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 March 31, 2023.
On
November 22, 2021, NV Nexalin entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nexalin Technology,
Inc., a Delaware corporation (“Nexalin”, or the “Company”). Pursuant to the Merger Agreement, NV Nexalin merged
with and into Nexalin with all shareholders of NV Nexalin receiving one common share of Nexalin in exchange for twenty shares of NV Nexalin
held at the time of the Merger Agreement. NV Nexalin treated the transaction as a corporate reorganization with the historical consolidated
financial statements of NV Nexalin becoming the historical consolidated financial statements of Nexalin. Nexalin had nominal assets and
liabilities and did not conduct any operations prior to the reorganization other than its incorporation. NV Nexalin has retroactively
applied the 20-for-1 exchange, effective on November 22, 2021, to share and per share amounts on the unaudited condensed consolidated
financial statements for the three months ended March 31, 2023 and 2022. NV Nexalin’s authorized shares of common stock were
not affected as a result of the Merger Agreement. As a result of the Merger Agreement, NV Nexalin was dissolved, and Neuro-Health became
a subsidiary of Nexalin. The Company completed its initial public offering on September 16, 2022.
The
initial public offering consisted of 2,315,000 units consisting of 2,315,000 shares of Common Stock and 2,315,000 accompanying warrants
to purchase up to 2,315,000 shares of common stock. Each share of common stock was sold together with one Warrant, each to purchase one
share of common stock with an exercise price of $4.15 per share at a combined offering price of $4.15, for gross proceeds of $9,607,250,
before deducting underwriting discounts and offering expenses. In addition, the underwriters purchased 347,250 warrants for net proceeds
of $3,473.
Our
shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) on September 16,
2022, under the symbols “NXL” and “NXLIW”, respectively.
Throughout
this report, the terms “Nexalin,” “our,” “we,” “us,” and the “Company” refer
to Nexalin Technology, Inc.
Business
Overview
We
design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic.
We developed an easy-to-administer medical device — referred to as Generation 1 or Gen-1 — that utilizes bioelectronic medical
technology to treat anxiety and insomnia, without the need for drugs or psychotherapy. Our original Gen-1 devices are cranial electrotherapy
stimulation (CES) devices that emit waveform at 4 milliamps during treatment and are presently classified by the U.S. Food and Drug Administration
(“FDA”) as a Class II device.
While
we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation
prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices. We continue to derive revenue
from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue
consists of monthly licensing fees and payments for the sale of electrodes. We have suspended marketing efforts for new sales of
devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team
makes a decision on amending our existing 510(k) application at 4 milliamps. A new pre-sub document in preparation of a new 510(k)
for our Gen-3 Halo headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments to our pre-sub document filing
were received in March of 2023. A formal meeting to address FDA comments is scheduled for May of 2023.
We
have designed and developed a new advanced wave form technology to be emitted at 15 milliamps through new and improved medical devices
referred to as Generation 2 or Gen-2 and Generation 3 or Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new
15 milliamp advanced waveform. Gen-3 is a new patient headset that will be prescribed by licensed medical professionals in a virtual
clinic setting similar to existing Tele-health platforms. Preliminary data provided by the University of California San Diego supports
the safety of utilizing our 15 milliamp waveform technology, however the determination of safety and efficacy of medical devices in the
United States is subject to clearance by the FDA.
Additionally,
we are currently designing clinical trial strategies for the use of Gen-3 for the treatment of substance use disorders including opiate,
cocaine, and alcohol abuse. Recently the Gen-2 device was tested in pilot trials in China for the treatment of Alzheimer’s disease,
and dementia. Continued pilot testing for Alzheimer’s and dementia, cognition and memory, and neurotransmitter changes is planned
in China in 2023.
Emerging
Growth Company
We
are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our
Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations
regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and approval of any golden parachute payments not previously approved. Further, Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class
of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS
Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging
growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition
period which means that when a standard is issued or revised and it has different application dates for public or private companies,
the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised
standard. This may make comparison of the Company’s consolidated financial statements with another public company which is neither
an emerging growth company, nor an emerging growth company which has opted out of using the extended transition period, difficult or
impossible because of the potential differences in accounting standards used.
Risks
and Uncertainties
Management
continues to evaluate the impact of the economy and the capital markets and has concluded that, while it is reasonably possible that
events could have negative effects on the Company’s financial position and results of its operations, the specific impacts are
not readily determinable as of the date of these consolidated financial statements. The unaudited condensed consolidated financial statements
do not include any adjustments that might result from the outcome of uncertainties.
