10-K/A: Nexalin Amends 10-K, Reveals Worsening Losses Amid Growth

Nexalin Technology, Inc. filed an amendment to its annual report, correcting internal control disclosures and refiling financials that show increased revenue but also widening net losses and persistent going concern doubts.

Summary

• Nexalin Technology, Inc. filed an Amendment No. 2 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2024, primarily to correct wording in Management's Report on Internal Control over Financial Reporting and refile CEO/CFO certifications.
• The company reported a net loss of $7,607,182 for the year ended December 31, 2024, a significant increase from $4,648,709 in 2023.
• Total revenues increased to $168,721 in 2024 from $110,748 in 2023, driven by new device sales and substantial growth in China sales.
• Operating expenses rose significantly to $7,886,774 in 2024 from $5,781,356 in 2023, primarily due to increased selling, general, and administrative costs.
• Management concluded that disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2024, citing material weaknesses in segregation of duties and IT controls.
• The company raised $4,516,184 in net proceeds from the sale of common stock for cash in 2024.
• A joint venture in Hong Kong for Gen-2 device distribution in China and Asia generated $4,851 in equity in net earnings for 2024.
• The company continues to face substantial doubt about its ability to continue as a going concern due to accumulated deficits and ongoing operating losses.

Sentiment

Score: 3

Explanation: While revenue growth and a capital raise are positive, the significant increase in net loss, operating expenses, and cash burn, coupled with material weaknesses in internal controls and explicit going concern doubts, indicate a challenging financial position. The regulatory progress is positive but still in early stages.

Positives

• Total revenues increased by 52.3% to $168,721 in 2024 from $110,748 in 2023.
• Device sales, a new revenue stream, contributed $55,500 in 2024.
• China sales saw significant growth, increasing from $3,614 in 2023 to $85,248 in 2024.
• The company successfully raised $4,516,184 in net proceeds from a common stock offering in 2024, improving liquidity.
• Equity in net earnings from the joint venture with Wider Come Limited contributed $4,851 in 2024, a new income stream.
• Regained compliance with Nasdaq's Minimum Bid Price Rule and Minimum Stockholder Equity Rule in 2024.
• Progress made in FDA pre-submission discussions for Gen-3 HALO headset, reaching consensus on Insomnia Clinical research protocols.

Negatives

• Net loss significantly widened to $7,607,182 in 2024 from $4,648,709 in 2023.
• Loss from operations increased to $7,754,646 in 2024 from $5,696,296 in 2023.
• Total operating expenses increased substantially by 36.4% to $7,886,774 in 2024.
• Selling, general and administrative expenses more than doubled to $4,228,986 in 2024 from $1,897,031 in 2023.
• Negative cash flows from operating activities increased to $3,944,390 in 2024 from $3,835,384 in 2023.
• Accumulated deficit grew to $84,645,231 at December 31, 2024.
• Disclosure controls and procedures were deemed not effective as of December 31, 2024.
• Internal control over financial reporting was deemed not effective as of December 31, 2024, due to material weaknesses in segregation of duties and IT controls.
• U.S. sales decreased to $83,473 in 2024 from $107,134 in 2023, and licensing fees also declined.

Risks

• Going Concern Doubt: The company has incurred significant losses and expects to continue incurring operating losses and negative cash flows, raising substantial doubt about its ability to continue as a going concern.
• Regulatory Approvals: The ability to commercialize Gen-2 and Gen-3 devices in the U.S. and other territories is dependent on obtaining and maintaining FDA and other regulatory approvals, which is a lengthy and uncertain process.
• Clinical Trial Outcomes: The success of product development relies on planned clinical trials for Gen-3, and the timing and availability of data, as well as the clinical utility and potential advantages of products, are uncertain.
• Internal Control Weaknesses: Material weaknesses in internal control over financial reporting (lack of segregation of duties, insufficient IT controls) could lead to misstatements in financial statements and impair future results if not remediated.
• Nasdaq Delisting Risk: While compliance was regained, the company has repeatedly faced non-compliance issues with Nasdaq's minimum bid price and stockholder equity rules, and future delisting could adversely affect its ability to attract investors and raise capital.
• Dependence on Joint Venture: The company's revenue and future prospects are currently dependent on its joint venture relationship with Wider Come Limited, particularly for sales in China and Asia, which are subject to regional economic and regulatory conditions.
• Competition: The market for neurostimulation products is competitive, and the company's ability to differentiate its products and gain market share is uncertain.
• Intellectual Property: The company's intellectual property position and the duration of its patent rights are critical for its business.
• Litigation Risk: Ongoing legal proceedings, such as the Sarah Veltz lawsuit, could result in significant compensatory and punitive damages.

