Nexalin Technology, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law. The management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with GAAP. Overview We design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic. We developed an easy-to-administer medical device — referred to as Generation 1 or Gen-1 — that utilizes bioelectronic medical technology to treat anxiety and insomnia, without the need for drugs or psychotherapy. Our original Gen-1 devices are cranial electrotherapy stimulation (CES) devices that emit waveform at 4 milliamps during treatment and are presently classified by the U.S. Food and Drug Administration (“FDA”) as a Class II device. Medical professionals in the United States have utilized the Gen-1 device to administer to patients in clinical settings. While the Gen-1 device had been cleared by the FDA to treat depression, anxiety, and insomnia, three prevalent and serious diseases, because of the FDA’s December 2019 reclassification of CES devices, the Gen-1 device was reclassified as a Class II device for the treatment of anxiety and insomnia. We are required to file a new application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the sales and marketing of our devices for the treatment of anxiety and insomnia. In the FDA’s December 2019 reclassification ruling, the treatment of depression with our device will require a Class III certification and require a new PMA (premarket approval) application to demonstrate safety and effectiveness. While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices in the United States. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licensing fees and payments for the sale of electrodes and patient cables. We have suspended marketing efforts for new sales of devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team decides on a new 510(k) application at 4 milliamps based on FDA comments expected to be received in 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. We have designed and developed a new advanced waveform technology to be emitted at 15 milliamps through new and improved medical devices referred to as “Generation 2” or “Gen-2” and “Generation 3” or “Gen-3.” Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that is designed to 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 development for the treatment of depression utilizing both Gen-2 and Gen-3. The new Gen-3 device is also scheduled for additional pilot trials and/or pivotal trials 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 China 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. 22 Additionally, a new pre-submission document in preparation of a new 510(k) and/or De Novo 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. Minutes of the meeting with the FDA were filed with the FDA on May 16, 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. In part due to the increasing incidence attributed to the devastating impacts of the COVID-19 pandemic, mental health and cognitive disorders are widespread across the globe and cause substantial health, social and economic losses, and hardships accordingly. Our focus is on the continued development of our innovative bioelectronic medical technologies and rapid regulatory approval. We intend to help reverse these losses, and hardships of these losses, by safely and effectively treating various mental health disorders associated with post Covid and long Covid mental disease states. All our products are non-invasive, safe, undetectable to the human body and can provide relief to those afflicted with mental health issues without adverse side effects. We have a proprietary design that stabilizes currents, electromagnetic fields, and various frequencies — referred to collectively as a waveform - particularly our proprietary, 15 milliamp patented waveform. Additionally, our devices generate a high frequency carrier wave for deeper penetration into the brain. It is applied to the brain with an array of electrodes on the forehead and behind each ear at the mastoid. The features of this proprietary waveform and the array of electrodes allow the application of the waveform to the entire brain rather than a small, targeted area of the brain. To ensure deeper penetration into the brain, we have created a waveform that is undetectable to the brain which allows the increase of the power from < 4 mAmps to 15 mAmps, more than a 400% increase without incurring any patient discomfort, risk, or adverse side effects. By increasing the power, our waveform can penetrate deeper into the brain and stimulate deep mid-brain structures associated with mental illness. Our research and clinical teams believe that a more powerful waveform will create a stronger response in the brain. A stronger response creates a higher level of efficacy. This entire proprietary technique allows Nexalin to provide a non-invasive and comfortable treatment that is more powerful than any stimulation device in the market. Current pilot study protocols and randomized clinical trials have been designed and submitted to the FDA to provide feedback on final reports and data sets for the purpose of safety and efficacy evaluations in the future. Determinations of the safety and efficacy of our devices are solely within the authority of the FDA. Currently, the waveform that comprises the basis of Gen-2 and new Gen-3 headset devices has been tested in research settings to