The
current challenging economic climate may lead to adverse changes in cash flows, working capital levels and/or debt balances, which may
also have a direct impact on the Company’s operating results and financial position in the future. The ultimate duration and magnitude
of the impact and the efficacy of government interventions on the economy has and may continue to indirectly impact the Company because
of its current dependence upon its distributor relationship with Wider Come Limited. Wider Come Limited acts as a distributor for the
Company’s devices in China and Asia. Because of significant restrictions imposed by the Chinese government during the COVID-19
pandemic through calendar year 2022 and into 2023, Wider’s ability to market and sell the Company’s devices has been negatively
impacted, resulting in decreased revenue to the Company. Patients and salespeople have been restricted in their movements resulting in
a significant slowdown in the medical and other sectors. Significant efforts and funds expended by our Chinese distributor has led to
regulatory approval in China in both depression and insomnia thus far which has allowed for sales of our devices in China in 2022, and
into 2023. The extent of future impact is dependent on future developments, including future activities by the Chinese government and
other possible events which are highly uncertain and not in the Company’s control, including new information which may emerge concerning
the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others. The repercussions
of this health crisis could have a material adverse effect on the Company’s business, financial condition, liquidity and operating
results.
NOTE
2 — LIQUIDITY
The
accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern,
which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2023,
we had a significant accumulated deficit of approximately $73.173,137,754 million. For the three months ended March 31, 2023, we had a loss
from operations of approximately $779779,426 thousand and negative cash flows used in operations of approximately $1.31,314,649 million. While we had
a working capital surplus as of March 31, 2023 of approximately $4.7 million, our operating activities consume most of our cash
resources.
We
expect to continue to incur operating losses as we execute our development plans, as well as undertaking other potential strategic and
business development initiatives through 2023 and through the twelve months from the date of this report. In addition, we have had and
expect to have negative cash flows from operations, at least into the near future. We have previously funded these losses primarily through
the sale of equity and issuance of convertible notes. The accompanying unaudited consolidated financial statements do not include any
adjustments that might be necessary should we be unable to continue as a going concern.
Our
ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate
revenue from the proposed 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 March 31, 2023 and has concluded
that due to the receipt of the net proceeds from the completion of the Initial Public Offering, we have sufficient cash and short-term
investments on hand to satisfy its anticipated cash requirements for the next twelve months from the issuance of these financial statements.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial information has been prepared in accordance with Generally Accepted Accounting
Principles (“GAAP”) for interim financial information. In the opinion of management, such financial information includes
all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s
financial position and the operating results and cash flows. Operating results for the three months ended March 31, 2023 and 2022
are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant
to the rules of the U.S. Securities and Exchange Commission (the “SEC”). These unaudited condensed consolidated financial
statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements for the
year ended December 31, 2022.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Nexalin and its wholly owned subsidiary Neuro-Health. Intercompany accounts
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure of contingent liabilities at
the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends
and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision,
actual results could differ from these estimates which may cause the Company’s future results to be affected.
Revenue
The
Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company
determines if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify
the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company
only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
The
Company has existing licensing and treatment fee agreements with its customers for the use of the Nexalin Device in their practices.
These agreements generally have terms of one year with automatic renewal if certain requirements are met and amounts due per these agreements
are billed monthly. The Company also sells products related to the provision of services. The Company sells its Devices in China to its
acting distributor and sells products relating to the use of the Devices. The Company has a Royalty Agreement whereby the manufacturer
of the Company’s electrodes will pay a royalty to the Company for a three-year period beginning January 1, 2022. The amount
of the Royalty is equal to 20% of the amount that the manufacturer invoices to the acting distributor for the sale of the electrodes.
Revenue
Streams
The
Company derives revenues from its license agreements by charging a monthly licensing fee for the duration of the agreement. The Company
derives revenues from equipment by selling additional individual electrodes to customers for use with the Nexalin Device. The Company
receives revenue from the sale in China of its Devices to its acting distributor and from the sale of products relating to the use of
those Devices. The Company derives revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with
the Company’s China sales.
Performance
Obligations
Management
identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied as long as the
licensing contract remains valid and is not terminated. The licensing revenue is invoiced monthly and is recognized at a point in time
in which the invoice is sent to the customer.