Future Outlook

The company plans to conduct decentralized clinical trials for its Gen-3 device in the U.S. and intends to extend development and commercialization globally upon FDA clearance. A new PMA application for depression treatment utilizing Gen-2 and Gen-3 is in strategic development. Pilot and/or pivotal trials for the Gen-3 device for anxiety and insomnia are planned to begin in the first quarter of 2025 in the United States, Brazil, and China. The company expects to continue incurring operating losses and negative cash flows at least into the near future as it executes its development plans and strategic initiatives through 2025.

Management Comments

• Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms due to the material weakness described below.
• Our Certifying Officers concluded that, as of the evaluation date, our internal control over financial reporting were not effective due to the following material weaknesses: Lack of sufficient resources necessary to provide adequate segregation of duties related to the preparation and review of financial information used in financial reporting and review of controls over the financial reporting process; and Insufficient IT controls which are effectively designed and implemented, specifically related to user/superuser access to the Company's financial reporting system.
• To address our material weakness, we intend to implement new financial accounting controls and processes. We intend to continue to take steps to remediate the material weakness described above through implementing enhancements and controls within our accounting systems, subject to budget limitations.
• The Nexalin research team believes that the new 15 milliamp Gen-2 and Gen-3 devices can penetrate deeper into the brain and stimulate associated structures that contribute to or cause mental illness, which we believe will generate enhanced patient response without any risk or unpleasant side effects.
• The Nexalin regulatory team has made a strategic decision to develop strategies for pilot trials and/or pivotal trials in various mental health disease states.
• Management has evaluated the significance of the conditions as of December 31, 2024 and have concluded that we will not have sufficient cash and short-term investments to satisfy our anticipated cash requirements for the next twelve months from the issuance of these financial statements.

Industry Context

The company operates in the neurostimulation and bioelectronic medical technology sector, specifically targeting mental health conditions like anxiety, insomnia, and depression. This industry is characterized by stringent regulatory requirements (e.g., FDA, CE-mark), significant R&D investment, and the need for clinical validation. The shift towards advanced waveform technologies (15 milliamps) and decentralized clinical trials for devices like Gen-3 reflects broader trends in medical device innovation and telehealth integration. The company's focus on non-drug, non-psychotherapy treatments positions it within a growing segment seeking alternative mental health solutions. Its expansion into China through a joint venture highlights the global market potential for such devices, particularly in regions with evolving regulatory landscapes and unmet medical needs.

Management Changes

Corporate Governance

Legal Proceedings

• Sarah Veltz v. Nexalin Technology, Inc. et al.: Lawsuit filed January 20, 2021, in Orange County Superior Court, alleging unpaid wages, overtime, other benefits, and sexual harassment by the company's then Chief Executive Officer. The company intends to contest vigorously, and a trial is set for June 9, 2025.
• Employment Development Department (EDD) of the State of California: Settlement discussions regarding misclassification of certain work as contract labor instead of employee labor. The total amount involved was approximately $300,000, later reduced to $40,000. The company has accrued $40,000 and is in negotiations for a settlement offer.