develop safety data that has been submitted for review by the FDA for safety evaluation and eventual marketing in the United States and around the world. Determinations of the safety and efficacy of our devices in the United States are solely within the authority of the FDA. We recognize that an additional barrier to treatment in today’s mental health treatment landscape -- beyond the concerns about safety, efficacy and side-effects that have been associated with conventional mental health treatments such as ECT (shock therapy), drugs and psychotherapy – is stigma. We have received industry reports and feedback that many patients that struggle with mood disorders have the stigma of embarrassment associated with psychiatrists and psychotherapy (e.g., counselling with a therapist). Additional stigmas and other issues are associated with the side effects of medication prescribed by psychiatrists. When we researched the current pharmaceuticals model, public information highlighted the many side effects associated with these medications. Frequently, patients would stop taking the medication because of the uncomfortable side effects. Additional public information mentions dependency and withdrawal issues associated with medication for psychiatric disorders. 23 To address the embarrassment stigma, we are developing a new virtual clinic that will allow the physician to diagnose a mental health issue in the privacy of a tele-psychiatry virtual platform. After diagnosis, the physician will prescribe the Nexalin Gen-3 headset to the patient for treatment. Next, the Gen-3 device will be shipped to the patient’s home. After the patient receives the device, they will pair the headset device with an app in the patient’s smart phone. The app will communicate with the Nexalin cloud servers to authorize the device for treatment according to the protocol designed by the physician. The physician will monitor treatment compliance and other health related issues in a private physician dashboard that connects through the Nexalin app and cloud servers. We believe that to preserve product safety and integrity for home use, the headset device will require physician oversight that will include a prescription for use with a monthly authorization provided by the physician after a monthly virtual visit. All appointments will be in a virtual setting to provide privacy and convenience for the physician and patient. The Nexalin virtual clinic will be provided in a proprietary virtual platform currently in the design stage. Our China Gen-2 15 milliamp device was approved in China by the NMPA for the treatment of insomnia and depression in China. This device and all other clinical devices will include a single use electrode for long term revenue streams. The USA Gen-2 device will have a fresh and modern appearance that meets the technology standards of the digital tech world of 2024. Early adopters of the Gen-1 device will be able to access additional firmware upgrades which are planned to enhance the previously purchased devices to the new symmetric15-milliamp waveform. Our Gen-2 device will be equipped with RFID technology that exchanges electrode usage data with a reader in the main device. The purpose of RFID is to track and maintain control of the proprietary single use electrode. Our electrode chip will be programmed to exchange data with the device and allow activation for a single treatment with a new electrode only. This ensures a recurring revenue stream on the device and protects against any generic knockoffs designed to avoid treatment costs. This upgrade in technology also ensures the proprietary nature of the electrodes that support treatment outcomes are sustained. Overall, we believe that our advanced waveform, technological upgrades and the development of a modern headset monitored with our IT management platform will position us with the opportunity to disrupt the traditional mental health treatment model. Our mission is to remove the stigma of expensive psychotherapy or pharmaceuticals with the attendant side effects and dependency issues and replace such stigma with clinically proven and cost-effective technology that is easily accessible in the privacy of the patient’s home and monitored by licensed healthcare providers. Since our inception, we have generated significant losses; we expect to continue to incur significant expenses and increasing operating losses for at least the next two years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures for other research and development activities. We expect our expenses will increase substantially over time as we: ● continue the ongoing and planned preclinical and clinical development of our products; ● review and analyze the value of amending our previous 510(k) Application for anxiety and insomnia in accordance with the FDA; ● arrange for an outsourced sales, marketing and distribution model and scale up external manufacturing capabilities to commercialize any product candidate for which we may obtain regulatory approval and intend to commercialize; ● maintain, expand and protect our intellectual property portfolio; ● engage additional clinical, scientific, manufacturing and controls personnel; ● add additional information systems including personnel to support our product development; Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. 