Nexalin Technology, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022; unaudited interim financial statements. Nexalin develops non-invasive neurostimulation devices for mental-health conditions. Its Gen-2 device is approved for insomnia and depression in China and is sold through Wider Come Limited. The company completed its Nasdaq initial public offering on September 20, 2022.
Financial Highlights
| Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 |
|---|---|---|---|---|
| Revenue | $545,323 | $55,970 | $1,282,933 | $120,066 |
| Gross profit | $358,025 | $46,664 | $926,588 | $97,618 |
| Gross margin | 65.65% | 83.37% | 72.22% | 81.30% |
| Operating loss | $(293,194) | $(1,795,449) | $(1,113,414) | $(5,441,112) |
| Net loss | $(135,401) | $(1,799,708) | $(968,139) | $(5,482,076) |
| Basic and diluted loss per share | $(0.03) | $(0.41) | $(0.19) | $(1.33) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(1,309,242) | $(667,700) |
- Q3 revenue increased 874%, primarily because the company sold 100 devices in 2022 versus no device sales in the comparable quarter. Nine-month revenue increased 969%, primarily reflecting 220 device sales and cost reimbursements from Wider.
- China-related revenue was $520,000 in Q3 and $1,193,069 for the nine months, representing approximately 95% and 93% of total revenue, respectively. Related-party revenue from Wider was $520,000 in Q3 and $1,183,367 for the nine months.
- Operating expenses declined 65% in Q3 and 63% for the nine months, primarily because stock-based compensation was substantially lower than in 2021. Salaries, research and development, consulting, and regulatory costs increased.
- At September 30, 2022, cash and cash equivalents were $7,864,079, compared with $661,778 at December 31, 2021. Working capital was $6,364,259, compared with a deficit of $1,610,975 at year-end 2021.
- Total assets were $8,352,763 and total liabilities were $1,997,990. Stockholders’ equity was $6,354,773, compared with a deficit of $1,681,941 at December 31, 2021.
- The accumulated deficit was $71,659,663 at September 30, 2022.
Capitalization, Debt and Liquidity
- The IPO generated gross proceeds of $9,610,723 and net proceeds of approximately $8.54 million after $1,067,078 of underwriting and offering costs. The offering included 2,315,000 common shares and warrants, with additional warrants issued in connection with the underwriters’ option.
- Cash provided by financing activities was $8,511,543 for the first nine months of 2022, primarily from the IPO. Financing cash flow was $725,690 in the prior-year period.
- Current liabilities included a $200,000 officer loan, a $500,000 note payable, $788,293 of accounts payable, and $442,501 of accrued expenses. The $500,000 Legacy Ventures note was in default as of September 30, 2022.
- The company’s $22,916 PPP loan was forgiven. A separate note was paid in full after the holder waived $165,643 of accrued interest, and accrued interest of $168,361 was forgiven as other income.
- Management expects continued operating losses and negative operating cash flow into the near term, but concluded that IPO proceeds provide sufficient cash for anticipated requirements for the next 12 to 15 months. The filing states that substantial doubt regarding continuation as a going concern for more than 12 months from the financial-statement date was alleviated.
Material Changes Versus the Prior Comparable Period
- Revenue growth was substantial, but the mix shifted toward device sales, which carry higher costs than licensing revenue; consequently, gross margins declined from 83.37% to 65.65% in Q3 and from 81.30% to 72.22% for the nine months.
- Net loss improved by $1,664,307 in Q3 and $4,513,937 for the nine months, mainly because of lower stock-based compensation and higher revenue.
- Common shares outstanding increased from 4,879,923 at December 31, 2021 to 7,279,961 at September 30, 2022. The IPO also resulted in 2,503,850 outstanding warrants at September 30, 2022, creating potential future dilution.
- Cash increased by $7,202,301 during the first nine months, although operating cash usage increased to $1,309,242 from $667,700 in the prior-year period.
- The proposed Wider joint venture remained unformed. The parties extended the target completion date to September 30, 2023.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management expects operating losses to continue as it funds clinical development, regulatory work, commercialization infrastructure, and Gen-2 and Gen-3 development.
- Management expects a significant and material negative impact on fourth-quarter 2022 China sales and reported that no fourth-quarter order from the Chinese distributor was expected because of COVID-19-related restrictions.
- The business is highly dependent on Wider and the China market. The filing indicates that a single related-party customer accounted for approximately 95% of Q3 revenue and 92% of nine-month revenue.
- U.S. regulatory approval for the advanced device has not been obtained. Gen-2 and Gen-3 remain subject to clinical, safety, efficacy, FDA, and other regulatory requirements.
- The company expects substantial uncertainty regarding the timing and cost of clinical trials, regulatory approvals, manufacturing scale-up, reimbursement, market acceptance, and future financing.
- Material contingencies include a wage and harassment lawsuit, for which the company accrued $50,000, and an Employment Development Department matter involving a potential $286,000 tax charge, which was also accrued. The company is contesting or negotiating these matters.
- Disclosure controls and procedures were reported as ineffective because of insufficient formal financial-reporting controls, segregation of duties, review procedures, and IT controls. Management had begun remediation efforts.
- Unusual items included $168,245 of other income related principally to forgiven accrued interest and $22,916 of PPP loan forgiveness.
Investor Verification Checklist
- Verify the sustainability and collectability of China-related revenue, including the related-party relationship with Wider and the concentration of sales in a single customer.
- Confirm the status and revised terms of the proposed Wider joint venture and whether the September 30, 2023 target remains achievable.
- Review fourth-quarter 2022 China orders and subsequent revenue to assess the impact of lockdowns and distributor restrictions.
- Assess cash-burn rates, remaining IPO proceeds, and the timing of any additional capital needs given continuing losses and negative operating cash flow.
- Review the defaulted $500,000 Legacy Ventures note and the status of the lawsuit and EDD settlement negotiations.
- Track FDA filings, clinical-trial results, and regulatory approval requirements for Gen-2 and Gen-3 products.
- Evaluate remediation of ineffective disclosure controls and the potential effects of outstanding warrants and future equity issuances on dilution.