Related Party Transactions

• U.S. Asian Consulting Group, LLC: Consulting agreement extended for eight years and amended effective July 1, 2024, to expand services. Monthly fee increased from $10,000 to $16,667. A one-time stock grant and semi-annual share award of $100,000 are also part of the amended agreement. Marilyn Elson, the company's Controller, is a member of U.S. Asian.
• Leonard Osser: Issued 200,000 shares of company stock as compensation for 2024 services on the Advisory Board, resulting in $196,000 of stock compensation expense.
• Officers (Mark White, David Owens, Michael Nketiah, Carolyn Shelton): Received significant stock option grants and cash bonuses based on performance and service. Mark White (CEO) received a $50,000 sign-on bonus, 1,387,024 stock options, and 2023/2024 performance-based cash bonuses ($120,000 and $220,000 respectively) and additional stock options (313,199 each year). David Owens (CMO) received 654,362 stock options, and 2023/2024 performance-based stock options (271,454 each year), plus an additional 125,000 vested options. Michael Nketiah (former SVP) received 100,671 stock options and a $50,000 cash bonus for 2023 performance. Carolyn Shelton (new SVP) received 90,620 stock options.
• IIcom Strategic Inc. (controlled by CEO Mark White): The company has sub-leases for its principal executive office through this entity. A new one-year sublease was entered into, with the company paying the third-party landlord directly for rent costs, and no additional payments made to the CEO or his controlled entity.
• Wider Come Limited and Affiliates: Issued 331,818 shares of common stock to Wider and its affiliates in 2024 in satisfaction of obligations under their collaborative agreement and for continuing research and development efforts.

Stakeholder Impact

• Shareholders: Experienced dilution from the 2024 capital raise and stock compensation. Face significant risk due to ongoing losses, going concern doubt, and internal control weaknesses. Potential for future value creation if new devices gain regulatory approval and market traction.
• Employees/Management: Received substantial stock-based compensation and cash bonuses, aligning incentives with company performance. Management changes occurred in a key regulatory role.
• Customers: Continued support for Gen-1 devices, but new sales/marketing paused in the U.S. for Gen-1. Potential for new Gen-2/Gen-3 devices if regulatory approvals are secured.
• Creditors: The company's ability to meet obligations is under 'substantial doubt' as a going concern, which could impact creditors.
• Regulatory Bodies (FDA): Ongoing engagement with the FDA for Gen-2/Gen-3 device approvals, including pre-submission documents and meetings, indicating active compliance efforts.

Next Steps

• Implement new financial accounting controls and processes to remediate material weaknesses in internal control over financial reporting.
• Continue taking steps to enhance and implement controls within accounting systems, subject to budget limitations.
• Conduct decentralized clinical trials for the Gen-3 device in the U.S.
• Extend the development and commercialization of devices for sale in the U.S. and other territories upon FDA clearance.
• Develop a strategic schedule to execute additional pilot trials and/or pivotal trials for the new Gen-3 device for anxiety and insomnia in the United States, Brazil, and China beginning in the first quarter of 2025.
• Pursue a new PMA application in the United States for the treatment of depression utilizing both Gen-2 and Gen-3.
• Utilize data from clinical trials to support an application for the CE-mark of Gen-2 and Gen-3 headset devices in the European Union.
• Continue discussions with the FDA regarding the suspension of marketing and sale of Gen-1 products to new providers.
• Contest allegations vigorously in the Sarah Veltz v. Nexalin Technology, Inc. et al. lawsuit, with a trial set for June 9, 2025.
• Continue negotiations with the Employment Development Department (EDD) of the State of California regarding the accrued $40,000 liability.

Key Dates

Recommendation

The filing highlights a deteriorating financial position with significantly increased net losses and operating cash burn, despite a capital raise. The explicit 'substantial doubt' about the company's ability to continue as a going concern, coupled with identified material weaknesses in internal controls, signals high operational and financial risk. While there is some revenue growth and regulatory progress, these are overshadowed by the fundamental financial instability and control deficiencies. A seasoned investor would likely view these factors as strong indicators to exit or avoid the stock due to the elevated risk profile and lack of clear path to profitability or sustained financial health.

Keywords

Neurostimulation, Mental Health, SEC Filing, 10-K/A, Financial Reporting, Internal Controls, FDA Approval, Clinical Trials, Going Concern, Nasdaq Listing, Joint Venture, Medical Device, Anxiety, Insomnia, Depression, Biotechnology