24 Recent Developments Formalized Joint Venture; China Related Activities; Approvals in Oman and Brazil 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. 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 and ASC 810, the Company recognized $159 and $0 for the three months ended September 30, 2024 and 2023 and $4,651 and $0 of equity method investment income from the Joint Venture on a one-quarter reporting lag for the nine months ended September 30, 2024 and 2023, respectively, on the condensed consolidated statements of operations and comprehensive loss. During the nine months ended September 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. 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 and 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 condensed 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. In September of 2021, the China National Medical Products Administration (the “NMPA”), the equivalent of the FDA, approved the Gen-2 device for marketing and sale in China for the treatment of insomnia and depression. These treatment indications and clearances from the NMPA have allowed Wider to market and sell the Gen-2 device in China for the treatment of insomnia and depression. 25 Our participation in the Joint Venture with Wider in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business and operations of the Joint Venture in China and our prospects generally. We face additional risks in China due to China’s historically limited recognition and enforcement of contractual and intellectual property rights. We may experience difficulty enforcing our intellectual property rights in China. If we cannot adequately monitor the use of our technologies and devices or enforce intellectual property rights related to our devices in China or contractual restrictions relating to use of our intellectual property by Chinese companies, our revenue could be adversely affected. The Joint Venture with Wider is subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, regulations and policies in China. Because many of the laws, regulations and policies applicable to our operations in China are relatively new, the interpretations of such laws, regulations and policies are not always uniform. Moreover, the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Enforcement of existing laws or contracts may be uncertain. As a result of the foregoing, it may be difficult for us to obtain timely or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations. Our ability to monetize the Joint Venture in China may also be limited. The Sultanate of Oman’s Ministry of Health granted conditional approval for use of our Gen-2 device on June 16, 2022, effective upon the end user of our device opening and operating a mental health care clinic being constructed in Oman. The Company’s first shipment of a device to Oman was made on January 30, 2024 and received in Oman on February 5, 2024 in connection with the opening of the end user’s clinic, rendering the approval effective. Two additional devices were shipped to Oman on February 29, 2024 and were received by the end user on March 6, 2024. Upon receipt of the two additional devices, the end user’s clinic was operational, and the use of the device to treat patients commenced pursuant to the approval. On June 13, 2024, the “Company announced that our Gen-2 device had been granted regulatory approval by the Brazilian Health Regulatory Agency, a regulatory body of the Brazilian government responsible for approving new drugs and medical devices. 26 Results of Operations Comparison of the three months ended September 30, 2024 and 2023 Our financial results for the three months ended September 30, 2024 and 2023 are summarized as follows: Three Months Ended September 30, 2024 2023 Change Change (1) $ % Revenues, net $ 36,031 $ 24,113 $ 11,918 49 % Cost of revenues 12,694 3,973 8,721 220 % Gross profit 23,337 20,140 3,197 16 % Operating expenses: Professional fees 262,303 127,202 135,101 106 % Salaries and benefits 294,175 363,330 (69,155 ) (19 )% Selling, general and administrative 1,975,376 1,945,145 30,231 2 % Total operating expenses 2,531,854 2,435,677 96,177 4 % Loss from operations (2,508,517 ) (2,415,537 ) (92,980 ) 4 % Other income (expense), net: Interest income (expense), net 1,000 (5,330 ) 6,330 119 % Gain on sale of short-term investments 56,250 82,943 (26,693 ) (32 )% Other income 2,851 40,735 (37,884 ) (93 )% Total other income (expense), net 60,101 118,348 (58,247 ) (49 )% Loss before equity in net earnings of affiliate (2,448,416 ) (2,297,189 ) (151,227 ) 7 % Equity in net earnings of affiliate 159 - 159 100 % Net loss $ (2,448,257 ) $ (2,297,189 ) $ (151,068 ) 7 % Other comprehensive income (loss): Unrealized loss from short-term investments (325 ) (32,289 ) 31,964 99 % Comprehensive loss $ (2,448,582 ) $ (2,329,478 ) $ (119,104 ) 5 % (1) Percentages may not foot due to rounding. Revenues For the three months ended September 30, 2024 and 2023, we generated $36,031 and $24,113 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. The increase in revenue for the three months ended September 30 2024 compared to 2023 was primarily due to sales of supplies and parts. 