Nexalin Technology, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Nexalin Technology, Inc. is an emerging-growth and smaller-reporting company developing non-invasive neurostimulation devices for mental-health and cognitive conditions. The company continues servicing legacy Gen-1 customers, sells approved Gen-2 devices in China through its distributor, and is developing Gen-2 and Gen-3 products using a 15-milliamp waveform.
This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the same periods in 2022. The filing was signed August 10, 2023. The company had 7,286,562 shares outstanding at June 30, 2023 and 7,436,562 shares outstanding as of August 8, 2023.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $35,540 | $414,288 | $66,100 | $737,610 |
| Gross profit | $26,166 | $291,256 | $49,616 | $568,563 |
| Gross margin | 74% | 70% | 75% | 77% |
| Operating loss | $(876,860) | $(445,103) | $(1,656,286) | $(820,220) |
| Net loss | $(822,437) | $(462,405) | $(1,570,851) | $(832,738) |
| Comprehensive loss | $(830,417) | $(462,405) | $(1,574,075) | $(832,738) |
| Basic and diluted loss per share | $(0.11) | $(0.09) | $(0.22) | $(0.17) |
- Quarterly revenue declined 91%, primarily because of lower device sales through the China distribution network. Six-month revenue also declined 91%.
- Revenue in the six months consisted primarily of $9,600 of device sales, $43,903 of licensing fees, $11,500 of equipment revenue and $1,097 of other revenue.
- Operating expenses increased 23% to $903,026 in the quarter and 23% to $1,705,902 for the six-month period. Six-month salaries and benefits increased 97%, while selling, general and administrative expense increased 36%.
- The company recognized gains on sales of short-term investments of $58,878 in the quarter and $97,650 year to date, partially offsetting operating losses.
- Research and development expense was $146,000 in the quarter and $211,834 for the six months, primarily related to Gen-2 and Gen-3 development.
Liquidity, Cash Flow, Debt and Balance Sheet
| Balance Sheet Metric | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $231,722 | $162,743 |
| Short-term investments | $4,464,922 | $6,831,192 |
| Current assets | $5,111,884 | $7,425,462 |
| Current liabilities | $1,182,621 | $1,948,986 |
| Working capital | $3,929,263 | $5,476,476 |
| Total liabilities | $1,182,621 | $1,953,449 |
| Stockholders’ equity | $3,993,000 | $5,478,687 |
- Cash and short-term investments totaled approximately $4.70 million at June 30, 2023, down from approximately $6.99 million at year-end.
- Cash used in operations was $2,130,260 for the first six months, compared with $365,543 in the prior-year period.
- Investing activities provided $2,399,239, principally from $21,155,143 of short-term investment sales, offset by $18,694,446 of purchases and $61,458 for patents.
- Financing activities used $200,000 to repay the officer loan. The $200,000 officer loan was fully repaid by March 17, 2023, with accrued interest paid in April.
- The company has a $500,000 promissory note outstanding to Legacy Ventures. The note matured in 2017 and remains in default; accrued interest was $105,001 at June 30, 2023.
- Management states that operating losses and negative operating cash flows are expected to continue, but believes cash and investments are sufficient for anticipated requirements for the twelve months following issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue and gross profit fell sharply because China-related device sales declined. China revenue was $10,207 in the quarter and $10,208 for the six months, compared with $372,570 and $673,069, respectively, in the prior-year periods.
- Gross margin improved in the quarter because the revenue mix shifted toward higher-margin licensing fees, but declined for the six-month period because 2022 included royalty and billable-expense revenue with no related costs.
- Operating losses approximately doubled for the quarter and increased 102% for the six months, reflecting lower revenue and higher personnel, research and development, insurance, travel and public-company costs.
- The company formalized a joint venture with Wider Come Limited on May 31, 2023. Nexalin is entitled to a 48% interest and Wider to 52%; the Hong Kong incorporation filing still reflected 50%-50% ownership as of the report date. The JV had no activity through June 30, 2023.
- The company purchased patents with a net carrying value of $60,106 at June 30, 2023; no patent asset was recorded at December 31, 2022.
- On July 13, 2023, after the reporting period, the company issued 150,000 shares to designated Wider shareholders under the collaborative agreement.
Guidance, Outlook, Risks and Unusual Items
- No specific revenue, earnings or cash-flow guidance was provided. Management expects continued operating losses and negative operating cash flow through at least the near term and expects expenses to rise as clinical, regulatory, manufacturing, commercialization and public-company activities expand.
- The Gen-3 Halo headset pre-submission was filed with the FDA in January 2023. The company received FDA comments in March, met with the FDA on May 9, and filed meeting minutes on May 16. FDA clearance or approval has not been obtained.
- The company has suspended new U.S. Gen-1 sales and marketing pending regulatory decisions. U.S. commercialization of products for certain indications remains dependent on FDA clearance or approval.
- Management identifies substantial dependence on Wider and China-related distribution. COVID-19 restrictions and related market disruptions reduced sales, and future regulatory, economic and governmental developments in China remain uncertain.
- On May 10, 2023, Nasdaq notified the company that its closing bid price had been below $1.00 for 30 consecutive business days. The stated initial compliance deadline was November 6, 2023, with a possible additional compliance period subject to conditions. Failure to regain compliance could result in delisting, although the filing states that the company may appeal a delisting determination.
- The company disclosed material weaknesses in internal control over financial reporting, including insufficient segregation of duties and inadequate information-technology access controls. Management concluded that disclosure controls and procedures were not effective as of June 30, 2023 and plans to engage outside assistance and implement remediation measures.
- Accrued expenses included $336,000 of settlement liabilities and $300,000 accrued for a California Employment Development Department matter. The company is also defending an employment-related lawsuit for which it cannot estimate a potential loss, and is responding to a University of Arizona demand for approximately $111,094.
- Revenue concentration is significant: three customers represented 65% of quarterly revenue and 54% of six-month revenue. A related party represented 29% and 15%, respectively. Two customers represented 85% of accounts receivable at June 30, 2023.
Important Facts for Investors to Verify
- Whether the company can restore revenue growth after the 91% year-over-year decline and reduce dependence on China and a limited number of customers.
- The status, timing and requirements for FDA clearance or approval of Gen-3, Gen-2 and the company’s existing 510(k) strategy.
- Whether the Wider joint venture’s ownership records are corrected to reflect the contractual 52%-48% split and whether the JV begins generating revenue.
- Cash burn, remaining short-term investments, funding needs and the company’s ability to continue as a going concern without additional capital.
- The status and repayment or renegotiation prospects of the $500,000 defaulted Legacy Ventures note.
- Progress toward remediation of the disclosed material weaknesses in internal controls.
- Nasdaq listing compliance and any subsequent reverse stock split, transfer, delisting notice or appeal.
- Potential outcomes and cash exposure from the California EDD matter, the Veltz litigation and the University of Arizona demand.
- The effect of the July 2023 issuance of 150,000 shares and any additional equity or option issuances under the new executive agreements.