Management
identified that the Company’s equipment and Device revenue has one performance obligation. That performance obligation is satisfied
when the equipment and Devices are shipped. The Company recognizes revenue at a point in time in which the electrodes and Devices are
shipped to the customer. The Company does not offer a warranty on the electrodes and Devices.
Management
identified that treatment fee revenue has one performance obligation. The performance obligation is satisfied upon the completion of
individual treatments on patients by customers.
Management
identified that royalty revenue has one performance obligation. The performance obligation is satisfied at the time the Electrode manufacturer
invoices the acting distributor for the sale to the acting distributor.
Practical
Expedients
As
part of ASC 606, the Company has adopted several practical expedients including:
| ● | Significant
Financing Component — the Company does not adjust the promised amount of consideration for the effects of a significant financing
component since the Company expects, at contract inception, that the period between when the Company transfers a promised goods or services
to the customer and when the customer pays for that service will be one year or less. |
|
● |
Unsatisfied
Performance Obligations — all performance obligations related to contracts with a duration of less than one year, the Company
has elected to apply the optional exemption provided in ASC Topic 606 and therefore, is not required to disclose the aggregate amount
of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting
period. |
|
● |
Shipping
and Handling Activities — the Company elected to account for shipping and handling activities as a fulfilment cost rather than
as a separate performance obligation. |
|
● |
Right
to Invoice — the Company has a right to consideration from a customer in an amount that corresponds directly with the value
to the customer of the Company’s performance completed to date the Company may recognize revenue in the amount to which the
entity has a right to invoice. |
Disaggregated
Revenues
Major
Revenue Streams
Revenue
consists of the following by service offering:
Schedule of disaggregation of revenue | |
| | | |
| | |
| |
Three Months Ended | |
| |
March 31,
2023 | | |
March 31,
2022 | |
Device Sales | |
$ | - | | |
$ | 264,500 | |
Licensing Fee | |
| 23,870 | | |
| 20,143 | |
Equipment | |
| 6,400 | | |
| 8,000 | |
Other | |
| 290 | | |
| 30,679 | |
Total | |
$ | 30,560 | | |
$ | 323,322 | |
Major
Geographic Locations
| |
Three Months Ended | |
| |
March 31,
2023 | | |
March 31,
2022 | |
U.S. Sales | |
$ | 30,560 | | |
$ | 22,823 | |
China Sales | |
| - | | |
| 300,499 | |
Total | |
$ | 30,560 | | |
$ | 323,322 | |
Contract
Modifications
There
were no contract modifications during the three months ended March 31, 2023 and 2022. Contract modifications are not routine in
the performance of the Company’s contracts.
Deferred
Revenue
The
Company receives payment for equipment and devices in advance of shipping. The Company recognizes the revenue as being earned upon shipment.
No deferred revenue was recognized as of March 31, 2023 and December 31, 2022.
Cash
and Cash Equivalents
Cash
held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through,
as well as maintaining cash balances, with major financial institutions.
Short-Term
Investments
The
appropriate classification of marketable securities is determined at the time of purchase and evaluated as of each reporting balance
sheet date. Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair value
is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or
liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in accumulated other comprehensive
income. Realized gains and losses, amortization of premiums and discounts and interest and dividends earned are included in other income
(expense), net. For declines in the fair values of equity securities that are considered other-than-temporary, impairment losses are
charged to other income (expense), net. The Company considers available evidence in evaluating potential impairments of its investments,
including the duration and extent to which fair value is less than cost. There were no deemed permanent impairments on March 31,
2023 and December 31, 2022, respectively.
Accounts
Receivable
Accounts
receivables are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically
assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances
for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other
factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts receivable against
the allowance for doubtful accounts when a balance is determined to be uncollectible. During the three months ended March 31, 2023
and 2022, the Company did not write off accounts receivable. The Company did not record an allowance for doubtful accounts on March 31,
2023 and December 31, 2022, respectively.
Inventory
Inventory
consists of finished goods and components stated at the lower of cost or net realizable value with cost determined on a first-in first-out
basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete, slow-moving, quantities
in excess of demand, or otherwise non-saleable items.
Equipment
Equipment
is recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the related assets, generally
five years.
Maintenance
and repairs are charged to expense as incurred. The Company capitalizes costs attributable to the betterment of property and equipment
when such betterment enhances the functionality of the asset or extends the useful life of the asset. Should an asset be disposed of
before the end of its useful life, the cost and accumulated depreciation at that date is removed from the consolidated balance sheets,
with the resulting gain or loss, if any, reflected in operations in that period.
