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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission file number: 001-41507

NEXALIN TECHNOLOGY, INC.

(Exact name of Registrant as specified in its charter)

Delaware |  | 27-5566468
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

1776 Yorktown, Suite 550 Houston, TX 77056 |  | 77056
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (832) 260-0222

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common stock, par value $0.001 per share |  | NXL |  | The Nasdaq Capital Market
Warrants, exercisable for one share of Common Stock |  | NXLIW |  | The Nasdaq Capital Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer | ☐ | Accelerated Filer | ☐
Non-Accelerated Filer | ☒ | Smaller Reporting Company | ☒
|  | Emerging Growth Company | ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 6, 2024, there were 10,586,562 shares of the Registrant’s common stock outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward- looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.

You should read thoroughly this Quarterly Report with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by risk factors included in our Registration Statement on Form S-1 (SEC File Number 333-279684) as declared effective by the Securities and Exchange Commission (“SEC”) on June 27, 2024 and the Prospectus contained therein, which risk factors could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

FORM 10-Q

For the Quarter Ended June 30, 2024

|  | Page
PART I. FINANCIAL INFORMATION |  |
ITEM 1. |  | Financial Statements |  | 1
|  | Condensed Consolidated Balance Sheets at June 30, 2024 (unaudited) and December 31, 2023 |  | 1
|  | Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2024 and 2023 |  | 2
|  | Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2024 and 2023 |  | 3
|  | Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2024 and 2023 |  | 4
|  | Notes to Unaudited Condensed Consolidated Financial Statements |  | 5
ITEM 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 23
ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  | 35
ITEM 4. |  | Controls and Procedures |  | 35
PART II. OTHER INFORMATION |  |
ITEM 1. |  | Legal Proceedings |  | 36
ITEM 1A. |  | Risk Factors |  | 36
ITEM 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 36
ITEM 3. |  | Defaults Upon Senior Securities |  | 36
ITEM 4. |  | Mine Safety Disclosures |  | 36
ITEM 5. |  | Other Information |  | 36
ITEM 6. |  | Exhibits |  | 37
SIGNATURES |  | 38

i

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

|  | June 30, |  |  | December 31, |
|  | 2024 |  |  | 2023 |
|  | (Unaudited) |  |  |  |
ASSETS |  |  |  |  |  |  |  |
Current Assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 848,796 |  |  | $ | 580,230 |
Short-term investments |  |  | - |  |  |  | 2,368,203 |
Accounts receivable (Includes related party of $1,933 and $3,614, respectively) |  |  | 11,720 |  |  |  | 9,369 |
Inventory |  |  | 145,141 |  |  |  | 156,420 |
Prepaid expenses and other current assets |  |  | 176,486 |  |  |  | 315,670 |
Total Current Assets |  |  | 1,182,143 |  |  |  | 3,429,892 |
ROU Asset |  |  | - |  |  |  | 496 |
Intangible assets, net |  |  | 226,077 |  |  |  | 105,528 |
Equity method investment |  |  | 100,492 |  |  |  | 96,000 |
Other assets |  |  | 54,414 |  |  |  | - |
Total Assets |  | $ | 1,563,126 |  |  | $ | 3,631,916 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 87,138 |  |  | $ | 159,534 |
Accrued expenses |  |  | 124,966 |  |  |  | 261,284 |
Lease liability, current portion |  |  | - |  |  |  | 4,463 |
Total Current Liabilities |  |  | 212,104 |  |  |  | 425,281 |
Total Liabilities |  |  | 212,104 |  |  |  | 425,281 |
Commitments and Contingencies (Note 7) |  |  |  |  |  |  |  |
Stockholders’ Equity: |  |  |  |  |  |  |  |
Common stock, $0.001 par value; 100,000,000 shares authorized; 7,586,562 shares issued and outstanding at June 30, 2024 and 7,436,852 issued and outstanding at December 31, 2023 |  |  | 7,587 |  |  |  | 7,437 |
Accumulated other comprehensive income (loss) |  |  | - |  |  |  | (405 | )
Additional paid in capital |  |  | 80,707,134 |  |  |  | 80,237,652 |
Accumulated deficit |  |  | (79,363,699 | ) |  |  | (77,038,049 | )
Total Stockholders’ Equity |  |  | 1,351,022 |  |  |  | 3,206,635 |
Total Liabilities and Stockholders’ Equity |  | $ | 1,563,126 |  |  | $ | 3,631,916 |

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

1

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Revenues, net (Includes related party of $0 and $10,207 for the three months ended and $0 and $10,207 for the six months ended, respectively) |  | $ | 26,840 |  |  | $ | 35,540 |  |  | $ | 105,511 |  |  | $ | 66,100 |
Cost of revenues |  |  | 7,247 |  |  |  | 9,374 |  |  |  | 16,403 |  |  |  | 16,484 |
Gross profit |  |  | 19,593 |  |  |  | 26,166 |  |  |  | 89,108 |  |  |  | 49,616 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Professional fees |  |  | 240,967 |  |  |  | 120,147 |  |  |  | 468,796 |  |  |  | 278,747 |
Salaries and benefits |  |  | 307,480 |  |  |  | 303,334 |  |  |  | 633,897 |  |  |  | 602,657 |
Selling, general and administrative |  |  | 768,167 |  |  |  | 479,545 |  |  |  | 1,357,148 |  |  |  | 824,498 |
Total operating expenses |  |  | 1,316,614 |  |  |  | 903,026 |  |  |  | 2,459,841 |  |  |  | 1,705,902 |
Loss from operations |  |  | (1,297,021 | ) |  |  | (876,860 | ) |  |  | (2,370,733 | ) |  |  | (1,656,286 | )
Other income (expense), net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income (expense), net |  |  | 66 |  |  |  | (5,518 | ) |  |  | 370 |  |  |  | (14,355 | )
Gain on sale of short-term investments |  |  | 11,719 |  |  |  | 58,878 |  |  |  | 36,665 |  |  |  | 97,650 |
Other income |  |  | 2,034 |  |  |  | 1,063 |  |  |  | 3,556 |  |  |  | 2,140 |
Total other income (expense), net |  |  | 13,819 |  |  |  | 54,423 |  |  |  | 40,591 |  |  |  | 85,435 |
Loss before equity in net earnings of affiliate |  |  | (1,283,202 | ) |  |  | (822,437 | ) |  |  | (2,330,142 | ) |  |  | (1,570,851 | )
Equity in net earnings of affiliate |  |  | (1,291 | ) |  |  | - |  |  |  | 4,492 |  |  |  | - |
Net loss |  |  | (1,284,493 | ) |  |  | (822,437 | ) |  |  | (2,325,650 | ) |  |  | (1,570,851 | )
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) from short-term investments |  |  | 245 |  |  |  | (7,980 | ) |  |  | 405 |  |  |  | (3,224 | )
Comprehensive loss |  | $ | (1,284,248 | ) |  | $ | (830,417 | ) |  | $ | (2,325,245 | ) |  | $ | (1,574,075 | )
Net loss per share attributable to common stockholders - Basic and Diluted |  | $ | (0.17 | ) |  | $ | (0.11 | ) |  | $ | (0.31 | ) |  | $ | (0.22 | )
Weighted Average Shares Outstanding - Basic and Diluted |  |  | 7,497,551 |  |  |  | 7,286,562 |  |  |  | 7,467,225 |  |  |  | 7,286,562 |

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

2

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

|  | Common Stock |  |  | Accumulated Other Comprehensive |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Gain (Loss) |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance as January 1, 2023 |  |  | 7,286,562 |  |  | $ | 7,287 |  |  | $ | 36,313 |  |  | $ | 77,824,427 |  |  | $ | (72,389,340 | ) |  | $ | 5,478,687 |
Other comprehensive gain |  |  | - |  |  |  | - |  |  |  | 4,756 |  |  |  | - |  |  |  | - |  |  |  | 4,756 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (748,414 | ) |  |  | (748,414 | )
Balance as of March 31, 2023 |  |  | 7,286,562 |  |  | $ | 7,287 |  |  | $ | 41,069 |  |  | $ | 77,824,427 |  |  | $ | (73,137,754 | ) |  | $ | 4,735,029 |
Other comprehensive gain |  |  | - |  |  |  | - |  |  |  | (7,980 | ) |  |  | - |  |  |  | - |  |  |  | (7,980 | )
Stock compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 88,388 |  |  |  | - |  |  |  | 88,388 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (822,437 | ) |  |  | (822,437 | )
Balance as of June 30, 2023 |  |  | 7,286,562 |  |  | $ | 7,287 |  |  | $ | 33,089 |  |  | $ | 77,912,815 |  |  | $ | (73,960,191 | ) |  | $ | 3,993,000 |

|  | Common Stock |  |  | Accumulated Other Comprehensive |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Gain (Loss) |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance as of January 1, 2024 |  |  | 7,436,562 |  |  | $ | 7,437 |  |  | $ | (405 | ) |  | $ | 80,237,652 |  |  | $ | (77,038,049 | ) |  | $ | 3,206,635 |
Other comprehensive gain |  |  | - |  |  |  | - |  |  |  | 160 |  |  |  | - |  |  |  | - |  |  |  | 160 |
Stock compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 161,349 |  |  |  | - |  |  |  | 161,349 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,041,157 | ) |  |  | (1,041,157 | )
Balance as of March 31, 2024 |  |  | 7,436,562 |  |  | $ | 7,437 |  |  | $ | (245 | ) |  | $ | 80,399,001 |  |  | $ | (78,079,206 | ) |  | $ | 2,326,987 |
Other comprehensive gain |  |  | - |  |  |  | - |  |  |  | 245 |  |  |  | - |  |  |  | - |  |  |  | 245 |
Stock compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 308,283 |  |  |  | - |  |  |  | 308,283 |
Shares issued |  |  | 150,000 |  |  |  | 150 |  |  |  | - |  |  |  | (150 | ) |  |  | - |  |  |  | - |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,284,493 | ) |  |  | (1,284,493 | )
Balance as of June 30, 2024 |  |  | 7,586,562 |  |  | $ | 7,587 |  |  | $ | - |  |  | $ | 80,707,134 |  |  | $ | (79,363,699 | ) |  | $ | 1,351,022 |

