Nexalin Technology, Inc. — Fiscal 2023 Form 10-K Summary
Business context and reporting period
Nexalin designs and develops non-invasive neurostimulation devices for mental-health and cognitive conditions. Its legacy Gen-1 device continues to generate limited licensing and consumables revenue from previously sold or leased units, but new U.S. sales and marketing have been suspended pending regulatory strategy. Gen-2 and Gen-3 devices use a proprietary 15-milliamp waveform and remain subject to U.S. FDA review and clinical development.
This filing covers the fiscal year ended December 31, 2023, with comparative results for 2022. Nexalin is headquartered in Houston, Texas, trades on Nasdaq under NXL and NXLIW, and qualifies as both an emerging growth company and a smaller reporting company.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $110,748 | $1,321,357 | Down 92% |
| Gross profit | $85,060 | $958,145 | Down 91% |
| Gross margin | 77% | 73% | Up 4 percentage points |
| Operating expenses | $5,781,356 | $2,791,176 | Up 107% |
| Loss from operations | $(5,696,296) | $(1,833,031) | Loss increased |
| Net loss | $(4,648,709) | $(1,697,816) | Loss increased 174% |
| Comprehensive loss | $(4,685,427) | $(1,661,503) | Loss increased |
| Basic and diluted loss per share | $(0.63) | $(0.30) | Higher loss per share |
| Cash flow from operations | $(3,835,384) | $(2,215,699) | Higher cash use |
Revenue consisted primarily of licensing fees of $82,080 and equipment, electrode and cable sales of $27,299, plus other revenue of $1,369. The company reported no device sales or royalty revenue in 2023. Three customers represented 62% of revenue, and a related-party customer represented 39% of accounts receivable at year-end.
At December 31, 2023, cash and cash equivalents were $580,230, short-term investments were $2,368,203, current assets were $3,429,892, current liabilities were $425,281, and working capital was $3,004,611. Total assets were $3,631,916 and total stockholders’ equity was $3,206,635. No loan or note payable remained outstanding at year-end; liabilities primarily consisted of accounts payable, accrued expenses and lease obligations.
Material changes versus the prior comparable period
- Revenue declined sharply because there were no new device sales, royalties or expense reimbursements. The company attributed the decline principally to the shutdown of a distributor customer amid the China COVID-related downturn.
- Operating expenses more than doubled, reflecting higher salaries and benefits, insurance, travel, regulatory and compliance spending, research and development, taxes and stock-based compensation.
- Research and development expense included approximately $1.5 million related to shares issued or issuable to designated Wider shareholders under the China collaboration.
- Stock-based compensation increased total operating costs and non-cash operating adjustments; aggregate stock compensation recognized in cash-flow reconciliation was $2,413,375.
- Cash from operations deteriorated to a $3.8 million use, while investing cash flow was positive primarily because the company sold approximately $41.3 million of short-term investments and purchased approximately $36.6 million.
- The company paid $200,000 toward an officer loan and recognized a $615,000 gain from extinguishment of a legacy note and accrued interest after determining the liability was legally extinguished.
- Common shares outstanding increased to 7,436,562 from 7,286,562, primarily because 150,000 shares were issued under the Wider collaboration.
Guidance, outlook, commentary and risks
Management expects continuing operating losses and negative operating cash flow through at least the near term, including 2024. It does not provide formal revenue or earnings guidance. Future spending is expected to focus on clinical trials, regulatory submissions, product development, intellectual property, manufacturing support, personnel and commercialization infrastructure.
The company formalized a Hong Kong joint venture with Wider Come Limited in May 2023 to develop, market, sell and distribute Gen-2 devices in China and nearby markets. Wider owns 52% and Nexalin owns 48%. Nexalin invested $96,000 and accounts for the investment under the equity method. No joint-venture operating activity was recorded through December 31, 2023 because of the reporting lag. Wider is obligated to fund the joint venture’s initial 12 months of operations, after which the parties expect to fund expenses pro rata.
In the United States, management shifted its regulatory strategy from a 510(k) pathway toward a de novo application for Gen-2 and Gen-3 anxiety and insomnia indications. A follow-up FDA pre-submission was filed in the first quarter of 2024, with a meeting scheduled for April 30, 2024. Management expected pivotal trials to require approximately 18 months for recruitment and data collection. A PMA for depression is also in development, but no U.S. marketing approval for Gen-2 or Gen-3 had been obtained as of the filing date.
The company’s China Gen-2 device has NMPA approval for insomnia and depression. China-related risks include regulatory changes, cybersecurity and data-security requirements, foreign-exchange controls, enforcement uncertainty, intellectual-property protection and political or economic developments.
The auditor included a going-concern explanatory paragraph. Management stated that available cash is not sufficient for the next 12 months from issuance of the financial statements and that additional financing may be required. The filing states that substantial doubt about the company’s ability to continue as a going concern was not overcome.
Nasdaq compliance remains a material risk. The company failed to regain compliance with the $1.00 minimum bid-price requirement and also did not meet Nasdaq’s $5 million minimum stockholders’ equity requirement for an additional compliance period. A Nasdaq Hearing Panel granted a temporary exception through April 25, 2024. Stockholders approved a potential 1-for-4 to 1-for-14 reverse stock split on March 7, 2024, but it had not been implemented as of the filing date.
Management identified material weaknesses in internal control over financial reporting related to inadequate segregation of duties and insufficient user and superuser access controls over the financial reporting system. The filing did not include an auditor attestation on internal controls because of the company’s emerging growth company status.
Pending matters include a California employment and harassment lawsuit with a November 18, 2024 trial date; management could not estimate the potential loss. The company accrued $40,000 for a California Employment Development Department matter, reduced from approximately $300,000, and stated that the University of Arizona settlement of approximately $69,000 was paid in full.
Most important facts for investors to verify
- Current cash runway, timing and terms of any required equity or debt financing, and whether financing can be obtained without substantial dilution.
- Status of the going-concern issue and any developments after the March 27, 2024 filing date.
- Nasdaq listing status, the April 25, 2024 compliance deadline and whether a reverse stock split was implemented.
- FDA feedback, the selected de novo or 510(k) pathway, clinical-trial timing and the feasibility of the planned depression PMA.
- Actual commercial activity, funding obligations and economics of the Wider joint venture, including when equity-method results will begin to be recorded.
- Customer and related-party concentration, particularly the decline from $1.2 million of China-related revenue in 2022 to $3,614 in 2023.
- Remediation of the material weaknesses in financial reporting controls.
- Potential dilution from 2,281,879 stock options, 2,662,250 warrants and additional equity awards subject to plan capacity or shareholder approval.
- Outcome and potential exposure from the Veltz litigation and remaining California employment-tax settlement discussions.