Patents
Patents
are amortized over their useful lives and are reviewed for impairment when warranted by economic conditions. Amortization expense was
$660 and $0 for the three months ended March 31, 2023 and 2022, respectively.
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 March 31, 2023 and December 31, 2022, the Company had a full valuation allowance applied
against its net tax assets.
Fair
Value Measurements
As
defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company
utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or
generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and
the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent
measurement.
| ● | Level
1: Quoted prices are available in active markets for identical assets or liabilities as of
the reporting date. Active markets are those in which transactions for the asset or liability
occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| ● | Level
2: Pricing inputs are other than quoted prices in active markets included in Level 1, which
are either directly or indirectly observable as of the reported date. Level 2 includes those
financial instruments that are valued using models or other valuation methodologies. These
models are primarily industry-standard models that consider various assumptions, including
quoted forward prices for commodities, time value, volatility factors and current market
and contractual prices for the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in the marketplace throughout
the full term of the instrument, can be derived from observable data or are supported by
observable levels at which transactions are executed in the marketplace. |
| ● | Level
3: Pricing inputs include significant inputs that are generally less observable from objective
sources. These inputs may be used with internally developed methodologies that result in
management’s best estimate of fair value. The significant unobservable inputs used
in the fair value measurement for nonrecurring fair value measurements of long-lived assets
include pricing models, discounted cash flow methodologies and similar techniques. |
Fair
Value of Financial Instruments
The
carrying value of cash, short-term investments, accounts receivable, inventory, prepaids, accounts payable and accrued expenses, and
other current liabilities approximate their fair values based on the short-term maturity of these instruments. The carrying amount of
the loans payable approximates the estimated fair value for this financial instrument as management believes that such debt and interest
payable on the note approximates the Company’s incremental borrowing rate.
The
following table summarizes the amortized cost, unrealized gains and the fair value at March 31, 2023 and December 31, 2022.
Schedule of amortized cost, unrealized gains | |
| | | |
| | | |
| | |
| |
Amortized Cost | | |
Unrealized Gain | | |
Fair Value | |
March 31, 2023 | |
| | | |
| | | |
| | |
Short-term investments | |
$ | 5,256,589 | | |
$ | 41,069 | | |
$ | 5,297,658 | |
Total March 31, 2022 | |
$ | 5,256,589 | | |
$ | 41,069 | | |
$ | 5,297,658 | |
December 31, 2022 | |
| | | |
| | | |
| | |
Short-term investments | |
$ | 6,794,879 | | |
$ | 36,313 | | |
$ | 6,831,192 | |
Total December 31, 2022 | |
$ | 6,794,879 | | |
$ | 36,313 | | |
$ | 6,831,192 | |
The
following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of March 31,
2023 and December 31, 2022.
Schedule of fair value, assets measured on recurring basis | |
| | | |
| | | |
| | | |
| | |
| |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
March 31, 2023 | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury Notes | |
$ | 5,297,658 | | |
$ | 5,297,658 | | |
$ | - | | |
$ | - | |
December 31, 2022 | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury Notes | |
$ | 6,831,192 | | |
$ | 6,831,192 | | |
$ | - | | |
$ | - | |
Net
Loss per Common Share
Net
loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
The dilutive effect, if any, of warrants is calculated using the treasury stock method. These shares were included in the basic and diluted
net loss per common share on the unaudited condensed consolidated statements of operations.
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
March 31, | |
| |
2023 | | |
2022 | |
Warrants | |
| 2,662,250 | | |
| 21,600 | |
Total | |
| 2,662,250 | | |
| 21,600 | |
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 statements of operations.
For
stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair
value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management
to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the
expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based
vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to
the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting
term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
Pursuant
to ASU 2018-07 Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the
Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation
methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.
Warrant
Accounting
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all its financial instruments, including issued private and public warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815-40,
Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is assessed as part of this evaluation. During the
reporting periods the Public Warrants were outstanding, they were precluded from liability classification, being equity-classified.
Research
and Development
All
research and development costs are charged to operations as incurred. For the three months ended March 31, 2023 and 2022, the Company
recorded $65,833 and $11,565, respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements
of operations.
Leases
A
lease is defined as an agreement that conveys the right to control the use of identified property, plant or equipment (right of use asset
or “ROU asset”) for a period of time in exchange for consideration. The Company accounts for its leases in accordance with
ASC 842, Leases, which requires that an ROU asset identified in a lease to be recorded as a noncurrent asset with a related liability.