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

3

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

|  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (2,325,650 | ) |  | $ | (1,570,851 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Stock compensation |  |  | 469,632 |  |  |  | 88,388 |
Depreciation |  |  | - |  |  |  | 268 |
Amortization |  |  | 6,454 |  |  |  | 1,352 |
Non-cash lease expense |  |  | 496 |  |  |  | 2,774 |
Gain on sale of short-term investments |  |  | (36,665 | ) |  |  | (97,650 | )
Share of net income from equity method investment |  |  | (4,492 | ) |  |  | - |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (418 | ) |  |  | (9,447 | )
Accounts receivable - related party |  |  | (1,933 | ) |  |  | - |
Prepaid assets |  |  | 139,184 |  |  |  | 31,371 |
Inventory |  |  | 11,279 |  |  |  | (5,637 | )
Other assets |  |  | (54,414 | ) |  |  | - |
Accounts payable - related party |  |  | - |  |  |  | (260,000 | )
Accounts payable |  |  | (72,396 | ) |  |  | (349,866 | )
Accrued expenses |  |  | (136,318 | ) |  |  | 63,811 |
Lease liability |  |  | (4,463 | ) |  |  | (24,773 | )
Net cash used in operating activities |  |  | (2,009,704 | ) |  |  | (2,130,260 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Sale of short-term investments |  |  | 9,169,596 |  |  |  | 21,155,143 |
Purchase of short-term investments |  |  | (6,764,323 | ) |  |  | (18,694,446 | )
Purchase of patents |  |  | (80,120 | ) |  |  | (61,458 | )
Purchase of trademarks |  |  | (46,883 | ) |  |  | - |
Net cash provided by investing activities |  |  | 2,278,270 |  |  |  | 2,399,239 |
Cash flows from financing activities: |  |  |  |  |  |  |  |
Payments on notes payable - officer |  |  | - |  |  |  | (200,000 | )
Net cash used in financing activities |  |  | - |  |  |  | (200,000 | )
Net increase in cash and cash equivalents |  |  | 268,566 |  |  |  | 68,979 |
Cash and cash equivalents - beginning of period |  |  | 580,230 |  |  |  | 162,743 |
Cash and cash equivalents - end of period |  | $ | 848,796 |  |  | $ | 231,722 |
Non-cash investing and financing activities: |  |  |  |  |  |  |  |
Unrealized gain on short-term investments |  | $ | 405 |  |  | $ | (3,224 | )

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

4

NEXALIN TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF THE ORGANIZATION AND BUSINESS

Corporate History

Nexalin Technology, Inc. (“NV Nexalin”) was formed on October 19, 2010 as a Nevada corporation. The Company’s principal offices are located at 1776 Yorktown, Suite 550, Houston, Texas 77056.

On September 6, 2019, Neuro-Health International, Inc. (“Neuro-Health”), a Nevada corporation, a wholly owned subsidiary of NV Nexalin, was formed. Neuro-Health had no activity from December 6, 2019 (Inception) through June 30, 2024.

Our shares and warrants began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market (“Nasdaq”) on September 16, 2022, under the symbols “NXL” and “NXLIW”, respectively.

On July 1, 2024, we consummated a follow-on public offering of an aggregate of 3,000,000 shares of the Common Stock for an offering price of $1.75 per share, resulting in aggregate gross proceeds of approximately $5,250,000. The Company intends to use the net proceeds of such offering primarily for general corporate purposes, which may include, but is not limited to, working capital, operating expenses, and capital expenditures.

Throughout this report, the terms “Nexalin,” “our,” “we,” “us,” and the “Company” refer to Nexalin Technology, Inc.

Business Overview

Nexalin is headquartered, and maintains its base of management and operations, in Houston, Texas. We design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic. We developed an easy-to-administer medical device — referred to as “Generation 1” or “Gen-1” — that utilizes bioelectronic medical technology to treat anxiety and insomnia and depression, without the need for drugs or psychotherapy. Our original Gen-1 devices are cranial electrotherapy stimulation (CES) devices that emit waveform at 4 milliamps during treatment and are presently classified by the U.S. Food and Drug Administration (the “FDA”) as a Class II device.

Medical professionals in the United States have utilized the Gen-1 device to administer to patients in clinical settings. While the Gen-1 device had been cleared by the FDA to treat depression, anxiety, and insomnia, three prevalent and serious diseases, because of the FDA’s December 2019 reclassification of CES devices, the Gen-1 device was reclassified as a Class II device for the treatment of anxiety and insomnia. We are required to file a new application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the sales and marketing of our devices for the treatment of anxiety and insomnia. In the FDA’s December 2019 reclassification ruling, the treatment of depression with our device will require a Class III certification and require a new PMA (premarket approval) and/or a new Denovo application to demonstrate safety and effectiveness.

While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices in the United States. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licensing fees and payments for the sale of electrodes and patient cables. We have suspended marketing efforts for new sales of devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team decides on a new 510(k) application at 4 milliamps based on FDA comments expected to be received in late 2024. Our regulatory team continues to inform the FDA of the suspension of the marketing and sale of the Gen-1 products to new providers. We are currently analyzing whether to proceed with an amended application with the FDA for Gen-1 devices for the treatment of insomnia and anxiety.

5

The waveform that comprises the basis of our “Generation 2” or “Gen-2” and new “Generation 3” or “Gen-3” headset devices is in pre-submission for review by the FDA for safety evaluation and eventual marketing in the United States. Determinations of the safety and efficacy of our devices in the United States are solely within the authority of the FDA. We plan to conduct decentralized clinical trials for the Gen-3 device in the U.S. and we continue to consult with the FDA as part of the pre-submission meetings. If and when we obtain FDA clearance for the Gen-3 device, we intend to extend the development and commercialization of our devices for sale in the U.S. and other territories, given the potential unmet demand for the treatment of mental health conditions with our device.

We have designed and developed a new advanced waveform technology to be emitted at 15 milliamps through new and improved medical devices referred to as Gen-2 and Gen-3. Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that will be prescribed by licensed medical professionals in a virtual clinic setting similar to existing tele-health platforms. 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 of 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. In addition, a new PMA application in the United States is in strategic development for the treatment of depression utilizing both Gen-2 and Gen-3. We plan to schedule additional pilot trials and/or pivotal trials for the new Gen-3 device for anxiety and insomnia in the United States and China beginning in the late third quarter or early fourth quarter of 2024. Preliminary data provided by The University of California, San Diego and recent published data from Asia supports the safety of utilizing our 15 milliamp waveform technology. However, the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA.

Currently, the waveform that comprises the basis of Gen-2 and new Gen-3 headset devices has been tested in research settings to develop safety data that has been submitted for review by the FDA for safety evaluation and eventual marketing in the United States and around the world. Determinations of the safety and efficacy of our devices in the United States are solely within the authority of the FDA.

A new pre-submission document in preparation of a new 510(k) and/or de novo application for our Gen-3 HALO headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments to our pre-submission document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023.

A second FDA pre-submission document was submitted on February 13, 2024. FDA comments to this second pre-submission document were received on April 26, 2024. A formal teleconference was held with the FDA on April 30, 2024. The Nexalin regulatory team and the FDA came to a consensus on the Anxiety and Insomnia Clinical research protocols.

On May 31, 2023, the Company formalized an agreement related to the formation of a joint venture established to engage in the clinical development, marketing, sale and distribution of Nexalin’s second generation transcranial Alternating Current Stimulation (“tACS”) devices (“Gen-2 devices”) in China and other countries in the region. The Joint Venture is registered in Hong Kong.

Under the Joint Venture Agreement, Wider Come Limited (“Wider”), a related party, is obligated to fund all operations for the initial 12-month period of the Joint Venture, after which Nexalin and Wider plan to jointly fund the Joint Venture’s operating expenses in accordance with their pro rata ownership. The Joint Venture conducts research, development and clinical studies of our devices, which supplements similar activities being conducted by Nexalin in the United States. The Joint Venture is responsible for funding all clinical trial and development costs incurred in China. We share associated economic responsibility for these expenses under the terms of the Joint Venture Agreement. The Joint Venture may provide the financial resources for, and– together with our clinical studies conducted in the U.S. - serve as an important regulatory precursor towards the advancement of our efforts in securing 510(k) and/or Denovo clearance from the FDA for our devices.

As of the date of this Quarterly Report on Form 10-Q, we have no employees or office in China and none of our operations are conducted in China. The Joint Venture does not maintain any variable interest entity structure or operate any data center in China.

6

The Joint Venture is controlled by a Board of Directors in which Wider is to have sole representation but neither the Company nor Wider has exclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin own 52% and 48% of the Joint Venture, respectively. In accordance with ASC 323 Investments - Equity Method and Joint Ventures (“ASC 323”) and ASC 810 - Consolidations (“ASC 810”), the Company recognized $(1,291) and $0 for the three months ended June 30, 2024 and 2023 and $4,492 and $0 for the six months ended June 30, 2024 and 2023 of equity method investment income from the Joint Venture on a one-quarter reporting lag, on the condensed consolidated statements of operations and comprehensive loss.

The investment in the Joint Venture is accounted for using the equity method of accounting. As of June 30, 2024 and December 31, 2023 the Company had an Equity Method Investment of $100,492 and $96,000, respectively, recorded on the condensed consolidated balance sheets. The Company invested $96,000 in the joint venture in September 2023 which is recorded on the consolidated balance sheet at December 31, 2023 as an Equity Method Investment. Wider invested$104,000. In accordance with ASC 323, the Company uses the equity method of accounting for its investment in the Joint Venture, an unconsolidated entity over which it does not have a controlling interest. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the unconsolidated entity’s earnings or losses. The Company evaluates the carrying amount of this investment in the Joint Venture for impairment in accordance with ASC 323. If the Company determines that a loss in the value of the investment is other than temporary, the Company writes down the investment to its estimated fair value. Any such losses are recorded to equity in income of unconsolidated entities in the Company’s consolidated statements of operations and comprehensive loss. The Company has made an election to classify distributions received from the Joint Venture using the nature of the distribution approach. Distributions received are classified as cash inflows from operating activities based on the nature of the activities of the unconsolidated entity.

