| 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 statements have been prepared in accordance with Generally Accepted Accounting
Principles in the United States (“GAAP”). 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, 2024 and 2023 are not necessarily
indicative of the results that may be expected for any other subsequent interim period. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of 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, 2023. Principles
of Consolidation The
unaudited condensed 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 unaudited condensed consolidated 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 consolidated 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers 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 our 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. We receive
revenue from the sale in China of our Devices to our distributor and from the sale of products relating to the use of those Devices.
We derive revenue as a royalty fee from the China-based manufacturer for electrodes ordered in connection with our China sales. Disaggregated
Revenues Major
Revenue Streams Revenue
consists of the following by service offering:
Schedule of disaggregation of revenue
Three Months Ended
2024 2023
Device sales $ - $ -
Licensing fee 16,941 18,664
Equipment 18,802 5,179
Other 288 270
Total $ 36,031 $ 24,113
Nine Months Ended
2024 2023
Device sales $ 55,500 $ 9,600
Licensing fee 54,561 62,566
Equipment 30,423 16,679
Other 1,058 1,367
Total $ 141,542 $ 90,212 Major
Geographic Locations
Three Months Ended
2024 2023
U.S. sales $ 20,664 $ 24,113
International sales 15,367 -
Total $ 36,031 $ 24,113
Nine Months Ended
2024 2023
U.S. sales $ 65,523 $ 80,005
International sales 76,019 10,207
Total $ 141,542 $ 90,212 Cash
and Cash Equivalents The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase 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, with major financial institutions. Short-Term
Investments The
appropriate classification of marketable securities is determined at the time of purchase and evaluated as of each reporting balance
sheet date. Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair value
is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or
liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities. Unrealized holding gains and losses for equity securities are recognized in earnings. Unrealized holding gains
and losses for available for sale debt securities are recognized in other comprehensive income (loss.) Realized gains and losses and
interest and dividends earned are included in other income (expense), net. For individual debt securities classified as available-for-sale
securities, the Company determines whether a decline in fair value below the amortized cost basis has resulted from a credit loss or
other factors. If the decline below amortized cost is a result of credit loss or the Company will more likely than not be required to
sell the security before recovery of its amortized cost basis, the Company will recognize an impairment relating to the decline through
an allowance for credit losses. There were no deemed permanent impairments for the three and nine months ended September 30, 2024
and 2023, respectively. Patents
and Trademarks Patents
and trademarks are amortized over their useful lives and are reviewed for impairment when warranted by economic conditions. Amortization
expense was $ 10,666 2,105 4,211 753 The
following table summarizes the gross carrying amount, amortization and the net carrying value at September 30, 2024 and December 31,
2023.
Schedule of patents
Gross Carrying Accumulated Net Carrying
September 30,
2024
Patents $ 200,906 $ (10,680 ) $ 190,226
Trademarks 62,717 (4,001 ) 58,716
Total September 30, 2024 $ 263,623 $ (14,681 ) $ 248,942
December 31,
2023
Patents $ 98,970 $ (3,751 ) $ 95,219
Trademarks 10,573 (264 ) 10,309
Total December 31, 2023 $ 109,543 $ (4,015 ) $ 105,528 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. At September 30, 2024 and December 31, 2023, the Company had a full valuation allowance applied
against its net tax assets. 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, short-term investments, 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. The
following table summarizes the amortized cost, unrealized gain (loss) and the fair value at September 30, 2024 and December 31,
2023.
Schedule of unrealized loss on investments
Amortized Cost Unrealized Gain Fair Value
September 30, 2024
Short-term investments $ 4,512,522 $ (325 ) $ 4,512,197
Total September 30, 2024 $ 4,512,522 $ (325 ) $ 4,512,197
December 31, 2023
Short-term investments $ 2,368,608 $ (405 ) $ 2,368,203
Total December 31, 2023 $ 2,368,608 $ (405 ) $ 2,368,203 The
following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of September 30,
2024 and December 31, 2023.
Schedule of fair value, assets measured on recurring basis
Carrying Value Level 1 Level 2 Level 3
September 30, 2024
U.S. Treasury Notes $ 4,512,197 $ 4,512,197 $ - $ -
December 31, 2023
U.S. Treasury Notes $ 2,368,203 $ 2,368,203 $ - $ - As
defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes
market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and
the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally
unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the
lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent
measurement for the three months ended September 30, 2024 and 2023. Net
Loss per Common Share 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
Three Months Ended
2024 2023
Warrants 2,662,250 2,662,250
Stock options 2,863,129 -
Total 5,525,379 2,662,250
Nine Months Ended
2024 2023
Warrants 2,662,250 2,662,250
Stock options 2,863,129 -
Total 5,525,379 2,662,250 Stock-Based
Compensation 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. Pursuant
to ASU 2018-07 Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the
Company accounts for stock options and restricted shares 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. Research
and Development Research
and development costs are charged to operations as incurred. For the nine months ended September 30, 2024 and 2023, the Company
recorded $ 453,643 1,842,341 178,565 1,638,508 Recent
Accounting Pronouncements In
August of 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (“JV”) Formations: Recognition and
Initial Measurement. The guidance requires newly formed JVs to apply a new basis of accounting to all of its contributed net assets,
which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would
be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1,
2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and does not
expect them to have a material effect on the consolidated financial statements. In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. In
December of 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, establishes incremental
disaggregation of income tax disclosures pertaining to the effective tax rate reconciliation and income taxes paid. This standard is
effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively.
Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this standard on our disclosures. All
other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company. |