The Company does not record ROU assets for those agreements of a twelve-month duration or less. The Company recognized a ROU asset and
corresponding lease liability on its balance sheets related to its office lease agreement. See Note 9, Leases, for further discussion,
including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
ROU
assets include any initial direct costs and prepaid lease payments and exclude any lease incentives. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease
if it is reasonably certain that the Company will exercise that option.
Recent
Accounting Pronouncements
In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which
amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments are in effect
for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The adoption on January 1, 2023
modified the way the Company analyzes financial instruments, but it did not have a material impact on our consolidated financial
statements.
All
other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE
4 — ACCRUED EXPENSES
Accrued
expenses consist of the following amounts:
Schedule of accrued expenses | |
| | | |
| | |
| |
March 31,
2023 | | |
December 31,
2022 | |
Accrued interest | |
$ | 134,501 | | |
$ | 111,501 | |
Accrued – other | |
| 37,159 | | |
| 2,321 | |
Accrued settlement liabilities | |
| 336,000 | | |
| 336,000 | |
Accrued research and development expense | |
| 90,000 | | |
| 90,000 | |
Total | |
$ | 597,660 | | |
$ | 539,822 | |
NOTE
5 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS
Potential
Joint Venture
On
December 21, 2018, the Company entered into the first of a series of agreements providing for the establishment of a joint venture
(“JV”) agreement (the “JV Agreement”) with Wider Come Limited, a China company (“Wider”) for the
purpose of marketing, sale and distribution of the Company’s proprietary devices for the treatment of (i) anxiety, depression and
insomnia (“ADI”) and (ii) Alzheimer’s and dementia (“AD”) in the applicable territories. Wider has an experienced
medical technology team in China and when formed, the JV will design and implement a comprehensive business model and distribution plan
for our devices in China, Hong Kong, Macau and Taiwan. The JV will be formed following the completion of certain funding, clinical study,
and publication milestones, which Wider has agreed to undertake but not yet completed, as well as resolution of potential regulatory
concerns in China. Following its formation, the JV will design and implement a comprehensive business model and distribution plan for
our devices in China, Hong Kong, Macau and Taiwan.
As
originally contemplated, each of the parties to the JV would hold a 50% interest in the equity, profits and losses, shareholder voting,
management control and rights to use production capacity of the facility. The Company will provide an Asian territory exclusive distribution
license for ADI treatment to the JV and Wider. As originally contemplated the JV, if completed, will be controlled by an equally represented
Board of Directors in which neither entity has sole decision-making ability over day-to-day or significant operational decisions. The
parties may determine to alter the equity interest or board composition of the Joint Venture or other economic terms as they move closer
to its implementation. As of March 31, 2023, the JV has not been established.
On
May 22, 2019, the Company entered into a supplementary agreement to the JV Agreement (the “Supplementary Agreement”).
At the time of the May 2019 Supplementary Agreement, the parties desired to expand the scope of the JV to include and address the
pain management opportunities for our devices and technology. Pursuant to the Supplementary Agreement, Wider was to fund the JV within
thirty days of execution of the JV Agreement with $600,000 in cash to be used for clinical trials and other activities related to pain
management utilization of our devices and technology in China. Within thirty days of the funding, the Company was to issue 5% of the
Company in common stock to Wider’s shareholders. As of the date of this report the JV has yet to be formally established and therefore
the $600,000 has not been funded. Further, the parties have determined not to proceed with the pain management scope of the JV and have
decided to terminate the May 2019 Supplementary Agreement. The parties may elect to proceed with a similar arrangement in the future.
On
April 6, 2020, the Company entered into a three-year service agreement with Wider, pursuant to which Wider agreed to perform clinical
trials associated with the possible formation of the future JV. In consideration, the Company and certain designated Wider shareholders
entered into stock issuance agreements for the issuance of 450,000 shares of the Company’s common stock, and simultaneously with
the execution of this service agreement, Wider contributed $200,000 to the Company. During the year ended December 31, 2020, the
Company issued 150,000 shares to affiliates of Wider in satisfaction of the obligation. The fair value of the 150,000 shares issued (less
the contributed $200,000 in cash) resulted in a charge to stock-based compensation of $550,000 and was recorded in selling, general and
administrative expenses on the statement of operations. The remaining 300,000 shares will be issued in accordance with the following
schedule upon Wider’s successful completion of the following milestones (i) 50% upon successful completion of the fourth of four
clinical trials pursuant to the terms and conditions of the Service Agreements and (ii) 50% upon all four trials being submitted for
publication in international medical journals satisfactory to the Company. As of March 31, 2023, these milestones have not been
met.