Continued Nasdaq Listing

Our common stock is currently listed on The Nasdaq Stock Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including the Minimum Bid Price Rule and Minimum Stockholder Equity Rule (each as discussed below) and those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

We are required to maintain a minimum bid price of $1.00 per share. On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023.

The Company requested a second 180-day period in order to regain compliance with Nasdaq Rule 5550(a)(2). On January 18, 2024, the Nasdaq Hearing Panel granted the Company a temporary exception to regain compliance with the Minimum Bid Price Rule until March 27, 2024, which date was further extended by the Panel until April 25, 2024.

On April 23, 2024, the Company received notice from Nasdaq notifying the Company that it has regained compliance with Nasdaq’s minimum bid price requirement under Nasdaq Rule 5550(a)(2).

Under the Nasdaq listing rules, we are also required to maintain stockholders’ equity of at least $2,500,000 (the “Minimum Stockholder Equity Rule”). In our Form 10-Q for the period ending March 31, 2024, we reported stockholders’ equity of $2,326,987. On May 16, 2024, we received a letter from the Listing Qualifications Department of Nasdaq notifying the Company that its stockholders’ equity as reported in such Quarterly Report did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market.

Pursuant to the Notice, the Company had 45 calendar days from the date of the Notice to submit a plan to regain compliance. On July 1, 2024, the Company submitted a plan to Nasdaq. As described in the Company’s submission to Nasdaq, and as set forth in the Current Report on Form 8-K filed by the Company on July 3, 2024, the Company consummated the public offering of 3 million shares of the Company’s Common Stock for total aggregate gross proceeds of approximately $5,250,000 On July 23, 2024, the Company received written notification from the Listing Qualifications Department of NASDAQ, confirming that, based on the information contained in the Company’s Form 8-K, filed with the SEC on July 16, 2024, the Company is now in compliance with the Minimum Stockholder Equity Rule.

7

NOTE 2 — LIQUIDITY

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2024, the Company had a significant accumulated deficit of approximately(79,363,699) $79.4 million. For the six months ended June 30, 2024, the Company had a loss from operations of approximately (2,370,733) $2.4 million and negative cash flows from operations of approximately (2,009,704) $2.0 million. While the Company had a working capital surplus as of June 30, 2024 of approximately $1.0 million, the Company’s operating activities consume most of its cash resources.

The Company expects to continue to incur operating losses as it executes its development plans, as well as undertaking other potential strategic and business development initiatives through 2024 and through the twelve months from the date of this report. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. We previously funded these losses primarily through the sale of equity. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. On July 1, 2024, the Company consummated the public offering of an aggregate of 3,000,000 shares of the Company’s common stock resulting in aggregate gross proceeds of approximately $5.25 million. The proceeds from the offering increased the Company’s stockholders’ equity by approximately $4.55 million, making the Company's stockholders’ equity approximately $6.9 million as of July 1, 2024. Although no assurances can be given as to our ability to deliver on our revenue plans or that unforeseen expenses may arise, management has evaluated the significance of the conditions as of June 30, 2024 and have concluded that we have sufficient cash and short-term investments in the amount of approximately $5.2 million on hand on August 6, 2024 to satisfy our anticipated cash requirements for the next twelve months from the issuance of these financial statements.

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 six months ended June 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.

8

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, 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 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.

Performance Obligations

Management identified that subsequent licensing revenue has one performance obligation. That performance obligation is satisfied if 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 equipment and Devices are shipped to the customer. The Company does not offer a warranty on the equipment or 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 notifies the Company that it has invoiced the distributor for the sale to the distributor.

9

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 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 June 30, |
|  | 2024 |  |  | 2023 |
Device sales |  | $ | - |  |  | $ | 9,600 |
Licensing fee |  |  | 16,064 |  |  |  | 20,033 |
Equipment |  |  | 10,108 |  |  |  | 5,100 |
Other |  |  | 668 |  |  |  | 807 |
Total |  | $ | 26,840 |  |  | $ | 35,540 |

|  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |
Device sales |  | $ | 55,500 |  |  | $ | 9,600 |
Licensing fee |  |  | 37,621 |  |  |  | 43,903 |
Equipment |  |  | 11,621 |  |  |  | 11,500 |
Other |  |  | 769 |  |  |  | 1,097 |
Total |  | $ | 105,511 |  |  | $ | 66,100 |

10

Major Geographic Locations

|  | Three Months Ended June 30, |
|  | 2024 |  |  | 2023 |
U.S. sales |  | $ | 21,688 |  |  | $ | 25,333 |
International sales |  |  | 5,152 |  |  |  | 10,207 |
Total |  | $ | 26,840 |  |  | $ | 35,540 |

|  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |
U.S. sales |  | $ | 44,858 |  |  | $ | 55,893 |
International sales |  |  | 60,653 |  |  |  | 10,207 |
Total |  | $ | 105,511 |  |  | $ | 66,100 |

Contract Modifications

There were no contract modifications during the six months ended June 30, 2024 and 2023. 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. No deferred revenue was recognized as of June 30, 2024 and December 31, 2023.

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. 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 six months ended June 30, 2024 and 2023 respectively,

Accounts Receivable

Accounts receivables are reported at their outstanding unpaid principal balances, net of allowances for credit loss. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides an allowance for credit loss 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 did not record an allowance for credit loss on June 30, 2024 and December 31, 2023, respectively.

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Inventory

Inventory consists of finished goods and components stated at the lower of cost or net realizable value (NRV) 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 quantities in excess of demand, or otherwise non-saleable items. At June 30, 2024 and December 31, 2023, the Company did not write down inventory.

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 $6,454 and $1,352 for the six months ended June 30, 2024 and 2023, respectively. Amortization expense was $3,792 and $692 for the three months ended June 30, 2024 and 2023, respectively.

The following table summarizes the gross carrying amount, amortization and the net carrying value at June 30, 2024 and December 31, 2023.

Schedule of patents |  |  |  |  |  |  |  |  |  |  |  |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net Carrying Value |
June 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |
Patents |  | $ | 179,090 |  |  | $ | (8,036 | ) |  | $ | 171,054 |
Trademarks |  |  | 57,456 |  |  |  | (2,433 | ) |  |  | 55,023 |
Total June 30, 2024 |  | $ | 236,546 |  |  | $ | (10,469 | ) |  | $ | 226,077 |
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 June 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, 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.

| ● | 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.

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| ● | 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 June 30, 2024 and December 31, 2023.

Schedule of unrealized loss on investments |  |  |  |  |  |  |  |  |  |  |  |
|  | Amortized Cost |  |  | Unrealized Gain (Loss) |  |  | Fair Value |
June 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments |  | $ | - |  |  | $ | - |  |  | $ | - |
Total March 31, 2024 |  | $ | - |  |  | $ | - |  |  | $ | - |
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 June 30, 2024 and December 31, 2023.

Schedule of fair value, assets measured on recurring basis |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Carrying Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
June 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Notes |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Notes |  | $ | 2,368,203 |  |  | $ | 2,368,203 |  |  | $ | - |  |  | $ | - |

Net Loss per Common Share

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 June 30, 2024 and 2023.

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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 June 30, |
|  | 2024 |  |  | 2023 |
Warrants |  |  | 2,662,250 |  |  |  | 2,662,250 |
Stock options |  |  | 2,281,879 |  |  |  | - |
Total |  |  | 4,944,129 |  |  |  | 2,662,250 |

|  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |
Warrants |  |  | 2,662,250 |  |  |  | 2,662,250 |
Stock options |  |  | 2,281,879 |  |  |  | - |
Total |  |  | 4,944,129 |  |  |  | 2,662,250 |

Stock-Based Compensation

The Company applies the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the condensed consolidated statements of operations and comprehensive loss.

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.

Warrant Accounting

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all its financial instruments, including issued private and public 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.

Research and Development

Research and development costs are charged to operations as incurred. For the six months ended June 30, 2024 and 2023, the Company recorded $275,077 and $211,834 respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss. For the three months ended June 30, 2024 and 2023, the Company recorded $169,409 and $146,000 respectively, in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss.

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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 in exchange for consideration. The Company accounts for its leases in accordance with ASC 842, Leases, which requires that an ROU asset identified in a lease be recorded as a noncurrent asset with a related liability. The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from short-term leases for any class of underlying asset.

Equity Method Investments

The Company accounts for its investments in common stock or in-substance common stock that give it the ability to exercise significant influence over as an equity method investment in accordance with the guidance in ASC 323, Equity Method and Joint Ventures. Specifically, the Company initially recognizes its investment in investees as an asset at cost. Further, the Company subsequently measures its investment by recognizing its share of earnings or losses of the investee on a one-quarter reporting lag.

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. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and 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.

NOTE 4 — ACCRUED EXPENSES

Accrued expenses consist of the following amounts:

Schedule of accrued expenses |  |  |  |  |  |  |  |
|  | June 30, 2024 |  |  | December 31, 2023 |
Accrued – other |  |  | 35,636 |  |  |  | 21,954 |
Accrued settlement liabilities |  |  | 89,330 |  |  |  | 89,330 |
Accrued bonuses |  |  | - |  |  |  | 150,000 |
Total |  | $ | 124,966 |  |  | $ | 261,284 |

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NOTE 5 — NON-CONSOLIDATED JOINT VENTURE AND RELATED PARTY TRANSACTIONS

Formalized Joint Venture

On May 31, 2023, the Company formalized an agreement related to the formation of a joint venture established to engage in the clinical development, marketing, sale and distribution of Nexalin’s second generation transcranial Alternating Current Stimulation (“tACS”) devices (“Gen-2 devices”) in China and other countries in the region. The Joint Venture is registered in Hong Kong.