27 Cost of Revenues and Gross Profit For the three months ended September 30, 2024 and 2023, cost of revenues was $12,694 and $3,973, respectively, yielding a gross profit of $23,337 and $20,140, respectively, or 64.77% and 83.52%, respectively. Such decrease in gross margin was due to the lower margins on supplies and parts. Operating Expenses Total operating expenses for the three months ended September 30, 2024 and 2023 were $2,531,854 and $2,435,677, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in shareholder related expenses of approximately $56,000, an increase in professional fees of approximately $79,000, an increase in travel of approximately $34,000, and an increase in stock compensation of approximately $1,466,000. These amounts were offset by a decrease in salaries and benefits of approximately $69,000 a decrease in research and development costs of approximately $1,452,000 and a decrease in insurance of approximately $17,000. The increase in shareholder related expenses was due to costs associated with investor relations. The increase in professional fees is due to an increase in legal fees and an executive search professional fee of $60,000. The increase in travel is primarily due to costs associated with meetings with our joint venture partners, staff visits to our Houston office and travel related to investor relations. The increase in stock compensation is primarily related to compensating consultants with stock compensation upon shareholder approval of amending the Company Equity Plan. The decrease in salaries is primary due to a bonus recorded in 2023. The decrease in research and development costs are primarily related to costs associated with clinical trials not incurred in 2024. The decrease in insurance is due to a reduction in our insurance premiums. Other Income (Expense), Net Other income (expense), net for the three months ended September 30, 2024 and 2023 was $60,101 and $118,348, respectively, consisting of interest and dividend income, gain on the sale of short-term investments offset by interest expense. The decrease in other income was due to a decrease in the amount available for investment. 28 Comparison of the nine months ended September 30, 2024 and 2023 Our financial results for the nine months ended September 30, 2024 and 2023 are summarized as follows: Nine Months Ended September 30, 2024 2023 Change Change (1) $ % Revenues, net $ 141,542 $ 90,212 $ 51,330 57 % Cost of revenues 29,097 20,457 8,640 42 % Gross profit 112,445 69,755 42,690 61 % Operating expenses: Professional fees 731,099 405,949 325,150 80 % Salaries and benefits 928,072 965,988 (37,916 ) (4 )% Selling, general and administrative 3,332,524 2,769,641 562,883 20 % Total operating expenses 4,991,695 4,141,578 850,117 21 % Loss from operations (4,879,250 ) (4,071,823 ) (807,427 ) 20 % Other income (expense), net: Interest income (expense), net 1,370 (19,685 ) 21,055 107 % Gain on sale of short-term investments 92,915 180,593 (87,678 ) (49 )% Other income 6,407 42,875 (36,468 ) (85 )% Total other income (expense), net 100,692 203,783 (103,091 ) (51 )% Loss before equity in net earnings of affiliate (4,778,558 ) (3,868,040 ) (910,518 ) 24 % Equity in net earnings of affiliate 4,651 - 4,651 100 % Net loss $ (4,773,907 ) $ (3,868,040 ) $ (905,867 ) 24 % Other comprehensive income (loss): Unrealized gain (loss) from short-term investments 80 (35,513 ) 35,593 100 % Comprehensive loss $ (4,773,827 ) $ (3,903,553 ) $ (870,274 ) 22 % (1) Percentages may not foot due to rounding. Revenues For the nine months ended September 30, 2024 and 2023, we generated $141,542 and $90,212 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. The increase in revenue for the nine months ended September 30, 2024 compared to 2023 was primarily due to the sales of devices to a new overseas customer. 29 Cost of Revenues and Gross Profit For the nine months ended September 30, 2024 and 2023, cost of revenues was $29,097 and $20,457, respectively, yielding a gross profit of $112,455 and $69,755, respectively, or 79.44% and 77.32%, respectively. Such increase in gross margin was primarily due to device revenue having a higher gross profit margin than that of other sources of revenue. Operating Expenses Total operating expenses for the nine months ended September 30, 2024 and 2023 were $4,991,695 and $4,141,578, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in shareholder related expenses of approximately $271,000, an executive search professional fee of $60,000, an increase in travel of approximately $115,000, and an increase in stock compensation of approximately $1,847,000. These amounts were offset by a decrease in research and development costs of approximately $1,389,000, a decrease in taxes of approximately $21,000, and a decrease in insurance of approximately $57,000. The increase in shareholder related expenses was due to costs associated with investor relations. The increase in stock compensation is primarily related to compensating consultants with stock compensation upon shareholder approval of amending the Company Equity Plan. The increase in travel is primarily due to costs associated with meetings with our joint venture partners, staff visits to our Houston office and travel related to investor relations. The decrease in research and development costs are primarily related to costs associated with clinical trials not incurred in 2024. The decrease in taxes is due to a reduction in our Delaware Franchise tax. The decrease in insurance is due to a reduction in our insurance premiums. Other Income (Expense), Net Other income (expense), net for the nine months ended September 30, 2024 and 2023 was $100,692 