In March 2022, we entered into a second supplement
to the JV Agreement with Wider, whereby the parties confirmed that the JV had not yet been established and is subject to further review
and analysis of regulatory issues in China and the United States, trade and political issues between the two countries and potential changes
in the use and market for the Company’s products and technology. Pursuant to the second supplement, the parties agreed to use their
commercial efforts to complete documentation by September 30, 2022. Wider has continued its work with respect to undertaking and
establishing clinical trials. In light of general economic conditions in China and the United States and the continued impact of regulatory
issues in China and the United States and trade and political issues between the two counties, the parties determined to further extend
the time frame to complete establishment of the JV to September 30, 2023 and entered into a supplement 3 to the JV Agreement to memorialize
such extension. The parties intend to continue to work together to complete the establishment prior to such extended time, however, the
ramifications of the continued COVID pandemic, especially in China, and the Chinese government’s regulatory approach to the pandemic
have adversely affected Wider’s ability to distribute our current products. As a result, the JV may be further delayed or we and
Wider may determine to re-structure the business terms (which changes may include timing and the scope of the intended operations and
trial studies) of the proposed JV.
During
the three months ended March 31, 2023 and 2022, the Company recorded $0 and $300,499 in revenue, respectively, from Wider on the
unaudited condensed consolidated statements of operations.
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 two members of U.S. Asian are shareholders in the Company and include Marilyn Elson who is the Chief Financial Officer of the Company.
Pursuant to the consulting agreement, U.S. Asian will provide consulting services to the Company with regard to, among other things,
corporate development and financing arrangements. The Company is to pay U.S. Asian $10,000 per month for services rendered and, on October 24,
2018, the Company issued 249,750 shares of the Company’s common stock to U.S. Asian. The Company recorded consulting expenses related
to the consulting agreement of $30,000 for each of the three months ended March 31, 2023 and 2022 on the Company’s
unaudited consolidated statements of operations. At December 31, 2022, U.S. Asian was owed $260,000 for accrued and unpaid services.
A payment of $250,000 was made to U.S. Asian on March 17, 2023.
On
December 22, 2021, the Company entered into a one-year agreement with Leonard Osser to serve on the Company’s Board of Advisors.
The agreement may be, but has not yet been, extended for an additional one-year term upon agreement of both parties. As consideration
Mr. Osser was entitled to $80,000 in shares of the Company’s common stock which was waived by Mr. Osser.
On
January 11, 2022, the Company entered into an employment agreement with Marilyn Elson to serve as Chief Financial Officer of the
Company for a three-year term with an option for the Company and Ms. Elson to extend the term for an additional two years. Ms. Elson
is the spouse of Leonard Osser.
Loan
Payable – Officer
On
November 1, 2021, the Company received $200,000
as a loan from the Company’s Chief Executive Officer. The loan had a principal of $200,000,
an interest rate of 9%,
and a maturity date of the earlier of (i) October
31, 2022 or (ii) the date of the consummation of the initial public offering. The note was amended as of
January 1, 2023 to extend the due date to March 17, 2023 and to provide that interest payable on the maturity date will be
$39,000
less any interest payments previously made. Total interest expense on this note was $18,000
and $4,500 for the three months ended March 31, 2023 and 2022, respectively. The December 31, 2022 outstanding principal
balance of $200,000
was satisfied by a payment on March 17, 2023. The March 31, 2023 outstanding interest balance of $34,500
was satisfied by a payment on April 26, 2023.
Leases
Our
principle executive office is located at 1776 Yorktown, Suite 550, Houston, Texas 77056. Under ASC 842 “Leases”, we
have two separate sub-leases (through IIcom Strategic Inc. controlled and owned by our Chief Executive Officer) totalling approximately
4,000 square feet of office space under operating leases. Management and supporting staff are hosted at this location. Our lease payments
for fiscal year 2022 were $54,000. Our lease costs for each of the three months ended March 31, 2023 and 2022 were $13,500.
The sub-leases are due to expire in 2024. Pursuant to the sublease, we pay the third-party landlord (not the sub landlord) all direct
and indirect rent costs under the primary lease directly for the leased premises. No additional payments are made to the Chief Executive
Officer or the entity controlled by him.
NOTE
6 — LOANS PAYABLE
Legacy
Ventures International, Inc.