As of the date of this Quarterly Report on Form 10-Q, (i) our operations are carried on outside of China; and (ii) the Joint Venture does not maintain any variable interest entity structure or operate any data center in China.

Under the Joint Venture Agreement, Wider is obligated to fund all operations for the initial 12-month period of the Joint Venture, after which Nexalin and Wider plan to jointly fund the Joint Venture’s operating expenses in accordance with their pro rata ownership.

The Joint Venture is controlled by a Board of Directors in which Wider is to have sole representation but neither the Company nor Wider has exclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin own 52% and 48% of the Joint Venture, respectively. In accordance with ASC 323 Investments - Equity Method and Joint Ventures (“ASC 323”) and ASC 810 - Consolidations (“ASC 810”), the Company recognized $(1,291) and $0 for the three months ended June 30, 2024 and 2023 and $4,492 and $0 for the six months ended June 30, 2024 and 2023 of equity method investment income from the Joint Venture on a one-quarter reporting lag, on the condensed consolidated statements of operations and comprehensive loss.

During the six months ended June 30, 2024, the Company issued 150,000 shares of common stock to affiliates of Wider in satisfaction of obligations pursuant to their collaborative agreement. A charge to research and development was recorded in 2023 at the time the Company recognized its obligation to issue these shares.

The investment in the Joint Venture is accounted for using the equity method of accounting. The Company invested $96,000 in the joint venture in September 2023 which is recorded on the consolidated balance sheet at December 31, 2023 as an Equity Method Investment. Wider invested $104,000. In accordance with ASC 323, Investments - Equity Method and Joint Ventures (“ASC 323”), the Company uses the equity method of accounting for its investment in the Joint Venture, an unconsolidated entity over which it does not have a controlling interest. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the unconsolidated entity’s earnings or losses. The Company evaluates the carrying amount of this investment in the Joint Venture for impairment in accordance with ASC 323. If the Company determines that a loss in the value of the investment is other than temporary, the Company writes down the investment to its estimated fair value. Any such losses are recorded to equity in income of unconsolidated entities in the Company’s consolidated statements of income. The Company has made an election to classify distributions received from the Joint Venture using the nature of the distribution approach. Distributions received are classified as cash inflows from operating activities based on the nature of the activities of the unconsolidated entity.

U.S. Asian Consulting Group, LLC

On May 9, 2018, the Company entered into a five-year consulting agreement with U.S. Asian Consulting Group, LLC (“U.S. Asian”). The consulting agreement was extended for an additional period of eight years upon the closing of our initial public offering. The two members of U.S. Asian are shareholders in the Company. Marilyn Elson is the Company’s Controller.

Pursuant to the consulting agreement, U.S. Asian provides consulting services to the Company with regard to, among other things, corporate development and financing arrangements. The Company pays U.S. Asian $10,000 per month for services rendered pursuant to the consulting agreement. The Company recorded consulting expenses related to the consulting agreement of $60,000 for each of the six months ended June 30, 2024 and 2023, respectively, and $30,000 for each of the three months ended June 30, 2024 and 2023, respectively, on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

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Officers

On July 1, 2023, the Company entered into a new employment agreement with Mark White to serve as Chief Executive Officer, a new services agreement with David Owens, M.D. to serve as Chief Medical Officer and a new employment agreement with Michael Nketiah to serve as Senior Vice President, Quality, Regulatory and Clinical Affairs. Each of the foregoing agreements are governed by three-year terms and provide compensation in the form of performance-and service-based stock option awards based on the closing price of the Company’s publicly traded common stock on the applicable date of grant.

Under the terms of his employment agreement, Mr. White is entitled to (i) a sign-on/retention bonus consisting of a one-time lump-sum payment of $50,000 and a grant of nonqualified stock options to purchase 1,387,024 shares of the Company’s common stock with an exercise price of $.894 per share subject to certain time and performance- and time-based vesting conditions.

Under the terms of his service agreement, Dr. Owens is entitled to (i) a sign-on/retention bonus consisting of a grant of nonqualified stock options to purchase 654,362 shares of the Company’s common stock with an exercise price of $.894 per share subject to certain time- and performance-based vesting conditions.

Under the terms of his employment agreement Mr. Nketiah is entitled to nonqualified stock option grants to purchase 100,671 shares of the Company’s common stock with an exercise price of $.894 subject to certain time and performance-based vesting conditions. See Note 9, on July 29, 2024, Michael Nketiah submitted his resignation effective August 16, 2024. He will continue to serve the Company in his current capacity until such effective date.

A portion of the nonqualified stock options granted to Messrs. White, Owens and Nketiah that are subject to future vesting are contingent upon the approval of the stockholders to increase the 2023 Plan capacity so as to authorize additional shares of common stock reserved for issuance under the 2023 Plan.

In addition to the retention payments, stock awards and nonqualified option grants described above, Messrs. White and Nketiah are receiving cash compensation and each of Messrs. White and Nketiah are eligible for performance-based cash bonuses. The 2023 performance-based milestones regarding Mr. White’s incentive compensation have been met for 2023, and he was awarded a cash bonus of $120,000 and 313,199 nonqualified stock options with a vesting date of July 1, 2024. The 2023 performance-based milestones regarding Mr. Nketiah’s incentive compensation have been met for 2023, and he was awarded a cash bonus of $50,000 and 218,121 nonqualified stock options with a vesting date of July 1, 2024.

The reported amounts are calculated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 718, “Compensation — Stock Compensation (“ASC 718”). ASC 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as the options issued under our 2023 Plan.

Leases

Our principal executive office is located at 1776 Yorktown, Suite 550, Houston, Texas 77056. Under ASC 842 “Leases”, we have two separate sub-leases (through IIcom Strategic Inc. controlled and owned by our Chief Executive Officer) totaling approximately 4,000 square feet of office space under operating leases. Management and supporting staff are hosted at this location. Our lease costs for each of the three months ended June 30, 2024 and 2023 were $13,500 and $13,500. Our lease costs for each of the six months ended June 30, 2024 and 2023 were $27,000 and $27,000. The initial sub-leases expired in January of 2024. The Company has entered into a new one year sublease for 4,000 square feet of office space under an operating lease. Pursuant to the sublease, the Company pays and will pay the third party landlord (not the sub landlord) all direct and indirect rent costs under the primary lease directly for the leased premises. No additional payments are made to the Chief Executive Officer or the entity controlled by him.

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NOTE 6 — STOCKHOLDERS’ EQUITY

Issuance of Common Stock

During the six months ended June 30, 2024, the Company issued 150,000 shares of common stock to affiliates of Wider in satisfaction of obligations pursuant to their collaborative agreement. A charge to research and development was recorded in 2023 at the time the Company recognized its obligation to issue these shares.

During the six months ended June 30, 2023, the Company issued no shares of common stock.

Options

Nexalin’s 2023 Equity Incentive Plan (the “2023 Plan”) was approved by our stockholders on November 10, 2023. The Plan provides that maximum number of shares of Common Stock available for the grant of awards under the Plan shall be 1,500,000, subject to adjustment for stock dividends, stock splits or similar events. The 2023 Plan is administered by the Compensation Committee of the Board of Directors, which may in turn delegate administrative authority to one or more of our executive officers. Under the terms of the 2023 Plan, the Compensation Committee may grant equity awards, including nonqualified stock options and restricted stock to employees, officers, directors, consultants, agents, advisors and independent contractors.

On July 1, 2023, the Company entered into amended employment agreements with the three executives. In addition to the cash compensation included in their employment contracts, the three executives were granted one-time bonus stock options (that were immediately vested) and performance-based stock options that would be triggered based on certain performance criteria being achieved. The amount expensed during the three months ended June 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $44,060 and $0 respectively. The amount expensed during the six months ended June 30, 2024 and 2023 in the unaudited condensed consolidated statements of operations and comprehensive loss was $88,120 and $0 respectively.

The following table presents a summary of stock option award activity during the six months ended June 30, 2024:

Schedule of stock option award activity |  |  |  |  |  |  |  |  |  |  |  |
|  | Number of options |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Life In Years |
Outstanding December 31, 2023 |  |  | 2,281,879 |  |  | $ | 0.89 |  |  |  | 9.00 |
Issued |  |  | - |  |  |  | - |  |  |  | - |
Exercised |  |  | - |  |  |  | - |  |  |  | - |
Expired or cancelled |  |  | - |  |  |  | - |  |  |  | - |
Outstanding June 30, 2024 |  |  | 2,281,879 |  |  | $ | 0.89 |  |  |  | 9.00 |

The following table provides additional information about stock options that are outstanding and exercisable at June 30, 2024:

| Schedule of additional information about stock options |  |  |  |  |  |  |  |  |  |  |  |  |
Exercise Price |  |  | Outstanding Number of Options |  |  | Weighted Average Remaining Life In Years |  |  | Exercisable Number of Options |
$ | 0.89 |  |  |  | 2,281,879 |  |  | $ | 9.00 |  |  |  | 587,248 |
|  |  |  |  | 2,281,879 |  |  | $ | 9.00 |  |  |  | 587,248 |

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The fair value of these stock option awards is estimated as of the grant date using a Black-Scholes option pricing model and the following assumptions: A risk-free interest rate based on the U.S. Treasury yield curve at the date of grant; an expected or contractual term; and expected volatility based on an evaluation of comparable public companies’ measures of volatility. The Company does not anticipate declaring dividends on common shares now or in the near future and has therefore assumed no dividend rate. The following table discloses the assumptions, utilized for stock options as follows:

Schedule of assumptions |  |  |  |  |  |  |  |
|  | June 30, 2024 |  |  | December 31, 2023 |
Volatility |  |  | 99.0 | % |  |  | 99.0 | %
Expected dividends |  | $ | - |  |  | $ | - |
Risk-free interest rate |  |  | 4.61 | % |  |  | 4.61 | %
Expected term (years) |  |  | 9.00 |  |  |  | 9.5 |

Warrants

The issuance of warrants to purchase shares of the Company’s common stock are summarized as follows:

Schedule of warrants |  |  |  |  |  |  |  |
|  | Number of warrants |  |  | Weighted Average Exercise Price |
Outstanding December 31, 2023 |  |  | 2,662,250 |  |  | $ | 4.15 |
Issued |  |  | - |  |  |  | - |
Exercised |  |  | - |  |  |  | - |
Expired or cancelled |  |  | - |  |  |  | - |
Outstanding June 30, 2024 |  |  | 2,662,250 |  |  | $ | 4.15 |

The following table summarizes information about warrants to purchase shares of the Company’s common stock outstanding and exercisable at June 30, 2024:

| Summary information about warrants to purchase |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Exercise Price |  |  | Outstanding Number of Warrants |  |  | Weighted Average Remaining Life In Years |  |  | Weighted Average Exercise Price |  |  | Exercisable Number of Warrants |
$ | 4.15 |  |  |  | 2,315,000 |  |  |  | 1.25 |  |  | $ | 4.15 |  |  |  | 2,135,000 |
$ | 4.15 |  |  |  | 347,250 |  |  |  | 1.25 |  |  |  | 4.15 |  |  |  | 347,250 |
|  |  |  |  | 2,662,250 |  |  |  | 1.25 |  |  | $ | 4.15 |  |  |  | 2,662,250 |

The compensation expense attributed to the issuance of the warrants, if required to be recognized on the nature of the transaction, was recognized as they vested/earned. These warrants are exercisable up to three years from the date of grant. All are currently exercisable.

