 8.75 Issued 581,250 0.94 5.00 Exercised - - - Expired or cancelled - - - Outstanding September 30, 2024 2,863,129 $ 0.90 8.27 The following table provides additional information about stock options that are outstanding and exercisable at September 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 $ 8.75 1,152,125 $ 0.94 581,250 5.00 581,250 2,863,129 $ 8.27 1,733,375 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 tables disclose the assumptions, utilized for stock options as follows: For the 581,250 stock options granted during the nine months ended September 30, 2024, we used the following weighted average assumptions to estimate the fair value of stock options: Schedule of assumptions September 30, 2024 Volatility 103.8 % Expected dividends $ - Risk-free interest rate 3.66 % Expected term (years) 5.0 For the stock options outstanding as of December 31,2023, we used the following weighted average assumptions to estimate the fair value of stock options: December 31, 2023 Volatility 99.0 % Expected dividends $ - Risk-free interest rate 4.61 % Expected term (years) 9.5 18 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 September 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 September 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 1.00 $ 4.15 2,135,000 $ 4.15 347,250 1.00 4.15 347,250 2,662,250 1.00 $ 4.15 2,662,250 The compensation expense attributed to the issuance of the warrants, if required to be recognized on the nature of the transaction, was recognized as they vested/earned. These warrants are exercisable up to three years from the date of grant. All are currently exercisable. NOTE 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 June 9, 2025, with a mediation date not yet set. 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. 19 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 September 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. NOTE 8 — CONCENTRATION OF CREDIT RISK Revenues Five customers accounted for 75 % of revenues for the three months ended September 30, 2024 and two customers accounted for 59 % of revenues for the nine months ended September 30, 2024, as set forth below: Concentration of credit risk Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Customer A 23 % 48 % Customer B 18 % 11 % Customer C 13 % - Customer D 11 % - Customer E 10 % - Three customers accounted for 70 % and 55 % of revenues for the three and nine months ended September 30, 2023, respectively as set forth below: Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Customer A 27 % 24 % Customer B 23 % 18 % Customer C 20 % 13 % 20 Accounts Receivable Four customers accounted for 78 % of accounts receivable at September 30, 2024, as set forth below: Customer A 43 % Customer B 18 % Customer C 17 % 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 % NOTE 9 — SUBSEQUENT EVENTS On November 7, 2024, the Company entered into stock option agreements with two employees for services in lieu of cash, and two members of the Board of Directors for their services as Board Members, granting options to purchase an aggregate of 581,250 shares of the Company’s common stock at an exercise price of $ .94 per share. Such stock options were immediately vested. On November 7, 2024, the Company entered into a stock option agreement with Michael Nketiah with respect to his July 1, 2023 Employment Agreement. Mr. Nketiah was granted performance-based stock options to purchase 100,671 shares of common stock at an exercise price of $ .894 per share. On November 7, 2024, the Company entered into a stock option agreement with Carolyn Shelton. Ms. Shelton was granted performance-based stock options to purchase up to 90,620 shares of common stock at an exercise price of $ .6621 per share that would be triggered based on certain performance criteria being achieved. Such options vest in three equal portions over the three year period beginning on the first anniversary of her employment date. On October 28, 2024, the Board of Directors approved the issuance of an aggregate of 363,635 shares of our restricted common stock for services in lieu of cash, to outside consultants and to Wider, a related party. 21