Nexalin Technology, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2023; filed May 10, 2023. Nexalin develops noninvasive neurostimulation devices for mental-health and cognitive conditions. Its Gen-1 U.S. marketing is suspended pending regulatory action, while Gen-2 is approved for certain uses in China and Gen-3 is under development. The company is a smaller reporting company and emerging growth company.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $30,560 | $323,322 | Down 91% |
| Gross profit | $23,450 | $277,307 | Down 92% |
| Gross margin | 77% | 86% | Down 9 percentage points |
| Operating expenses | $802,876 | $652,424 | Up 23% |
| Loss from operations | $(779,426) | $(375,117) | Loss increased 108% |
| Net loss | $(748,414) | $(393,249) | Loss increased 90% |
| Comprehensive loss | $(707,345) | $(393,249) | Loss increased 80% |
| Basic and diluted loss per share | $(0.10) | $(0.08) | |
| Net cash used in operating activities | $(1,314,649) | $(203,271) | Higher cash usage |
- Revenue consisted of $23,870 of licensing fees, $6,400 of equipment revenue and $290 of other revenue; there were no device sales in Q1 2023. Q1 2022 included $264,500 of device sales.
- All reported Q1 2023 revenue was from U.S. sales. China sales were $300,499 in Q1 2022 and zero in Q1 2023.
- Operating expense growth reflected higher salaries and benefits, selling, general and administrative costs, research and development, insurance, taxes and travel. Professional fees declined following elevated public-offering costs in the prior-year period.
- Other income included a $38,772 gain on the sale of short-term investments and $1,077 of other income, partially offset by $8,837 of net interest expense.
- Cash and cash equivalents were $174,961 at March 31, 2023, compared with $162,743 at December 31, 2022. Short-term investments were $5,297,658, down from $6,831,192.
- Working capital was $4,680,325 at March 31, 2023, compared with $5,476,476 at year-end 2022.
- Total assets were $5,930,473 and total liabilities were $1,195,444. Stockholders’ equity was $4,735,029.
- Debt included a $500,000 note payable that was in default as of March 31, 2023. The $200,000 officer loan was repaid on March 17, 2023; $34,500 of related accrued interest was paid on April 26, 2023.
- The company had 7,286,562 common shares outstanding as of March 31, 2023 and May 8, 2023. It also had 2,662,250 outstanding warrants with a $4.15 exercise price.
Material Changes Versus Q1 2022
- Revenue fell $292,762, primarily because China-related device sales through distributor Wider Come Limited ceased during the quarter amid distribution and COVID-related restrictions.
- Gross profit declined $253,857, and gross margin decreased from 86% to 77% because the revenue mix shifted away from device sales.
- Operating expenses increased $150,452. Salaries and benefits increased $160,729, while professional fees decreased $136,856 and stock-based compensation declined from the prior-year period.
- Operating cash use increased by $1,111,378 to $1,314,649, reflecting the larger net loss and reductions in accounts payable, including payment of $250,000 owed to a related party consulting firm.
- Investing activities provided $1,526,867, primarily from net sales and purchases of short-term investments, while financing activities used $200,000 for repayment of the officer loan.
- Accumulated deficit increased to $73,137,754 from $72,389,340 at December 31, 2022.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued operating losses and negative operating cash flow through at least the near future, with significant expenses anticipated for clinical development, regulatory approvals, manufacturing, intellectual property, personnel and public-company obligations.
- Management concluded that cash and short-term investments should satisfy anticipated requirements for the twelve months following issuance of the financial statements, but continued operations depend on executing the business plan, generating revenue and potentially raising additional capital.
- A Gen-3 Halo headset pre-submission document was filed with the FDA in January 2023. FDA comments were received in March, with a formal meeting scheduled for May 2023. FDA clearance or approval has not been obtained.
- The company is developing a PMA application for depression and expects additional Gen-3 pilot trials for anxiety and insomnia in the United States and China beginning in the third quarter of 2023. These plans are subject to regulatory, clinical and funding risks.
- The proposed joint venture with Wider had not been established as of March 31, 2023. The target timing was extended to September 30, 2023, but formation remains uncertain. Wider accounted for no revenue in Q1 2023 compared with 93% of revenue in Q1 2022.
- Revenue concentration is significant: six customers accounted for 94% of Q1 2023 revenue, and three customers represented 91% of accounts receivable.
- The company reported a $300,000 accrued liability related to negotiations with the California Employment Development Department concerning worker classification.
- A lawsuit alleging unpaid wages and sexual harassment is scheduled for trial in March 2024. Management could not estimate a probable loss range. The University of Arizona has also demanded approximately $111,094 under a study agreement; discussions were ongoing.
- A $500,000 promissory note issued to Legacy Ventures International, Inc. remains in default and bears interest at 4% annually.
- Management identified material weaknesses in disclosure controls and internal control over financial reporting involving insufficient segregation of duties, review documentation, reconciliations and information-technology access controls. Remediation is planned but was not complete as of the filing.
- The filing states that no material changes occurred to previously disclosed risk factors. Key risks include FDA and other regulatory approval, clinical-trial execution, commercialization, reimbursement, intellectual-property protection, dependence on distributors, China-related regulation and trade conditions, customer concentration and additional financing needs.
Important Facts for Investors to Verify
- Whether FDA discussions and the planned Gen-3 510(k) pathway result in clearance, and whether the planned depression PMA advances.
- Whether the Wider joint venture is formed by the extended September 30, 2023 target date and whether China sales recover.
- The timing and funding requirements of planned clinical trials, product development and commercialization activities.
- The company’s cash-burn rate, remaining short-term investments and ability to obtain additional capital if operating losses persist.
- Status and potential exposure of the Legacy defaulted note, California EDD settlement, University of Arizona demand and employment litigation.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- The sustainability of revenue given the absence of Q1 2023 device sales, customer concentration and dependence on a limited distributor and customer base.