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NOTE 7 — COMMITMENTS AND CONTINGENCIES

There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company other than the following:

Sarah Veltz v. Nexalin Technology, Inc. et al.

Plaintiff, Sarah Veltz, filed a lawsuit in this matter on January 20, 2021 in Orange County Superior Court (Case No. 30-2021-01180164-CU-WT-CJC) (the “Complaint”) naming the Company and others as defendants. In her Complaint, Plaintiff contends that she was employed by defendants, including Nexalin, and has not been paid all wages, including overtime wages and other benefits allegedly due her. Plaintiff also contends that, during her employment, she was subjected to sexual harassment by the Company’s then Chief Executive Officer. Plaintiff seeks both compensatory and punitive damages. On March 12, 2021, the Company filed its answer to the Complaint. Although the parties are seeking mediation, the court has set a trial in this matter for November 18, 2024, with mediation scheduled for October 10, 2024. Management’s intent is to contest the allegations vigorously and, as of the date of this report, is unable to provide an evaluation of the potential outcome of the litigation within the probable or remote range or to provide an estimate of the amount of or a range of potential loss that might be incurred by the Company.

Employment Development Department

The Company is currently engaged in settlement discussions with the Employment Development Department (EDD) of the State of California. This matter involves issues related to our previous management’s classification of certain work provided to or on behalf of the Company’s business as contract labor instead of employee labor. The total amount involved was approximately $300,000. Management has petitioned for reassessment and believes the hired workers at issue were indeed actual contractors and not employees. We have no business in California other than one part time and one full time worker residing in California. The EDD approved a significant downward adjustment in our outstanding employment tax liability to approximately $40,000 as reflected on its Statement of Account dated November 30, 2023. We plan to further negotiate with the EDD and proceed with a settlement offer. The Company has accrued $40,000 and $40,000 on the consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively. The reduction in the amount accrued was recognized as other income on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2023. The Company believes it has adequately accrued for this matter.

Demand Letter from The University of Arizona

On December 8, 2022, the Company received a demand letter from the University of Arizona seeking payment of $111,094. The Company and the University of Arizona agreed on the terms of a settlement for the amounts claimed by the University, whereby the Company paid an aggregate of approximately $69,000 (in three equal monthly payments) in full satisfaction of amounts the University claims it is owed. The settlement amount was paid in full as of December 31, 2023.

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NOTE 8 — CONCENTRATION OF CREDIT RISK

Revenues

Six customers accounted for 90% of revenues for the three months ended June 30, 2024, as set forth below:

Concentration of credit risk |  |  |  |
Customer A |  |  | 25 | %
Customer B |  |  | 15 | %
Customer C |  |  | 14 | %
Customer D |  |  | 14 | %
Customer E |  |  | 11 | %
Customer F |  |  | 11 | %

Two customers accounted for 67% of revenues for the six months ended June 30, 2024, as set forth below:

Customer A |  |  | 56 | %
Customer B |  |  | 11 | %

Three customers accounted for 65% and 54% of revenues for the three and six months ended June 30, 2023, respectively as set forth below:

|  | Three Months Ended June 30, 2023 |  |  | Six Months Ended June 30, 2023 |
Customer A - related party |  |  | 29 | % |  |  | 15 | %
Customer B |  |  | 21 | % |  |  | 23 | %
Customer C |  |  | 15 | % |  |  | 16 | %

Accounts Receivable

Four customers accounted for 84% of accounts receivable at June 30, 2024, as set forth below:

Customer A |  |  | 35 | %
Customer B |  |  | 25 | %
Customer C - related party |  |  | 12 | %
Customer D |  |  | 12 | %

Five customers accounted for 97% of accounts receivable at December 31, 2023.

Customer A - related party |  |  | 39 | %
Customer B |  |  | 21 | %
Customer C |  |  | 15 | %
Customer D |  |  | 12 | %
Customer E |  |  | 10 | %

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NOTE 9 — SUBSEQUENT EVENTS

Management evaluated subsequent events and transactions that occurred after the balance sheet date, up to the date that the unaudited condensed consolidated financial statements were issued. On July 1, 2024, the Company, consummated a public offering (the “Offering”) of an aggregate of 3,000,000 shares of the Company’s Class common stock, $0.001 par value per share, resulting in aggregate gross proceeds of approximately $5,250,000. The Company filed a registration statement on Form S-1 (the “Registration Statement”) relating to the Offering (File No. 333-279684) was initially filed with U.S. Securities and Exchange Commission (the “SEC”) on May 23, 2024, as amended, and was declared effective by the SEC on June 27, 2024.

On July 29, 2024, Michael Nketiah submitted his resignation as Senior Vice President of Quality, Clinical and Regulatory of the Company. Mr. Nketiah’s resignation has an effective date of August 16, 2024. He will continue to serve the Company in his current capacity until such effective date.

Management did not identify any additional subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.

The management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with GAAP.

Overview

We design and develop innovative neurostimulation products to uniquely and effectively help combat the ongoing global mental health epidemic. We developed an easy-to-administer medical device — referred to as Generation 1 or Gen-1 — that utilizes bioelectronic medical technology to treat anxiety and insomnia, without the need for drugs or psychotherapy. Our original Gen-1 devices are cranial electrotherapy stimulation (CES) devices that emit waveform at 4 milliamps during treatment and are presently classified by the U.S. Food and Drug Administration (“FDA”) as a Class II device.

Medical professionals in the United States have utilized the Gen-1 device to administer to patients in clinical settings. While the Gen-1 device had been cleared by the FDA to treat depression, anxiety, and insomnia, three prevalent and serious diseases, because of the FDA’s December 2019 reclassification of CES devices, the Gen-1 device was reclassified as a Class II device for the treatment of anxiety and insomnia. We are required to file a new application under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k) Application”) to be approved by the FDA for the sales and marketing of our devices for the treatment of anxiety and insomnia. In the FDA’s December 2019 reclassification ruling, the treatment of depression with our device will require a Class III certification and require a new PMA (premarket approval) application to demonstrate safety and effectiveness.

While we continue providing services to medical professionals to support patients’ use of the Gen-1 devices which were in operation prior to December 2019, we are not making new sales or new marketing efforts of Gen-1 devices in the United States. We continue to derive revenue from devices which we sold or leased prior to the FDA’s December 2019 reclassification announcements. This revenue consists of monthly licensing fees and payments for the sale of electrodes and patient cables. We have suspended marketing efforts for new sales of devices related to the Gen-1 device for treatment of anxiety and insomnia in the United States until the Nexalin regulatory team decides on a new 510(k) application at 4 milliamps based on FDA comments expected to be received in 2024. Our regulatory team continues to inform the FDA of the suspension of the marketing and sale of the Gen-1 products to new providers. We are currently analyzing whether to proceed with an amended application with the FDA for Gen-1 devices for the treatment of insomnia and anxiety.

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We have designed and developed a new advanced waveform technology to be emitted at 15 milliamps through new and improved medical devices referred to as “Generation 2” or “Gen-2” and “Generation 3” or “Gen-3.” Gen-2 is a clinical use device with a modern enclosure to emit the new 15 milliamp advanced waveform. Gen-3 is a new patient headset that is designed to be prescribed by licensed medical professionals in a virtual clinic setting similar to existing Tele-health platforms. 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 of 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. In addition, a new PMA application in the United States is in development for the treatment of depression utilizing both Gen-2 and Gen-3. The new Gen-3 device is also scheduled for additional pilot trials and/or pivotal trials for anxiety and insomnia in the United States and China beginning in the late second or early third quarter of 2024. Preliminary data provided by The University of California, San Diego and recent published data from China supports the safety of utilizing our 15 milliamp waveform technology. However, the determination of safety and efficacy of medical devices in the United States is subject to clearance by the FDA.

Additionally, a new pre-submission document in preparation of a new 510(k) and/or de novo for our Gen-3 Halo headset at 15 milliamps was filed with the FDA in January of 2023. Formal comments to our pre-submission document filing were received in March of 2023. A formal meeting to address FDA comments took place on May 9, 2023. Minutes of the meeting with the FDA were filed with the FDA on May 16, 2023.

A second FDA pre-submission document was submitted on February 13, 2024. FDA comments to this second pre-submission document were received on April 26, 2024. A formal teleconference was held with the FDA on April 30, 2024. The Nexalin regulatory team and the FDA came to a consensus on the Anxiety and Insomnia Clinical research protocols.

In part due to increasing incidence attributed to the devastating impacts of the COVID-19 pandemic, mental health and cognitive disorders are widespread across the globe and cause substantial health, social and economic losses, and hardships accordingly. Our focus is on the continued development of our innovative bioelectronic medical technologies and rapid regulatory approval. We intend to help reverse these losses, and hardships of these losses, by safely and effectively treating various mental health disorders associated with post Covid and long Covid mental disease states.

