Business Overview and Chronological History
Nexalin Technology, Inc. (NASDAQ:NXL) is an innovative medical device company that has developed groundbreaking neurostimulation products to address the growing global mental health epidemic. The company's mission is to provide safe, effective, and accessible solutions that can transform the lives of individuals struggling with various mental health conditions.
Nexalin was originally formed on October 19, 2010 as a Nevada corporation under the name NV Nexalin, with its principal offices located in Houston, Texas. The company's focus has been on the design and development of innovative neurostimulation devices that utilize bioelectronic medical technology to treat mental health conditions, such as anxiety, insomnia, and depression, without the need for drugs or psychotherapy.
In September 2019, Nexalin formed a wholly owned subsidiary, Neuro-Health International, Inc., to expand its operations and research efforts, although this subsidiary had no activity from inception through June 30, 2024. The company's initial product, known as the Generation 1 (Gen-1) device, was a cranial electrotherapy stimulation (CES) device that emitted a waveform at 4 milliamps during treatment. The Gen-1 device had been cleared by the U.S. Food and Drug Administration (FDA) to treat depression, anxiety, and insomnia.
However, in December 2019, the FDA reclassified CES devices, including Nexalin's Gen-1 device, as Class II medical devices for the treatment of anxiety and insomnia. This reclassification required Nexalin to file a new 510(k) application with the FDA to obtain approval for the sales and marketing of its devices for the treatment of these conditions. The FDA's decision also meant that the treatment of depression with Nexalin's device would require a Class III certification and a new premarket approval (PMA) application to demonstrate safety and effectiveness.
While Nexalin continues to provide services to medical professionals to support the use of existing Gen-1 devices, the company has suspended new sales and marketing efforts for these products in the United States. Instead, the company has focused on the development of its next-generation devices, known as Generation 2 (Gen-2) and Generation 3 (Gen-3).
The Gen-2 and Gen-3 devices feature a new advanced waveform technology that emits a 15-milliamp signal, which Nexalin believes can penetrate deeper into the brain and stimulate the structures associated with mental illness. The company has conducted research and clinical studies to develop safety data for these new devices and has submitted the waveform technology for review by the FDA for eventual marketing in the United States and globally.
In May 2023, Nexalin formalized a joint venture agreement with Wider Come Limited, a Hong Kong-based company, to engage in the clinical development, marketing, sale, and distribution of the Gen-2 devices in China and other countries in the region. Under the 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 venture's expenses.
Nexalin's Gen-2 device was approved by the China National Medical Products Administration (NMPA) in September 2021 for the treatment of insomnia and depression in China. This approval has allowed Wider to market and sell the Gen-2 device in China for these indications.
In addition to the China joint venture, Nexalin has also made progress in other global markets. In June 2022, the Sultanate of Oman's Ministry of Health granted conditional approval for the use of the Gen-2 device, and in June 2024, the company announced that its Gen-2 device had been granted regulatory approval by the Brazilian Health Regulatory Agency.
In 2023, Nexalin faced challenges in maintaining its Nasdaq listing, including failing to meet the minimum bid price requirement and the minimum stockholder equity requirement. However, the company was able to regain compliance through a public offering in July 2024 that raised approximately $5.25 million in gross proceeds.
Financial Performance and Ratios
Nexalin's financial performance has been marked by significant losses in recent years, as the company has focused on the development and regulatory approval of its neurostimulation devices. For the year ended December 31, 2023, the company reported a net loss of $4.65 million, with total revenue of $110,750 and an operating loss of $5.70 million. The company's operating cash flow (OCF) for 2023 was negative $3.84 million, and its free cash flow (FCF) was negative $3.94 million.
For the three months ended June 30, 2024 (Q2 2024), Nexalin generated $26,840 in revenue, down from $35,540 in the prior year period, representing a 24% year-over-year decrease. This decline was primarily due to the lack of device sales in Q2 2024 compared to Q2 2023. Gross profit for Q2 2024 was $19,590, or a 73% gross margin, compared to $26,170 and a 73.6% gross margin in Q2 2023.
Operating expenses increased significantly in Q2 2024 to $1.32 million, up from $903,030 in Q2 2023. The increase was driven by higher professional fees, sales/marketing, and R&D costs related to the development of the Gen-2 and Gen-3 devices. As a result, Nexalin reported a net loss of $1.28 million in Q2 2024, compared to a $822,440 net loss in the prior year period. The company's OCF for Q2 2024 was negative $1.25 million, and its FCF was negative $1.31 million.
