Nexalin Technology, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report; quarterly Q4 results are not separately presented. Nexalin develops non-invasive neurostimulation devices for mental-health and cognitive disorders. Its Gen-1 devices continue to generate limited servicing, licensing, electrode and cable revenue, while Gen-2 and Gen-3 products remain subject to development and regulatory activities in the United States.
Financial Performance and Position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $1.321 million | $0.144 million | +$1.177 million; 817% |
| Gross profit | $0.958 million | $0.123 million | +$0.836 million; 681% |
| Gross margin | 73% | 85% | Down 12 percentage points |
| Total operating expenses | $2.791 million | $6.141 million | Down $3.350 million; 55% |
| Net loss | $1.698 million | $6.078 million | Improved by $4.380 million |
| Comprehensive loss | $1.662 million | $6.078 million | Improved by $4.417 million |
| Net loss per share | $0.30 | $1.43 | Loss per share reduced |
| Net cash used in operations | $2.216 million | $1.077 million | Use increased $1.139 million |
| Net cash used in investing | $6.795 million | — | Primarily Treasury investments |
| Net cash provided by financing | $8.512 million | $1.660 million | Primarily IPO proceeds |
Revenue growth was primarily driven by the sale of 221 devices in 2022, compared with no device sales in 2021. China represented $1.208 million, or approximately 91%, of 2022 revenue; U.S. revenue was $0.114 million. Revenue from a related party, primarily Wider, was $1.183 million, or approximately 90% of total revenue.
Lower operating expenses primarily reflected an approximately $4.2 million reduction in stock-based compensation and lower professional fees, partly offset by higher salaries, research and development, consulting and insurance costs. The filing contains an apparent inconsistency: the MD&A table reports a 2022 operating loss of $1.883 million, while the audited statement of operations reports $1.833 million. Investors should verify the correct amount in the final financial statements and any subsequent amendment.
At December 31, 2022, current assets were $7.425 million, current liabilities were $1.949 million and working capital was $5.476 million, compared with negative working capital of $1.611 million in 2021. Cash and cash equivalents were $0.163 million and short-term investments, consisting of U.S. Treasury notes, were $6.831 million. Total assets were $7.432 million and total liabilities were $1.953 million.
Debt and obligations included a $0.500 million defaulted promissory note, a $0.200 million loan from the CEO outstanding at year-end and lease liabilities of approximately $0.055 million. The CEO loan was repaid on March 17, 2023. The PPP loan and the chairman’s note were paid or forgiven. The company had an accumulated deficit of $72.389 million at year-end.
Material Changes Versus 2021
- Revenue increased substantially due to China device sales, but the business remained loss-making and dependent on a single related-party distributor.
- Gross margin declined because 2022 revenue was weighted toward equipment sales with higher production and shipping costs, whereas 2021 revenue primarily consisted of licensing and consumable sales.
- The company completed its initial public offering on September 16, 2022, issuing 2,315,000 units and additional warrants. Net IPO proceeds were approximately $8.544 million after offering costs; total proceeds including the over-allotment warrants were approximately $8.547 million.
- Short-term investments increased to $6.831 million as IPO proceeds were invested, while cash declined to $0.163 million.
- Shares outstanding increased from 4,879,923 at December 31, 2021 to 7,286,562 at December 31, 2022. The company had 2,662,250 outstanding warrants exercisable at $4.15 per share.
- Research and development expense increased to approximately $0.511 million from $0.139 million, reflecting Gen-2 and Gen-3 development.
Guidance, Outlook, Risks and Unusual Items
- Management expects continuing operating losses and negative operating cash flow for at least the near term, with expenses expected to increase as clinical development, regulatory submissions, manufacturing, sales infrastructure and public-company compliance expand.
- Management stated that cash and short-term investments were sufficient for anticipated requirements for the twelve months following issuance of the financial statements, but additional financing may ultimately be required. The filing states that the financial statements do not include adjustments that might be necessary if the company cannot continue as a going concern.
- The Gen-2 device received NMPA approval in China for insomnia and depression. U.S. commercialization remains subject to FDA clearance or approval. The company filed a 510(k) pre-submission for Gen-3 anxiety and insomnia indications in January 2023 and expected FDA feedback in the second or third quarter of 2023. A PMA strategy is being developed for depression.
- The proposed 50/50 joint venture with Wider had not been formed as of December 31, 2022. Formation was extended to late 2023, subject to regulatory, funding, clinical and political considerations. The filing contains differing references to September 30 and December 30, 2023 as the extended target date; this should be verified.
- COVID-19 restrictions in China delayed clinical trials, reduced distributor activity and adversely affected sales. China-related risks include evolving data-security, foreign-investment, cybersecurity, currency and regulatory requirements.
- Material contingencies include a wage and harassment lawsuit with an April 2023 trial date and no estimable loss range; an approximately $300,000 California Employment Development Department matter, for which the company accrued approximately $300,000; and a $111,094 demand from the University of Arizona that remained unresolved.
- Management identified material weaknesses in internal control over financial reporting involving inadequate segregation of duties and insufficient user-access controls over the financial reporting system. Remediation is planned, but the weaknesses had not been remediated at filing.
- Approximately 90% of 2022 revenue came from one related-party customer, creating significant customer and distributor concentration risk. The company has no manufacturing facilities and relies on third parties for manufacturing quality assurance and clinical activities.
Investor Verification Checklist
- Verify the correct 2022 loss from operations, which is reported inconsistently as $1.833 million and $1.883 million in different sections of the filing.
- Confirm the final status and applicable deadline of the proposed Wider joint venture, including funding, clinical milestones, ownership and regulatory approvals.
- Assess the sustainability and collectability of the $1.208 million of 2022 China revenue, including the related-party nature of approximately 90% of total revenue.
- Review available liquidity after operating cash burn, planned clinical and regulatory spending, and the company’s need for additional financing.
- Track FDA feedback, 510(k) submissions, PMA progress, clinical-trial enrollment and the timing of potential U.S. commercialization.
- Evaluate the $0.500 million defaulted promissory note, the unresolved legal matters and the adequacy of recorded accruals.
- Monitor remediation of the material weaknesses and the company’s ability to produce timely, reliable financial reporting.
- Consider dilution and potential share-price effects from 2.662 million warrants exercisable at $4.15 per share, future equity financing and lock-up expirations.