All our products are non-invasive, safe, undetectable to the human body and can provide relief to those afflicted with mental health issues without adverse side effects. We have a proprietary design that stabilizes currents, electromagnetic fields, and various frequencies — referred to collectively as a waveform - particularly our proprietary, 15 milliamp patented waveform. Additionally, our devices generate a high frequency carrier wave for deeper penetration into the brain. It is applied to the brain with an array of electrodes on the forehead and behind each ear at the mastoid. The features of this proprietary waveform and the array of electrodes allow the application of the waveform to the entire brain rather than a small, targeted area of the brain. To ensure deeper penetration into the brain, we have created a waveform that is undetectable to the brain which allows the increase of the power from < 4 mAmps to 15 mAmps, more than a 400% increase without incurring any patient discomfort, risk, or adverse side effects. By increasing the power, our waveform can penetrate deeper into the brain and stimulate deep mid-brain structures associated with mental illness. Our research and clinical teams believe that a more powerful waveform will create a stronger response in the brain. A stronger response creates a higher level of efficacy. This entire proprietary technique allows Nexalin to provide a non-invasive and comfortable treatment that is more powerful than any stimulation device in the market. Current pilot study protocols and randomized clinical trials have been designed and submitted to the FDA to provide feedback on final reports and data sets for the purpose of safety and efficacy evaluations in the future. Determinations of the safety and efficacy of our devices are solely within the authority of the FDA.

Currently, the waveform that comprises the basis of Gen-2 and new Gen-3 headset devices has been tested in research settings to develop safety data that has been submitted for review by the FDA for safety evaluation and eventual marketing in the United States and around the world. Determinations of the safety and efficacy of our devices in the United States are solely within the authority of the FDA.

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We recognize that an additional barrier to treatment in today’s mental health treatment landscape -- beyond the concerns about safety, efficacy and side-effects that have been associated with conventional mental health treatments such as ECT (shock therapy), drugs and psychotherapy – is stigma. We have received industry reports and feedback that many patients that struggle with mood disorders have the stigma of embarrassment associated with psychiatrists and psychotherapy (e.g., counselling with a therapist). Additional stigmas and other issues are associated with the side effects of medication prescribed by psychiatrists. When we researched the current pharmaceuticals model, public information highlighted the many side effects associated with these medications. Frequently, patients would stop taking the medication because of the uncomfortable side effects. Additional public information mentions dependency and withdrawal issues associated with medication for psychiatric disorders.

To address the embarrassment stigma, we are developing a new virtual clinic that will allow the physician to diagnose a mental health issue in the privacy of a tele-psychiatry virtual platform. After diagnosis, the physician will prescribe the Nexalin Gen-3 headset to the patient for treatment. Next, the Gen-3 device will be shipped to the patient’s home. After the patient receives the device, they will pair the headset device with an app in the patient’s smart phone. The app will communicate with the Nexalin cloud servers to authorize the device for treatment according to the protocol designed by the physician. The physician will monitor treatment compliance and other health related issues in a private physician dashboard that connects through the Nexalin app and cloud servers. We believe that to preserve product safety and integrity for home use, the headset device will require physician oversight that will include a prescription for use with a monthly authorization provided by the physician after a monthly virtual visit. All appointments will be in a virtual setting to provide privacy and convenience for the physician and patient. The Nexalin virtual clinic will be provided in a proprietary virtual platform currently in the design stage.

Our China Gen-2 15 milliamp device was approved in China by the NMPA for the treatment of insomnia and depression in China. This device and all other clinical devices will include a single use electrode for long term revenue streams. The USA Gen-2 device will have a fresh and modern appearance that meets the technology standards of the digital tech world of 2023. Early adopters of the Gen-1 device will be able to access additional firmware upgrades which are planned to enhance the previously purchased devices to the new symmetric15-milliamp waveform. Our Gen-2 device will be equipped with RFID technology that exchanges electrode usage data with a reader in the main device. The purpose of RFID is to track and maintain control of the proprietary single use electrode. Our electrode chip will be programmed to exchange data with the device and allow activation for a single treatment with a new electrode only. This ensures a recurring revenue stream on the device and protects against any generic knockoffs designed to avoid treatment costs. This upgrade in technology also ensures the proprietary nature of the electrodes that support treatment outcomes are sustained.

Overall, we believe that our advanced waveform, technological upgrades and the development of a modern headset monitored with our IT management platform will position us with the opportunity to disrupt the traditional mental health treatment model. Our mission is to remove the stigma of expensive psychotherapy or pharmaceuticals with the attendant side effects and dependency issues and replace such stigma with clinically proven and cost-effective technology that is easily accessible in the privacy of the patient’s home and monitored by licensed healthcare providers.

Since our inception, we have generated significant losses; we expect to continue to incur significant expenses and increasing operating losses for at least the next two years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures for other research and development activities. We expect our expenses will increase substantially over time as we:

| ● | continue the ongoing and planned preclinical and clinical development of our products;

| ● | review and analyze the value of amending our previous 510(k) Application for anxiety and insomnia in accordance with the FDA and seek other regulatory approvals for any future products that successfully complete clinical trials;

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| ● | arrange for an outsourced sales, marketing and distribution model and scale up external manufacturing capabilities to commercialize any product candidate for which we may obtain regulatory approval and intend to commercialize;

| ● | maintain, expand and protect our intellectual property portfolio;

| ● | engage additional clinical, scientific, manufacturing and controls personnel;

| ● | add additional information systems including personnel to support our product development;

Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

Recent Developments

Formalized Joint Venture; China Related Activities; Approvals in Oman and Brazil

On May 31, 2023, the Company formalized an agreement related to the formation of a joint venture established to engage in the clinical development, marketing, sale and distribution of Nexalin’s second generation transcranial Alternating Current Stimulation (“tACS”) devices (“Gen-2 devices”) in China and other countries in the region. The Joint Venture is registered in Hong Kong.

As of the date of this Quarterly Report on Form 10-Q, (i) our operations are carried on outside of China; and (ii) the Joint Venture does not maintain any variable interest entity structure or operate any data center in China.

Under the Joint Venture Agreement, Wider is obligated to fund all operations for the initial 12-month period of the Joint Venture, after which Nexalin and Wider plan to jointly fund the Joint Venture’s operating expenses in accordance with their pro rata ownership.

The Joint Venture is controlled by a Board of Directors in which Wider is to have sole representation but neither the Company nor Wider has exclusive decision-making ability over day-to-day or significant operational decisions. Wider and Nexalin own 52% and 48% of the Joint Venture, respectively. In accordance with ASC 323 and ASC 810, the Company recognized $(1,291) and $0 for the three months ended June 30, 2024 and 2023 and $4,492 and $0 of equity method investment income from the Joint Venture on a one-quarter reporting lag for the six months ended June 30, 2024 and 2023, respectively, on the condensed consolidated statements of operations and comprehensive loss.

The investment in the Joint Venture is accounted for using the equity method of accounting. As of June 30, 2024 and December 31, 2023 the Company had an Equity Method Investment of $100,492 and $96,000, respectively, recorded on the condensed consolidated balance sheets. The Company invested $96,000 in the joint venture in September 2023 and Wider invested $104,000. In accordance with ASC 323, Investments - Equity Method and Joint Ventures (“ASC 323”), the Company uses the equity method of accounting for its investment in the Joint Venture, an unconsolidated entity over which it does not have a controlling interest. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the unconsolidated entity’s earnings or losses. The Company evaluates the carrying amount of this investment in the Joint Venture for impairment in accordance with ASC 323. If the Company determines that a loss in the value of the investment is other than temporary, the Company writes down the investment to its estimated fair value. Any such losses are recorded to equity in income of unconsolidated entities in the Company’s condensed consolidated statements of operations and comprehensive loss. The Company has made an election to classify distributions received from the Joint Venture using the nature of the distribution approach. Distributions received are classified as cash inflows from operating activities based on the nature of the activities of the unconsolidated entity.

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In September of 2021, the China National Medical Products Administration (the “NMPA”), the equivalent of the FDA, approved the Gen-2 device for marketing and sale in China for the treatment of insomnia and depression. These treatment indications and clearances from the NMPA have allowed Wider to market and sell the Gen-2 device in China for the treatment of insomnia and depression.

Our participation in the Joint Venture with Wider in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business and operations of the Joint Venture in China and our prospects generally.

We face additional risks in China due to China’s historically limited recognition and enforcement of contractual and intellectual property rights. We may experience difficulty enforcing our intellectual property rights in China. If we cannot adequately monitor the use of our technologies and devices or enforce intellectual property rights related to our devices in China or contractual restrictions relating to use of our intellectual property by Chinese companies, our revenue could be adversely affected.

The Joint Venture with Wider is subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, regulations and policies in China. Because many of the laws, regulations and policies applicable to our operations in China are relatively new, the interpretations of such laws, regulations and policies are not always uniform. Moreover, the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Enforcement of existing laws or contracts may be uncertain. As a result of the foregoing, it may be difficult for us to obtain timely or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations. Our ability to monetize the Joint Venture in China may also be limited.

The Sultanate of Oman’s Ministry of Health granted conditional approval for use of our Gen-2 device on June 16, 2022, effective upon the end user of our device opening and operating a mental health care clinic being constructed in Oman. The Company’s first shipment of a device to Oman was made on January 30, 2024 and received in Oman on February 5, 2024 in connection with the opening of the end user’s clinic, rendering the approval effective. Two additional devices were shipped to Oman on February 29, 2024 and were received by the end user on March 6, 2024. Upon receipt of the two additional devices, the end user’s clinic was operational, and the use of the device to treat patients commenced pursuant to the approval.

On June 13, 2024, the “Company announced that our Gen-2 device had been granted regulatory approval by the Brazilian Health Regulatory Agency, a regulatory body of the Brazilian government responsible for approving new drugs and medical devices.

