Nexalin Technology, Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Nexalin Technology, Inc. develops non-invasive neurostimulation devices for mental-health conditions. Its Gen-1 devices continue generating limited licensing and consumables revenue from existing customers, while Gen-2 and Gen-3 devices are under development and regulatory review. The company sells Gen-2 devices in China through a Hong Kong joint venture and distributor relationship with Wider Come Limited.
This unaudited Form 10-Q covers the three months ended March 31, 2024, with comparison to the three months ended March 31, 2023. Nexalin is a non-accelerated filer, smaller reporting company, and emerging growth company. It had 7,436,562 common shares outstanding as of May 9, 2024.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $78,671 | $30,560 | +$48,111, or 157% |
| Gross profit | $69,515 | $23,450 | +$46,065, or 196% |
| Gross margin | 88% | 77% | +11 percentage points |
| Operating expenses | $1,143,227 | $802,876 | +$340,351, or 42% |
| Loss from operations | $(1,073,712) | $(779,426) | Loss increased 38% |
| Net loss | $(1,041,157) | $(748,414) | Loss increased 39% |
| Loss per basic and diluted share | $(0.14) | $(0.10) | Higher loss per share |
| Cash flow from operations | $(763,289) | $(1,314,649) | Use decreased $551,360 |
Revenue consisted of $55,500 of device sales, $21,558 of licensing fees, $1,513 of equipment revenue, and $100 of other revenue. International revenue was $55,500, compared with none in Q1 2023; U.S. revenue was $23,171, compared with $30,560 in the prior-year quarter. One customer represented 71% of Q1 2024 revenue.
Gross-margin expansion primarily reflected the greater proportion of higher-margin device sales. Operating-expense growth included higher professional fees, salaries and benefits, travel, consulting, research and development, and $161,349 of stock-based compensation.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $546,255 at March 31, 2024, compared with $580,230 at December 31, 2023.
- Short-term investments, consisting of U.S. Treasury notes, were $1,597,687, down from $2,368,203 at year-end.
- Total current assets were $2,563,253 and total current liabilities were $507,223, implying working capital of approximately $2.1 million.
- Total assets were $2,834,210 and stockholders’ equity was $2,326,987. The accumulated deficit was $78.1 million.
- The filing reports no outstanding debt at March 31, 2024. The company made no financing-related cash payments in Q1 2024; Q1 2023 included a $200,000 payment on an officer note.
- Investing activities provided $729,314, reflecting $6.235 million of short-term investment sales, offset by $5.439 million of purchases and approximately $66,000 of patent and trademark purchases.
- Management states that operating activities are expected to remain cash consumptive and that available cash is insufficient for the twelve months following issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because of device sales to a new overseas customer, but the company remained deeply unprofitable.
- Operating expenses increased 42%, exceeding the 157% revenue increase in absolute dollars and resulting in a larger operating loss.
- Operating cash outflow improved year over year, partly because Q1 2023 included a $250,000 related-party accounts-payable payment and a $353,609 reduction in accounts payable.
- The company recognized $5,783 of equity-method income from its China-related joint venture, compared with none in Q1 2023. The joint-venture investment increased to $101,783 from $96,000.
- Stock-based compensation of $161,349 was recorded in Q1 2024, compared with none in the prior-year quarter.
- The company acquired additional patents and trademarks, increasing net intangible assets to $169,174 from $105,528 at December 31, 2023.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continuing operating losses and negative operating cash flows as it funds clinical development, regulatory work, manufacturing development, intellectual property, personnel, and public-company costs. No revenue or earnings guidance was provided.
- The financial statements include a going-concern warning. Management states that substantial doubt exists regarding the company’s ability to continue as a going concern within one year and that additional capital may be required.
- U.S. marketing of new Gen-1 devices remains suspended pending regulatory decisions. A new or amended FDA 510(k) application may be pursued for anxiety and insomnia.
- Gen-2 and Gen-3 products require FDA review and applicable clinical evidence before U.S. commercialization. The company expects Gen-3 clinical trials for anxiety and insomnia to begin in late Q2 or early Q3 2024. FDA comments on a February 2024 pre-submission were received April 26, 2024, followed by an April 30 teleconference; the company reported agreement on anxiety and insomnia clinical protocols.
- The Gen-2 device has Chinese regulatory approval for insomnia and depression. China-related revenue and growth depend heavily on Wider and the joint venture, which face regulatory, economic, governmental, data-privacy, intellectual-property, and enforcement risks.
- Nasdaq notified the company on April 23, 2024 that it had regained compliance with the $1.00 minimum bid-price requirement. Stockholders had approved potential reverse-split authority, but the board did not use it.
- Management identified material weaknesses in financial reporting controls, including inadequate segregation of duties and review controls and insufficient information-technology access controls. Disclosure controls were deemed ineffective as of March 31, 2024; remediation is planned but not complete.
- A wage and harassment lawsuit is scheduled for trial on November 18, 2024. Management cannot estimate the probable outcome or potential loss.
- The company accrued approximately $40,000 for a California Employment Development Department matter involving worker classification. A separate University of Arizona settlement of approximately $69,000 was paid in full by December 31, 2023.
- Related-party consulting expense to U.S. Asian Consulting Group was $30,000 in Q1 2024. The company also leases office space through an entity controlled by its CEO.
Most Important Facts for Investors to Verify
- Whether the company can obtain additional financing or generate sufficient operating cash to address the stated going-concern uncertainty.
- The timing, cost, and outcome of FDA review, clinical trials, and potential 510(k) or PMA approvals for Gen-2 and Gen-3 devices.
- The sustainability and concentration of Q1 revenue, including the 71% contribution from one customer and reliance on China-related sales.
- Whether the Wider joint venture generates recurring cash distributions or requires additional funding after its initial funding period.
- Progress in remediating material weaknesses in internal control over financial reporting.
- The potential financial impact of the pending employment-related litigation and the final resolution of the EDD matter.
- The dilutive effect of 2,281,879 stock options and 2,662,250 warrants outstanding at March 31, 2024.