and $203,753, respectively, consisting of interest and dividend income, gain on the sale of short-term investments offset by interest expense. The decrease is primarily due to a decrease in gain on short term investments resulting from decreased short term investments. Cash Flows The following table summarizes our consolidated cash flows for the nine months ended September 30, 2024 and 2023: September 30, 2024 September 30, 2023 Net cash used in operating activities $ (2,809,914 ) $ (2,831,354 ) Net cash provided by (used in) investing activities $ (2,205,079 ) $ 3,230,008 Net cash provided by (used in) financing activities $ 4,516,184 $ (200,000 ) Net Cash Used In Operating Activities Net cash used in operating activities was $(2,809,914) for the nine months ended September 30, 2024, as compared to $(2,831,554) for the respective period in 2023, was primarily due to the net loss of $4,773,907, as well as a combined decrease in accrued expenses of approximately $196,000, offset by increases in stock compensation of approximately $347,000 and accounts payable and accounts payable-related party of approximately $593,000. Net Cash Provided By (Used In) Investing Activities Net cash provided by (used in) investing activities during the nine months ended September 30, 2024, and 2023 was $(2,205,079) and $3,230,008, respectively, which was due to short-term investment sales approximately $22.3 million offset by purchases of approximately $24.4 million of short-term investments for the nine months ended September 30, 2024. Compared to short-term investment sales of approximately $32.7 million offset by purchases of $29.3 million of short-term investments during the nine months ended September 30, 2023. 30 Net Cash Provided By (Used In) Financing Activities Net cash provided by (used in) financing activities during the nine months ended September 30, 2024 and 2023 was $4,516,184 and $(200,000), respectively, which was due to the issuance of common stock for approximately $4.5 million from the July 1, 2024 offering. The September 30, 2023 use of cash was for a payment of note payable to an officer of the Company. Uses and Availability of Additional Funds Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, manufacturing development costs, legal and other regulatory expenses, and general administrative costs. Although we have produced Gen-2, which is selling in China where it is approved for certain utilizations by medical practitioners, the successful development of our future products is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the clinical development of Gen-3 and obtain regulatory approvals. We are also unable to predict when, if ever, net cash inflows from revenues will enable us to be cash flow positive. This is due to the numerous risks and uncertainties associated with developing products, including, among others, the uncertainty of: ● successful enrolment in, and completion of clinical trials; ● performing preclinical studies and clinical trials in compliance with the FDA or any comparable regulatory authority requirements; ● the ability to outsource the manufacture of our products for development, clinical trials and/ or potential commercialization; ● obtaining and maintaining patent, trademark and trade secret protection for our products; ● scaling the commercial sales of products, if and when approved, whether alone or in collaboration with others; ● acceptance of existing therapies, and future therapies, if and when approved, by healthcare providers, physicians, clinicians, patients and third-party payors; ● competing effectively with other therapies; ● obtaining and maintaining healthcare coverage and adequate reimbursement; ● protecting our rights in our intellectual property portfolio; and ● maintaining a continued acceptable safety profile of our products following approval. Liquidity and Capital Resources As of September 30, 2024, the Company had a significant accumulated deficit of $81.8 million. For the nine months ended September 30, 2024, the Company had a loss from operations of $4.9 million and negative cash flows from operations of $2.8 million. The Company’s operating activities consume the majority of its cash resources. The Company will continue to service existing customers in the United States. The Company anticipates that it will continue to incur operating losses as it executes its development plans through 2024, as well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company previously funded these losses primarily through the sale of equity. As of September 30, 2024, the Company had cash and cash equivalents on hand of approximately $4.6 million. 31 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. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 3, “Summary of Significant Accounting Policies and New Accounting Standards” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2023 Form 10-K. 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. 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. Contractual Obligations See Note 7 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a summary of our contractual obligations. 32 Continued Nasdaq Listing Minimum Bid Price Requirement 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). 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). Minimum Stockholder Equity Requirement 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.