| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS | NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS Basis of Presentation The accompanying unaudited condensed consolidated financial information has been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position and the operating results and cash flows. Operating results for the nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”). These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021. Principles of Consolidation The consolidated financial statements include the accounts of Nexalin and its wholly-owned subsidiary Neuro-Health. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure of contingent liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ from these estimates which may cause the Company’s future results to be affected. Revenue The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. The Company has existing licensing and treatment fee agreements with its customers for the use of the Nexalin Device in their practices. These agreements generally have terms of one year with automatic renewal if certain requirements are met and amounts due per these agreements are billed monthly. The Company also sells products related to the provision of services. The Company sells its Devices in China to its acting distributor and sells products relating to the use of the Devices. The Company has a Royalty Agreement whereby the manufacturer of the Company’s electrodes will pay a royalty to the Company for a three year period beginning January 1, 2022. The amount of the Royalty is equal to 20% of the amount that the manufacturer invoices to the acting distributor for the sale of the electrodes. Revenue Streams The Company derives revenues from its license agreements by charging a monthly licensing fee for the duration of the agreement. The Company derives revenues from equipment by selling additional individual electrodes to customers for use with the Nexalin Device. The Company receives revenue from the sale in China of its Devices to its acting distributor and from the sale of products relating to the use of those Devices. The Company derives revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with the Company’s China sales. Performance Obligations Management identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied as long as the licensing contract remains valid and is not terminated. The licensing revenue is invoiced monthly and is recognized at a point in time in which the invoice is sent to the customer. Management identified that the Company’s equipment and Device revenue has one performance obligation. That performance obligation is satisfied when the equipment and Devices are shipped. The Company recognizes revenue at a point in time in which the electrodes and Devices are shipped to the customer. The Company does not offer a warranty on the electrodes and Devices. Management identified that treatment fee revenue has one performance obligation. The performance obligation is satisfied upon the completion of individual treatments on patients by customers. Management identified that royalty revenue has one performance obligation. The performance obligation is satisfied at the time the Electrode manufacturer invoices the acting distributor for the sale to the acting distributor. Practical Expedients As part of ASC 606, the Company has adopted several practical expedients including:
● Significant Financing Component — the Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised goods or services to the customer and when the customer pays for that service will be one year or less.
● Unsatisfied Performance Obligations — all performance obligations related to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC Topic 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
● Shipping and Handling Activities — the Company elected to account for shipping and handling activities as a fulfilment cost rather than as a separate performance obligation.
● Right to invoice — the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date the Company may recognize revenue in the amount to which the entity has a right to invoice. Disaggregated Revenues Major Revenue Streams Revenue consists of the following by service offering:
Schedule
of disaggregation of revenue
Three
Months Ended Nine
Months Ended
September 30, September 30,
September 30,
September 30,
Device
Sales $ 520,000 $ - $ 1,164,500 $ -
Licensing
Fee 21,113 27,329 60,561 83,266
Royalty
Fee - - 9,702 -
Equipment 4,100 28,078 22,033 36,058
Other 110 563 26,137 742
Total $ 545,323 $ 55,970 $ 1,282,933 $ 120,066 Major
Geographic Locations
Three
Months Ended Nine
Months Ended
September 30,
September 30,
September 30,
September 30,
US
Sales $ 25,323 $ 29,838 $ 89,864 $ 93,934
China
Sales 520,000 26,132 1,193,069 26,132
Total $ 545,323 $ 55,970 $ 1,282,933 $ 120,066 Contract Modifications There were no contract modifications during the nine months ended September 30, 2022 and 2021. Contract modifications are not routine in the performance of the Company’s contracts. Deferred Revenue The Company receives payment for equipment and devices in advance of shipping. The Company recognizes the revenue as being earned upon shipment. Deferred revenue of $ 0 130,000
Schedule of deferred revenue
Deferred
Revenue
Outstanding
at January 1, 2022 $ 130,000
Recognized 754,000
Transferred
to revenue (884,000 )
$ - Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less at the time of purchase and all treasury obligations to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions. Accounts Receivable Accounts receivables are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. During the nine months ended September 30, 2022 and 2021, the Company wrote off $ 11,175 - - - no Inventory Inventory consists of finished goods and components stated at the lower of cost or net realizable value with cost determined on a first-in first-out basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete, slow-moving, quantities in excess of demand, or otherwise non-saleable items. The Company did no Equipment Equipment are recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the related assets, generally five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are charged to expense as incurred. The Company capitalizes costs attributable to the betterment of property and equipment when such betterment enhances the functionality of the asset or extends the useful life of the asset. Should an asset be disposed of before the end of its useful life, the cost and accumulated depreciation at that date are removed from the consolidated balance sheets, with the resulting gain or loss, if any, reflected in operations in that period. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. Advertising and Marketing Costs The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $ 18,345 25,470 12,435 3,592 Income Taxes The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. The Company records valuation allowances against deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company routinely evaluates the realizability of deferred tax assets by assessing the likelihood that deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, historical results are considered along with certain assumptions related to future earnings. At September 30, 2022 and December 31, 2021, the Company had a full valuation allowance applied against its deferred tax assets From time to time the Company may recognize an income tax benefit, in its consolidated statements of operations, related to uncertain tax positions taken. For uncertain tax positions that are “more likely than not” to sustain an income tax audit, the Company may record an allowance against certain deferred tax assets related to these positions. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations. Fair Value Measurements As defined in ASC 820, Fair Value Measurements and Disclosures Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. Fair Value of Financial Instruments The carrying value of cash, accounts receivable, inventory, prepaids, accounts payable and accrued expenses, and other current liabilities approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the loans payable approximates the estimated fair value for this financial instrument as management believes that such debt and interest payable on the note approximates the Company’s incremental borrowing rate. Net Loss per Common Share Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The dilutive effect, if any, of warrants is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the warrants and shares issuable upon conversion have been excluded from the Company’s computation of net loss per common share for the three and nine months ended September 30, 2022 and 2021. These shares were included in the basic and diluted net loss per common share on the unaudited condensed consolidated statements of operations. The
following table summarizes the securities that would be excluded from the diluted per share calculation because the effect of
including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price
could be less than the most recent fair value of the common shares:
Schedule of antidilutive shares
Nine Months Ended
2022 2021
Warrants 2,503,850 40,800
Total 2,503,850 40,800 Stock - The Company applies the provisions of ASC 718, Compensation — Stock Compensation For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. Due to the Company’s limited history and lack of public market for its common stock, the Company used the average of historical share prices of similar companies within its industry to calculate volatility for use in the Black-Scholes option pricing model. Pursuant to ASU 2018-07 Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above. Warrant Accounting The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including
issued private and public placement stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815-40,
Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is assessed as part of this evaluation. During the reporting periods the Public Warrants were outstanding, they were precluded from liability classification, being equity-classified. The Company
accounted for these warrants in accordance with ASC 815-40. Accordingly, the Company recognized the warrants as an equity at fair
value and recorded in additional paid-in capital. The fair value of the warrants was determined using a Black-Scholes option-pricing
methodology (“Black-Scholes model”). The valuation was primarily based on observable market data while the related
theoretical warrant volatility assumption within the Black-Scholes model represented a Level 3 measurement within the fair value
measurement hierarchy. Research and Development All research and development costs are charged to operations as incurred. For the nine months ended September 30, 2022 and 2021, the Company recorded $ 154,722 111,440 113,617 33,474 Leases A lease is defined as an agreement that conveys the right to control the use of identified property, plant or equipment (right of use asset or “ROU asset”) for a period of time in exchange for consideration. The Company accounts for it leases in accordance with ASC 842, Leases, which requires that an ROU asset identified in a lease to be recorded as a noncurrent asset with a related liability. The Company does not record ROU assets for those agreements of a twelve-month duration or less. The Company recognized a ROU asset and corresponding lease liability on its balance sheets related to its office lease agreement. See Note 10 — Leases for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures. ROU assets include any initial direct costs and prepaid lease payments and exclude any lease incentives. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option. Paycheck Protection Program The Company’s policy is to account for the PPP loan as debt. The Company continued to record the loan as debt until either (1) the loan was partially or entirely forgiven and the Company had been legally released, at which point the amount forgiven would be recorded as income or (2) the Company paid off the loan. As of September 30, 2022, the Company’s outstanding PPP loan was forgiven (see Note 7). Recent Accounting Pronouncements In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its unaudited condensed consolidated financial statements. All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company. |
