Nexalin Technology(NXL) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's financial statements, management's analysis, market risk, and internal controls assessment Item 1. Financial Statements Nexalin Technology reported a significant Q1 2025 revenue decrease and wider net loss, with reduced assets and going concern doubts despite a May 2025 public offering Condensed Consolidated Balance Sheet Summary | Metric | March 31, 2025 (Unaudited) | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $2,620,591 | $3,961,141 | | Total Assets | $2,900,111 | $4,222,732 | | Total Current Liabilities | $574,736 | $546,694 | | Total Stockholders' Equity | $2,325,375 | $3,676,038 | Condensed Consolidated Statement of Operations Summary | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Revenues, net | $41,015 | $78,671 | | Gross profit | $27,457 | $69,515 | | Loss from operations | $(2,011,225) | $(1,073,712) | | Net loss | $(1,988,337) | $(1,041,157) | | Net loss per share | $(0.15) | $(0.14) | Condensed Consolidated Statement of Cash Flows Summary | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,426,214) | $(763,289) | | Net cash provided by investing activities | $1,473,758 | $729,314 | | Cash and cash equivalents - end of period | $622,029 | $546,255 | Note 1: Nature of the Organization and Business The company develops neurostimulation products, focusing on Gen-2/3 FDA pre-submission, managing a joint venture, and addressing Nasdaq compliance - The company designs and develops neurostimulation products for mental health, with its Gen-1 device facing U.S. marketing restrictions following a 2019 FDA reclassification[23][24] - The company is now focused on developing its next-generation devices, Gen-2 (SYNC) and Gen-3 (HALO), which use a more powerful 15 milliamp waveform and are currently in the FDA's pre-submission process[26] - A joint venture was formed on May 31, 2023, with Wider Come Limited to develop, market, and sell the Gen-2 SYNC device in China and other Asian countries, with Nexalin owning 48% of the JV and accounting for it using the equity method[40][43] - The company has faced and regained compliance with Nasdaq's minimum bid price and minimum stockholder equity requirements, highlighting ongoing risks to its stock listing[48][51][52] Note 2: Liquidity The company faces substantial going concern doubt due to accumulated deficit, operating losses, and negative cash flow, despite a recent public offering - The company's financial statements were prepared on a going concern basis, but significant factors raise substantial doubt about its ability to continue, including an accumulated deficit of approximately $86.7 million, a Q1 operating loss of $2.0 million, and negative operating cash flow of $1.4 million as of March 31, 2025[54] - Management believes that a public offering completed on May 6, 2025, provides sufficient cash for the next twelve months, though these plans were deemed insufficient to overcome the presumption of substantial doubt about the company's ability to continue as a going concern[56] Note 7: Commitments and Contingencies The company settled the Sarah Veltz lawsuit and is in discussions with the California EDD regarding worker classification issues - The company entered into a confidential settlement agreement on May 12, 2025, to resolve the Sarah Veltz lawsuit, with the settlement amount not expected to have a material effect on the company's financials[119] - The company is in settlement discussions with the California Employment Development Department (EDD) regarding worker classification issues, with the potential liability reduced to approximately $40,000, which has been accrued[120] Note 8: Concentration of Credit Risk The company faces significant customer concentration risk, with a few customers accounting for a large portion of revenues and accounts receivable - The company has significant customer concentration risk, with two customers accounting for 50% of revenues for the three months ended March 31, 2025[122] - As of March 31, 2025, three customers accounted for 90% of accounts receivable[123] Note 10: Subsequent Events A public offering completed on May 6, 2025, raised approximately $5.005 million in gross proceeds for the company - On May 6, 2025, the company completed a public offering of 3,850,000 shares of common stock, raising aggregate gross proceeds of approximately $5,005,000[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2025 revenue declined 48% with net loss widening 91% due to higher operating expenses, highlighting liquidity concerns despite a recent $5 million equity offering and Gen-2 device approvals Results of Operations Q1 2025 revenue declined due to lower device sales, while operating expenses increased significantly, leading to a wider net loss Comparison of Operations (Q1 2025 vs Q1 2024) | Metric | Q1 2025 | Q1 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $41,015 | $78,671 | $(37,656) | (48%) | | Gross Profit | $27,457 | $69,515 | $(42,058) | (61%) | | Total Operating Expenses | $2,038,682 | $1,143,227 | $895,455 | 78% | | Loss from Operations | $(2,011,225) | $(1,073,712) | $(937,513) | 87% | | Net Loss | $(1,988,337) | $(1,041,157) | $(947,180) | 91% | - The decrease in revenue was primarily due to the sale of devices to a new overseas customer in Q1 2024, which was not repeated in Q1 2025[155] - The significant increase in operating expenses was driven by higher professional fees (approximately $140,000), R&D costs (approximately $301,000), and stock compensation (approximately $475,000)[157] Liquidity and Capital Resources The company continues to incur operating losses and negative cash flows, funding operations through equity sales, with a recent offering expected to cover the next twelve months - As of March 31, 2025, the company had an accumulated deficit of $86.7 million and cash of approximately $622,000, continuing to incur operating losses and negative cash flows, funding these primarily through equity sales[163] - Management believes the capital raised from the May 2025 public offering will be sufficient to satisfy cash requirements for the next twelve months, but acknowledges this is not sufficient to overcome the substantial doubt about the company's ability to continue as a going concern[165] Recent Developments The company received regulatory approvals for its Gen-2 device in the Sultanate of Oman and Brazil, expanding its international market access - The company received conditional approval for its Gen-2 device from the Ministry of Health in the Sultanate of Oman, with the first device shipped in January 2024[152] - On June 13, 2024, the Gen-2 device was granted regulatory approval by the Brazilian Health Regulatory Agency[153] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Nexalin is not required to provide the information for this item[180] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025, due to material weaknesses in segregation of duties and IT controls, with remediation efforts underway - Management identified material weaknesses in internal control over financial reporting and concluded that disclosure controls and procedures were not effective as of March 31, 2025[181][182] - The specific material weaknesses include: (i) lack of adequate segregation of duties related to financial reporting, and (ii) insufficient IT controls, particularly regarding user access to the financial reporting system[181] - The company intends to engage an outside firm and implement new controls to remediate the material weaknesses, but no material changes to internal controls were made during the quarter[182][184] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, and a list of exhibits filed with the report Item 1. Legal Proceedings This section states there are no material pending legal proceedings - The report states there are no material pending legal proceedings under this item[185] Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024 - There have been no material changes from the risk factors previously disclosed in the company's 2024 Form 10-K[186][187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds from registered securities during the period - None reported for the period[188] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including underwriting agreements, corporate governance documents, material contracts such as employment and joint venture agreements, and officer certifications - The report includes a list of exhibits filed, such as an Underwriting Agreement dated May 4, 2025, various employment and consulting agreements, and certifications from the Principal Executive Officer[193]