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Results of Operations

Comparison of the three months ended June 30, 2024 and 2023

Our financial results for the three months ended June 30, 2024 and 2023 are summarized as follows:

|  | Three Months Ended June 30, |  |  |  |  |  |  |
|  | 2024 |  |  | 2023 |  |  | Change |  |  | Change(1) |
|  |  |  |  |  |  |  | $ |  |  | % |
Revenues, net |  | $ | 26,840 |  |  | $ | 35,540 |  |  | $ | (8,700 | ) |  |  | (24 | )%
Cost of revenues |  |  | 7,247 |  |  |  | 9,374 |  |  |  | (2,127 | ) |  |  | (23 | )%
Gross profit |  |  | 19,593 |  |  |  | 26,166 |  |  |  | (6,573 | ) |  |  | (25 | )%
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Professional fees |  |  | 240,967 |  |  |  | 120,147 |  |  |  | 120,820 |  |  |  | 101 | %
Salaries and benefits |  |  | 307,480 |  |  |  | 303,334 |  |  |  | 4,146 |  |  |  | 1 | %
Selling, general and administrative |  |  | 768,167 |  |  |  | 479,545 |  |  |  | 288,622 |  |  |  | 60 | %
Total operating expenses |  |  | 1,316,614 |  |  |  | 903,026 |  |  |  | 413,588 |  |  |  | 46 | %
Loss from operations |  |  | (1,297,021 | ) |  |  | (876,860 | ) |  |  | (420,161 | ) |  |  | 48 | %
Other income (expense), net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income (expense), net |  |  | 66 |  |  |  | (5,518 | ) |  |  | 5,584 |  |  |  | 101 | %
Gain on sale of short-term investments |  |  | 11,719 |  |  |  | 58,878 |  |  |  | (47,159 | ) |  |  | (80 | )%
Other income |  |  | 2,034 |  |  |  | 1,063 |  |  |  | 971 |  |  |  | 91 | %
Total other income (expense), net |  |  | 13,819 |  |  |  | 54,423 |  |  |  | (40,604 | ) |  |  | (75 | )%
Loss before equity in net earnings of affiliate |  |  | (1,283,202 | ) |  |  | (822,437 | ) |  |  | (460,765 | ) |  |  | 56 | %
Equity in net earnings of affiliate |  |  | (1,291 | ) |  |  | - |  |  |  | (1,291 | ) |  |  | 100 | %
Net loss |  | $ | (1,284,493 | ) |  | $ | (822,437 | ) |  | $ | (460,765 | ) |  |  | 56 | %
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) from short-term investments |  |  | 245 |  |  |  | (7,980 | ) |  |  | 8,225 |  |  |  | 103 | %
Comprehensive loss |  | $ | (1,284,248 | ) |  | $ | (830,417 | ) |  | $ | (452,540 | ) |  |  | 54 | %

| (1) | Percentages may not foot due to rounding.

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Revenues

For the three months ended June, 2024 and 2023, we generated $26,840 and $35,540 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. The decrease in revenue for the three months ended June 2024 compared to 2023 was primarily due to a device related sale in 2023. There were no device sales in during the three months ended June 30, 2024.

Cost of Revenues and Gross Profit

For the three months ended June 30, 2024 and 2023, cost of revenues was $7,427 and $9,374, respectively, yielding a gross profit of $19,593 and $26,166, respectively, or 73.0% and 73.6%, respectively. Such decrease in gross margin was negligible.

Operating Expenses

Total operating expenses for the three months ended June 30, 2024 and 2023 were $1,316,614 and $903,026, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in travel of approximately $43,000, an increase in research and development costs of approximately $23,000 and an increase in stock compensation of approximately $220,000. The increase in professional fees is primarily related to costs associated with investor relations. Salaries and benefits remained consistent. The increase in travel is primarily due to costs associated with meetings with our joint venture partners, staff visits to our Houston office and travel related to investor relations. The increases in research and development costs are attributable to the development of our Gen-2 and Gen-3 devices. The increase in stock compensation is primarily related to compensating consultants with stock.

Other Income (Expense), Net

Other income (expense), net for the three months ended June 30, 2024 and 2023 was $13,819 and $54,423, respectively, consisting of interest and dividend income, gain on the sale of short-term investments offset by interest expense.

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Comparison of the six months ended June 30, 2024 and 2023

Our financial results for the six months ended June 30, 2024 and 2023 are summarized as follows:

|  | Six Months Ended June 30, |  |  |  |  |  |  |
|  | 2024 |  |  | 2023 |  |  | Change |  |  | Change(1) |
|  |  |  |  |  |  |  | $ |  |  | % |
Revenues, net |  | $ | 105,511 |  |  | $ | 66,100 |  |  | $ | 39,411 |  |  |  | 60 | %
Cost of revenues |  |  | 16,403 |  |  |  | 16,484 |  |  |  | (81 | ) |  |  | (0 | )%
Gross profit |  |  | 89,108 |  |  |  | 49,616 |  |  |  | 39,492 |  |  |  | 80 | %
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Professional fees |  |  | 468,796 |  |  |  | 278,747 |  |  |  | 190,049 |  |  |  | 68 | %
Salaries and benefits |  |  | 633,897 |  |  |  | 602,657 |  |  |  | 31,240 |  |  |  | 5 | %
Selling, general and administrative |  |  | 1,357,148 |  |  |  | 824,498 |  |  |  | 532,650 |  |  |  | 65 | %
Total operating expenses |  |  | 2,459,841 |  |  |  | 1,705,902 |  |  |  | 753,939 |  |  |  | 44 | %
Loss from operations |  |  | (2,370,733 | ) |  |  | (1,656,286 | ) |  |  | (714,447 | ) |  |  | 43 | %
Other income (expense), net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income (expense), net |  |  | 370 |  |  |  | (14,355 | ) |  |  | 14,725 |  |  |  | 103 | %
Gain on sale of short-term investments |  |  | 36,665 |  |  |  | 97,650 |  |  |  | (60,985 | ) |  |  | (62 | )%
Other income |  |  | 3,556 |  |  |  | 2,140 |  |  |  | 1,416 |  |  |  | 66 | %
Total other income (expense), net |  |  | 40,591 |  |  |  | 85,435 |  |  |  | (44,844 | ) |  |  | (52 | )%
Loss before equity in net earnings of affiliate |  |  | (2,330,142 | ) |  |  | (1,570,851 | ) |  |  | (759,291 | ) |  |  | 48 | %
Equity in net earnings of affiliate |  |  | 4,492 |  |  |  | - |  |  |  | 4,492 |  |  |  | 100 | %
Net loss |  | $ | (2,325,650 | ) |  | $ | (1,570,851 | ) |  | $ | (759,291 | ) |  |  | 48 | %
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) from short-term investments |  |  | 405 |  |  |  | (3,224 | ) |  |  | 3,629 |  |  |  | 113 | %
Comprehensive loss |  | $ | (2,325,245 | ) |  | $ | (1,574,075 | ) |  | $ | (755,662 | ) |  |  | 48 | %

| (1) | Percentages may not foot due to rounding.

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Revenues

For the six months ended June, 2024 and 2023, we generated $105,511 and $66,100 respectively, of revenue primarily from the sale of devices, supplies and from licensing and treatment fee agreements with our customers for which we charge a monthly licensing fee for the duration of the agreement. We also generated revenue from treatment fee agreements by collecting fees based on the number of treatments per month the customer performs. In addition, we derived revenue from equipment by selling electrodes and patient cables to customers for use with our device. The increase in revenue for the six months ended June 2024 compared to 2023 was primarily due to the sales of devices to a new overseas customer.

Cost of Revenues and Gross Profit

For the six months ended June 30, 2024 and 2023, cost of revenues was $16,403 and 16,484, respectively, yielding a gross profit of $89,108 and $49,616, respectively, or 84.5% and 75.1%, respectively. Such increase in gross margin was primarily due to device revenue having a higher gross profit margin than that of other sources of revenue.

Operating Expenses

Total operating expenses for the six months ended June 30, 2024 and 2023 were $2,459,841 and $1,705,902, respectively. The increase in selling, general and administrative expenses was due primarily to an increase in travel of approximately $81,000, an increase in research and development costs of approximately $63,000 and an increase in stock compensation of approximately $381,000. The increase in professional fees is primarily related to costs associated with investor relations. The increase in travel is primarily due to costs associated with meetings with our joint venture partners, staff visits to our Houston office and travel related to investor relations. The increases in research and development costs are attributable to the development of our Gen-2 and Gen-3 devices. The increase in stock compensation is primarily related to compensating consultants with stock

Other Income (Expense), Net

Other income (expense), net for the three months ended June 30, 2024 and 2023 was $40,591 and $85,435, respectively, consisting of interest and dividend income, gain on the sale of short-term investments offset by interest expense. The decrease is primarily due to a decrease in gain on short term investments resulting from decreased short term investments.

Cash Flows

The following table summarizes our consolidated cash flows for the six months ended June 30, 2024 and 2023:

|  | June 30, 2024 |  |  | June 30, 2023 |
Net cash used in operating activities |  | $ | (2,009,704 | ) |  | $ | (2,130,260 | )
Net cash provided by investing activities |  | $ | 2,278,270 |  |  | $ | 2,399,239 |
Net cash used in financing activities |  | $ | - |  |  | $ | (200,000 | )

Net Cash Used In Operating Activities

Net cash used in operating activities was $2,009,704 for the six months ended June 30, 2024, as compared to $2,130,260 for the respective period in 2023, was primarily due to the net loss of $2,325,650, as well as a combined decrease in accounts payable and accounts payable-related party of approximately $537,000 and accrued expenses of approximately $200,000, offset by increases in stock compensation of approximately $381,000.

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Net Cash Provided By Investing Activities

Net cash provided by investing activities during the six months ended June 30, 2024, and 2023 was $2,278,270 and $2,399,239, respectively, which was due to short-term investment sales approximately $9.2 million offset by purchases of approximately $6.8 million of short-term investments and the purchase of patents and trademarks of approximately $127,000 for the six months ended June 30, 2024.