On
September 11, 2017, the Company issued a promissory note (the “Promissory Note”) in favor of Legacy Ventures International,
Inc. (“Legacy”) as part of a commercial transaction with Legacy that was never consummated. The Promissory Note was issued
in the original principal amount of $500,000, with interest at 4% per annum and a maturity date of December 31, 2017. As of March 31,
2023, this promissory note is in default. The Company recorded $5,000 and $5,000 of interest expense for the three months ended March 31,
2023 and 2022, respectively. The amount outstanding at March 31, 2023 and December 31, 2022 was $500,000.
NOTE
7 — STOCKHOLDERS’ EQUITY (Deficit)
Issuance
of Common Stock
During
the three months ended March 31, 2022, the Company issued 850 shares of common stock to an investor for cash proceeds of $5,100
with a fair value of $6.00 per share.
During
the three months ended March 31, 2022, the Company issued 24,390 shares of common stock to a consultant for services rendered in
lieu of cash for an aggregate compensation charge of $150,000, of which $37,500 was expensed during the three months ended March 31,
2022, in the unaudited condensed consolidated statement of operations. In addition, $60,000 was expensed as stock compensation related
to shares to be issued to advisors.
During
the three months ended March 31, 2023, the Company issued no shares of common stock.
Warrants
The
issuance of warrants to purchase shares of the Company’s common stock are summarized as follows:
Schedule of warrants | |
| | | |
| | |
| |
Number of
warrants | | |
Weighted Average
Exercise Price | |
Outstanding December 31, 2022 | |
| 2,662,250 | | |
$ | 4.15 | |
Issued | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Expired or cancelled | |
| - | | |
| - | |
Outstanding March 31, 2023 | |
| 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 March 31, 2023:
Summary information about warrants to purchase | | | |
| | | |
| | | |
| | | |
| | |
Exercise Price | | |
Outstanding Number of Warrants | | |
Weighted Average Remaining Life
In Years | | |
Weighted Average Exercise Price | | |
Exercisable Number of Warrants | |
$ | 4.15 | | |
| 2,315,000 | | |
| 2.5 | | |
$ | 4.15 | | |
| 2,135,000 | |
$ | 4.15 | | |
| 347,250 | | |
| 2.5 | | |
| 4.15 | | |
| 347,250 | |
| | | |
| 2,662,250 | | |
| 2.75 | | |
$ | 4.15 | | |
| 2,662,250 | |
The
compensation expense attributed to the issuance of the warrants, if required to be recognized on the nature of the transaction, was recognized
as they vested/earned. These warrants are exercisable up to three years from the date of grant. All are currently exercisable.
NOTE
8 — COMMITMENTS AND CONTINGENCIES
Legal
Claims
There
are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer
or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder
is a party adverse to us or has a material interest adverse to the Company other than the following:
Sarah
Veltz v. Nexalin Technology, Inc. et al.
Plaintiff,
Sarah Veltz, filed a lawsuit in this matter on January 20, 2021 in Orange County Superior Court (Case No. 30-2021-01180164-CU-WT-CJC)
(the “Complaint”) naming the Company and others as defendants. In her Complaint, Plaintiff contends that she was employed
by defendants, including Nexalin, and has not been paid all wages, including overtime wages and other benefits allegedly due her. Plaintiff
also contends that, during her employment, she was subjected to sexual harassment by the Company’s then Chief Executive Officer.
Plaintiff seeks both compensatory and punitive damages. On March 12, 2021, the Company filed its answer to the Complaint. Although
the parties are seeking mediation, the court has set a trial in this matter for March 18, 2024. Management’s intent
is to contest the allegations vigorously and, as of the date of this report, is unable to provide an evaluation of the potential outcome
of the litigation within the probable or remote range or to provide an estimate of the amount of or a range of potential loss that might
be incurred by the Company.
Employment
Development Department
The
Company is currently engaged in settlement discussions with the Employment Development Department (EDD) of the state of California. This
matter involves issues related to our previous management’s classification of certain work provided to or on behalf of the Company’s
business as contract labor instead of employee labor. The total amount involved is approximately $300,000. Management has petitioned
for reassessment and believes the hired workers at issue were indeed actual contractors and not employees. We have no business in California
other than one part time and one full time worker residing in California. An initial hearing before an EDD magistrate was held on April 15,
2022. A second hearing was held in June of 2022. We are now in negotiations with the EDD for a final settlement. The Company believes
its potential exposure to be approximately $300,000 and, as such, has accrued this amount on the consolidated balance sheets as of March 31,
2023 and December 31, 2022 and 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 purportedly due
on an Investigator Initiated Cooperative Study Agreement, dated as of September 25, 2017 (the “2017 Study”). The Company
believes that the 2017 Study was not completed and no payment was due. In fact, for a number of months prior to receipt of the demand
letter, the Company had had discussions with the person at the University of Arizona who was to conduct the 2017 Study concerning updating
the 2017 Study and completing an updated study and related work. After receipt of the demand letter, the Company has had discussions
with the University of Arizona concerning resuming an updated study and receipt of credit for some or all the monies claimed to be due
for the 2017 Study. Such discussions are ongoing, and no resolution has been reached but the Company hopes to achieve a consensual resolution.