Liquidity
The company's liquidity position has been a concern, as it had cash and cash equivalents of $580,230 and short-term investments of $2.37 million as of December 31, 2023. Nexalin's current ratio, a measure of its ability to meet short-term obligations, stood at 5.57 as of the same date. However, more recent data as of December 31, 2023, shows an improved current ratio of 8.09 and a quick ratio of 7.72, indicating strong liquidity.
As of June 30, 2024, Nexalin had $848,800 in cash and cash equivalents on its balance sheet. The company's financial situation improved significantly after it completed a public offering in July 2024, raising approximately $5.25 million in gross proceeds. This capital infusion increased Nexalin's stockholders' equity to approximately $6.90 million as of July 1, 2024, strengthening its financial position and providing additional resources for the continued development and commercialization of its products.
Nexalin's research and development expenses have been a significant contributor to its overall losses, as the company has invested heavily in the development of its Gen-2 and Gen-3 devices. For the year ended December 31, 2023, the company reported $275,080 in research and development expenses, which were included in its selling, general, and administrative expenses.
The company's debt-to-equity ratio is effectively zero, as it has minimal debt of $4,460 as of December 31, 2023. Nexalin does not have any disclosed available credit lines.
Geographic Markets
While Nexalin's products have a global potential, the company's sales are currently concentrated in the United States. In Q2 2024, 81% of revenue was from US sales, while 19% came from international sales. The company's joint venture in China and regulatory approvals in other countries suggest a growing focus on international markets.
Risks and Challenges
Nexalin faces several key risks and challenges as it continues to develop and commercialize its neurostimulation products. One of the most significant challenges is the regulatory approval process, particularly in the United States, where the company must navigate the FDA's requirements for both its existing Gen-1 device and its new Gen-2 and Gen-3 devices.
The reclassification of CES devices by the FDA in 2019 has required Nexalin to pursue new 510(k) and PMA applications, which can be a complex and time-consuming process. Any delays or setbacks in the regulatory approval process could significantly impact the company's ability to bring its products to market and generate revenue.
Additionally, Nexalin's operations in China, including its joint venture with Wider, expose the company to various political, economic, and regulatory risks inherent to doing business in the country. The company's ability to enforce its intellectual property rights and effectively monetize the joint venture in China may also be limited.
The company's reliance on a limited number of large customers for a significant portion of its revenue also poses a risk, as the loss of one or more of these customers could have a material impact on its financial performance.
Nexalin also faces competition from other companies developing neurostimulation and mental health treatment technologies, which could impact the company's market share and pricing power.
Outlook and Clinical Development
Nexalin is currently analyzing pilot and pivotal trial strategies for the Gen-2 and Gen-3 devices, with plans to conduct additional trials for anxiety, insomnia, and depression in the US and China in late 2024. The company has outlined several key strategic priorities, including:
1. Advancing the clinical development and regulatory approval process for its Gen-2 and Gen-3 devices in the United States and other global markets. 2. Expanding the commercialization and distribution of its approved Gen-2 device in China and other international markets. 3. Exploring additional strategic partnerships and collaborations to support the development and commercialization of its products. 4. Investing in the expansion of its virtual clinic model, which aims to provide patients with convenient and private access to its neurostimulation treatments.
The company's success in executing these strategic initiatives will be crucial in determining its ability to generate revenue, reduce its operating losses, and enhance its long-term financial stability.
Short Reports and Controversies
Nexalin has not been the subject of any major short reports or controversies during the period covered in this analysis. However, the company has faced some challenges related to its operations in California, where it has been engaged in settlement discussions with the state's Employment Development Department (EDD) regarding the classification of certain workers as contractors rather than employees.
In January 2021, the company was also named as a defendant in a lawsuit filed by a former employee, Sarah Veltz, who alleged that she was not paid all wages and benefits due to her and that she was subjected to sexual harassment during her employment. The case is currently pending, with a trial scheduled for November 2024.
Conclusion
Nexalin Technology, Inc. is an innovative medical device company that is at the forefront of the mental health treatment revolution. While the company has faced significant regulatory and financial challenges in recent years, its focus on developing non-invasive neurostimulation solutions for conditions like anxiety, insomnia, and depression, as well as its progress in global markets, position it as a promising player in a growing industry.
As Nexalin continues to navigate the complex regulatory landscape and works to commercialize its next-generation devices, investors will be closely watching the company's ability to execute on its strategic priorities and generate sustainable revenue growth. With the recent capital infusion from its public offering, Nexalin appears to be well-positioned to take advantage of the significant unmet demand for effective, safe, and accessible mental health treatments. However, the company's ongoing losses and regulatory hurdles underscore the need for careful execution of its development and commercialization strategies in the coming years.