Net cash provided by investing activities as during the six months ended June 30, 2023 was due to the short-term investment sales of approximately $21.2 million offset by short-term investment purchases of approximately $18.7 million and the purchase of patents of approximately $61,000.

Net Cash Used In Financing Activities

Net cash used in financing activities during the six months ended June 30, 2024 and 2023 was $0 and $200,000, respectively, which was due to payment of note payable to an officer of the Company in the prior period.

Uses and Availability of Additional Funds

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, manufacturing development costs, legal and other regulatory expenses, and general administrative costs. Although we have produced Gen-2, which is selling in China where it is approved for certain utilizations by medical practitioners, the successful development of our future products is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the clinical development of Gen-3 and obtain regulatory approvals. We are also unable to predict when, if ever, net cash inflows from revenues will enable us to be cash flow positive. This is due to the numerous risks and uncertainties associated with developing products, including, among others, the uncertainty of:

| ● | successful enrolment in, and completion of clinical trials;
| ● | performing preclinical studies and clinical trials in compliance with the FDA or any comparable regulatory authority requirements;

| ● | the ability to outsource the manufacture of our products for development, clinical trials and/ or potential commercialization;
| ● | obtaining and maintaining patent, trademark and trade secret protection for our products;
| ● | scaling the commercial sales of products, if and when approved, whether alone or in collaboration with others;
| ● | acceptance of existing therapies, and future therapies, if and when approved, by healthcare providers, physicians, clinicians, patients and third-party payors;
| ● | competing effectively with other therapies;
| ● | obtaining and maintaining healthcare coverage and adequate reimbursement;
| ● | protecting our rights in our intellectual property portfolio; and
| ● | maintaining a continued acceptable safety profile of our products following approval.

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Liquidity and Capital Resources

As of June 30, 2024, the Company had a significant accumulated deficit of $79.4 million. For the six months ended June 30, 2024, the Company had a loss from operations of $2.4 million and negative cash flows from operations of $2.0 million. The Company’s operating activities consume the majority of its cash resources. The Company will continue to service existing customers in the United States. The Company sold devices overseas. The Company anticipates that it will continue to incur operating losses as it executes its development plans through 2024, as well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company previously funded these losses primarily through the sale of equity. As of June 30, 2024, the Company had cash and cash equivalents on hand of approximately $0.8 million.

Our ability to continue as a going concern will be dependent upon our ability to execute on our business plan, including the ability to generate revenue from the joint venture and obtain U.S. approval for the sale of our devices in the United States, and, if necessary, our ability to raise additional capital. On July 1, 2024, the Company consummated the public offering of an aggregate of 3,000,000 shares of the Company’s common stock resulting in aggregate gross proceeds of approximately $5.25 million. The proceeds from the offering increased the Company’s stockholders’ equity by approximately $4.55 million, making the Company’s stockholders’ equity approximately $6.9 million as of July 1, 2024. Although no assurances can be given as to our ability to deliver on our revenue plans or that unforeseen expenses may arise, management has evaluated the significance of the conditions as of June 30, 2024 and have concluded that we have sufficient cash and short-term investments in the amount of approximately $5.2 million on hand on August 6, 2024 to satisfy our anticipated cash requirements for the next twelve months from the issuance of these financial statements.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 3, “Summary of Significant Accounting Policies and New Accounting Standards” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2023 Form 10-K.

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. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

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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.

Contractual Obligations

See Note 7 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a summary of our contractual obligations.

Continued Nasdaq Listing

Minimum Bid Price Requirement

On May 10, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was no longer in compliance with the minimum bid price requirement for continued listing on Nasdaq, as the closing bid price for the Company’s common stock was below $1.00 per share as set forth in the Nasdaq listing rules. The Company was afforded 180 calendar days, or until November 6, 2023, to regain compliance with the Nasdaq listing rules. The Company was unable to regain compliance with the bid price requirement by November 6, 2023.

The Company requested a second 180-day period in order to regain compliance with Nasdaq Rule 5550(a)(2). On January 18, 2024, the Nasdaq Hearing Panel granted the Company a temporary exception to regain compliance with the Minimum Bid Price Rule until March 27, 2024, which date was further extended by the Panel until April 25, 2024.

On April 23, 2024, the Company received notice from Nasdaq notifying the Company that it has regained compliance with Nasdaq’s minimum bid price requirement under Nasdaq Rule 5550(a)(2).

Minimum Stockholder Equity Requirement

Under the Nasdaq listing rules, we are also required to maintain stockholders’ equity of at least $2,500,000 (the “Minimum Stockholder Equity Rule”). In our Form 10-Q for the period ending March 31, 2024, we reported stockholders’ equity of $2,326,987. On May 16, 2024, we received a letter from the Listing Qualifications Department of Nasdaq notifying the Company that its stockholders’ equity as reported in such Quarterly Report did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market.

Pursuant to the Notice, the Company had 45 calendar days from the date of the Notice to submit a plan to regain compliance. On July 1, 2024, the Company submitted a plan to Nasdaq. As described in the Company’s submission to Nasdaq, and as set forth in the Current Report on Form 8-K filed by the Company on July 3, 2024, the Company consummated the public offering of 3 million shares of the Company’s Common Stock for total aggregate gross proceeds of approximately $5,250,000. On July 23, 2024, the Company received written notification from the Listing Qualifications Department of NASDAQ, confirming that, based on the information contained in the Company’s Form 8-K, filed with the SEC on July 16, 2024, the Company is now in compliance with the Minimum Stockholder Equity Rule.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.

Item 4. Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, our management, including our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, management identified material weaknesses in our internal control over financial reporting. The material weaknesses identified to date include: (i) 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, including documentation of review of reconciliations; and (ii) insufficient IT controls which are effectively designed and implemented, specifically related to user/superuser access to the Company’s financial reporting system.

As of June 30, 2024, based on evaluation of these disclosure controls and procedures, management concluded that our disclosure controls and procedures were not effective. To address our material weakness, we intend to engage an outside firm to advise on our financial reporting processes and 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. We will not be able to remediate these control deficiencies until these steps have been completed and have been operating effectively for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively. The redesign and implementation of improvements to our accounting and proprietary systems and controls may be costly and time consuming and the cost to remediate may impair our results of operations in the future.

In light of the conclusion that our disclosure controls and procedures were not effective at June 30, 2024, we have applied particular procedures and processes as necessary to ensure the reliability of our financial reporting with respect to this quarterly report. Accordingly, we believe, based on our knowledge that: (i) this quarterly report does not contain any untrue statement of material fact or omit a statement of material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this quarterly report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors.

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. The risk factors set forth in our Registration Statement on Form S-1 (SEC File Number 333-279684) as declared effective by the Securities and Exchange Commission on June 27, 2024 and the Prospectus contained therein describe some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition.

There have been no material changes from the risk factors previously disclosed in such filings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities

None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits and Financial Statement Schedules.

| (a) | Exhibits.

Exhibit Number |  | Description of Document
3.1* |  | Certificate of Incorporation, as amended and as currently in effect.
3.2* |  | Amended and Restated Bylaws.
4.1* |  | Form of Specimen stock certificate evidencing shares of common stock.
4.2** |  | Warrant Agreement between the Company and Continental Stock Transfer and Trust company as warrant agent dated as of September 16, 2022
4.3* |  | Form of Warrant Certificate (filed as part of Exhibit 4.2)
10.1**** |  | Joint Venture Agreement between the Company and Wider Come Limited dated as of May 31, 2023.
10.2**** |  | Employment Agreement between the Company and Mark White dated as of July 1, 2023.
10.3**** |  | Services Agreement between the Company and David Owens, M.D. dated as of July 1, 2023.
10.4* |  | Quality Assurance Agreement between the Company and Apical Instruments dated December 31, 2020.
10.5* |  | Advisor Agreement with Leonard Osser dated as of December 22,2021.
10.6* |  | Advisor Agreement with Tucker Anderson dated as of December 24, 2021.
10.7* |  | Advisor Agreement with Gian Domenico Trombetta dated December 24, 2021.
10.8* |  | Employment Agreement between the Company and Marilyn Elson dated as of January 11, 2022
10.9* |  | Amendment and Deferral Agreement dated as of March 30, 2022 to Consulting Agreement between the Company and US Asian Consulting Group LLC
10.10**** |  | Employment Agreement between the Company and Michael Nketiah dated as of July 1, 2023.
10.11* |  | Form of Lock-Up Agreement.
10.12* |  | Consulting Agreement dated as of May 9, 2018 as amended between the Company and US Asian Consulting Group, LLC, as amended on January 2, 2019 and March 4, 2021
10.13*** |  | Amended and Restated Promissory Note in favor of Mark White dated as of January 1, 2023.
10.14* |  | Distribution Authorization Agreement dated as of May 1, 2019 with Wider Come Limited.
10.15***** |  | Form of Lock-Up Agreement.
10.16***** |  | Form of Securities Purchase Agreement.
10.17****** |  | Placement Agency Agreement
31.1******* |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1******* |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1* |  | Code of Ethics
99.2* |  | Audit Committee Charter
99.3* |  | Compensation Committee Charter
99.4* |  | Nominating and Corporate Governance Committee Charter

* | Previously filed as an exhibit to Form S-1 as declared effective by the SEC on September 15, 2022 (SEC File Number 333-261989).
** | Previously filed as an exhibit to Form 8-K/A as filed with the SEC on September 20, 2022.
*** | Previously filed as an exhibit to Form 10-Q as filed with the SEC on May 10, 2023.
**** | Previously filed as an exhibit to Form 10-Q as filed with the SEC on August 10, 2023.
***** | Previously filed as an exhibit to Form S-1 as declared effective by the SEC on June 27, 2024 (SEC File Number 333-279684).
****** | Previously filed as an exhibit to Form 8-K as filed with the SEC on July 3, 2024.
******* | Filed as an exhibit to this Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized on the 8th day of August, 2024.

| NEXALIN TECHNOLOGY, INC.
| By: | /s/ Mark White
|  | Mark White
|  | Chief Executive Officer Principal Executive Officer
|  | Principal Financial Officer

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