NOTE
9 — LEASES
With
the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as ROU assets and corresponding
lease liabilities.
On
January 1, 2022, the Company exercised its right to lease an additional 400 square feet of office space and an increase of monthly
rent of $500. In accordance with ASC 842 management accounted for this as a separate lease and, as a result, recorded an ROU asset and
lease liability of $11,359.
When
measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated
incremental borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 9%.
Operating
leases are included in the consolidated balance sheets as follows:
Schedule of Operating leases | |
| |
| | | |
| | |
| |
Classification | |
March 31,
2023 | | |
December 31,
2022 | |
Lease assets | |
| |
| | | |
| | |
Operating lease cost ROU assets | |
Assets | |
$ | 4,800 | | |
$ | 6,171 | |
Total lease assets | |
| |
$ | 4,800 | | |
$ | 6,171 | |
| |
| |
| | | |
| | |
Lease liabilities | |
| |
| | | |
| | |
Operating lease liabilities, current | |
Current liabilities | |
$ | 43,026 | | |
$ | 50,797 | |
Operating lease liabilities, non-current | |
Liabilities | |
| - | | |
| 4,463 | |
Total lease liabilities | |
| |
$ | 43,026 | | |
$ | 55,260 | |
The
components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations,
were as follows:
Schedule
of lease cost | |
| | | |
| | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Leases costs | |
| | | |
| | |
Operating lease costs | |
$ | 13,500 | | |
$ | 13,500 | |
Total lease costs | |
$ | 13,500 | | |
$ | 13,500 | |
Future
minimum payments under non-cancellable leases for operating leases for the remaining terms of the leases following the three months ended
March 31, 2023:
Future minimum payments under non-cancelable leases for operating leases | |
| | |
Fiscal Year | |
Operating
Leases | |
Remainder of 2023 | |
$ | 40,304 | |
2024 | |
| 4,496 | |
Total future minimum lease payments | |
| 44,800 | |
Amount representing interest | |
| 1,774 | |
Present value of net future minimum lease payments | |
$ | 43,026 | |
Additional
information related to leases is presented as follows:
Schedule of additional information related to leases | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Leases | |
| | | |
| | |
Weighted average remaining lease term | |
| 0.75 | | |
| 1.00 | |
Weighted average discount rate | |
| 9.9 | % | |
| 9.9 | % |
NOTE
10 — CONCENTRATION OF CREDIT RISK
Revenues
Six
customers accounted for 94% of revenues for the three months ended March 31, 2023, as set forth below:
Concentration of credit risk | |
| | |
| |
Three Months Ended March 31,
2023 | |
Customer A | |
| 25 | % |
Customer B | |
| 17 | % |
Customer C | |
| 16 | % |
Customer D | |
| 14 | % |
Customer E | |
| 12 | % |
Customer F | |
| 10 | % |
One
customer, a related party, accounted for 93% of revenue for the three months ended March 31, 2022.
Accounts
Receivable
Three
customers accounted for 91% of accounts receivable at March 31, 2023, as set forth below:
| |
Three Months Ended March 31,
2023 | |
Customer A | |
| 32 | % |
Customer B | |
| 28 | % |
Customer C | |
| 31 | % |
Four
customers accounted for 84% of accounts receivable at December 31, 2022, as set forth below:
| |
For the
Year Ended
December 31,
2022 | |
Customer A | |
| 29 | % |
Customer B | |
| 20 | % |
Customer C | |
| 20 | % |
Customer D | |
| 15 | % |
NOTE
11 — SUBSEQUENT EVENTS
Management
evaluated subsequent events and transactions that occurred after the balance sheet date, up to the date that the unaudited financial
statements were issued. Based upon this review management did not identify any subsequent events that would have required adjustment
or disclosure in the unaudited consolidated condensed financial statements.