Special Note Regarding Forward-Looking Statements



You should read the following discussion and analysis of financial condition and
operating results together with our financial statements and the related notes
and other financial information included elsewhere in this annual report on Form
10-K. References in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" to "us," "we," "our," and similar terms
refer to Nexalin Technology, Inc. This discussion contains forward-looking
statements as that term is defined within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe
harbor" created by those sections. The events described in forward-looking
statements contained in this discussion may not occur. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or
anticipated benefits from acquisitions that may be made by us, or projections
involving anticipated revenues, earnings or other aspects of our operating
results. The words "may," "will," "expect," "believe," "anticipate," "project,"
"plan," "intend," "estimate," and "continue," and their opposites and similar
expressions, are intended to identify forward-looking statements. We caution you
that these statements are not guarantees of future performance or events and are
subject to a number of uncertainties, risks and other influences, many of which
are beyond our control, which may influence the accuracy of the statements and
the projections upon which the statements are based. Reference is made to "Risk
Factors" in this annual report on Form 10-K Our actual results may differ
materially from those anticipated in these forward-looking statements. For
convenience of presentation some of the numbers have been rounded in the text
below.

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 makes a
decision on a new 510(k) application at 4 milliamps based on FDA comments
expected to be received in April 2023. 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 analyzing whether to proceed with an amended application with
the FDA for Gen-1 devices for the treatment of insomnia and anxiety.


                                       49




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 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 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 for
anxiety and insomnia in the United States and China beginning in the third
quarter of 2023. Preliminary data provided by the University of California San
Diego 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, we are currently designing clinical trial strategies for the use
of Gen-3 for the treatment of substance use disorders including opiate, cocaine,
and alcohol abuse. Recently the Gen-2 device was tested in pilot trials in China
for the treatment of Alzheimer's disease and dementia. Continued pilot testing
for Alzheimer's and dementia is planned in China in 2023.

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 eliminates voltage while stabilizing
currents, electromagnetic fields, and various frequencies - referred to
collectively as waveform - particularly our proprietary, 15 milliamp patented
symmetrical waveform. Our devices generate a high frequency carrier wave that is
charge balanced. 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 eliminated the voltage from the
waveform 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 safe 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.

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.


                                       50





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 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 recently 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;

? arrange for a sales, marketing and distribution infrastructure and scale up

external manufacturing capabilities to commercialize any product candidate for

which we may obtain regulatory approval and intend to commercialize on our


    own;



  ? maintain, expand and protect our intellectual property portfolio;

? engage additional clinical, scientific, manufacturing and controls personnel;

? add additional operational, financial and management information systems and

personnel, including personnel to support our product development and planned


    future commercialization efforts;



  ? seek to discover and develop additional products; and

? initiate preclinical studies and clinical trials for any additional products

that we may pursue in the future.


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.


                                       51




Recent Developments

Completion of Initial Public Offering



The Company completed its initial public offering on September 16, 2022. The
initial public offering consisted of 2,315,000 units consisting of 2,315,000
shares of its Common Stock and 2,315,000 accompanying warrants to purchase up to
2,315,000 shares of common stock. Each share of common stock was sold together
with one warrant, each to purchase one share of common stock with an exercise
price of $4.15 per share at a combined offering price of $4.15, for gross
proceeds of $9,607,250 before deducting underwriting discounts and offering
expenses. In addition, Nexalin granted the underwriters a 45-day option to
purchase up to an additional 347,250 shares of common stock and/or warrants to
purchase up to 347,250 shares of common stock to cover over-allotments at the
initial public offering price, less the underwriting discount. The underwriters
exercised their option to purchase 347,250 warrants for net proceeds of $3,473.

The registration statement on Form S-1 (File No. 333-261989) for our initial
public offering was filed with the Securities and Exchange Commission ("SEC")
and became effective on September 15, 2022. A final prospectus relating to the
offering was filed with the SEC and is available on the SEC's website at
http://www.sec.gov. The offering was being made only by means of a prospectus
forming part of the effective registration statement.

The shares and warrants began trading on the Nasdaq Capital Market tier of the
Nasdaq Stock Market ("Nasdaq") in September 2022, under the symbols "NXL" and
"NXLIW", respectively.

Impact of COVID-19 Pandemic

We continue to monitor how the COVID-19 pandemic is affecting our employees,
business and clinical trials. Such pandemic has delayed our clinical trials and
our receipt of marketing approvals from the FDA. Such pandemic also might have
reduced, and continue to reduce, participation in our clinical trials, due to
both travel restrictions and a general unwillingness of subjects to travel. We
cannot presently predict the scope and severity of any other potential business
shutdowns or disruptions, but if we or any of the third parties with whom we
engage, including the suppliers, clinical trial sites, regulators and other
third parties with whom we conduct business, were to experience shutdowns or
other business disruptions, our ability to conduct our business in the manner
and on the timelines presently planned could be materially and negatively
impacted.

We continue to be indirectly impacted because of our current dependence upon our
distributor relationship with Wider Come Limited (Wider".) Wider acts as a
distributor for the Company's devices in China and Asia. Because of significant
restrictions imposed by the Chinese government during the Covid pandemic,
Wider's ability to market and sell the Company's devices has been negatively
impacted, resulting in decreased revenue to the Company. Patients and
salespeople are restricted in their movements resulting in a significant
slowdown in the medical and other sectors. Fortunately, our Chinese distributor
continues our strategy of multiple clinical studies in the major institution in
Beijing in an array of brain related diseases. Very significant efforts and
funds expended by our Chinese distributor has led to regulatory approval in
China in both depression and insomnia thus far which has allowed for sales of
our devices in China this year. The extent of future impact will depend on
future developments, including future activities by the Chinese government and
other possible events which are highly uncertain and not in the Company's
control, including new information which may emerge concerning the spread and
severity of COVID-19, or any of its variants, and actions taken to address its
impact, among others.

In addition, the spread of an infectious disease, including COVID-19, may also
result in the inability of our suppliers to deliver components or raw materials
on a timely basis. Such events may result in a period of business and
manufacturing disruption, and in reduced operations, any of which could
materially affect our business, financial condition and results of operations.
The extent to which the coronavirus impacts our business will depend on future
developments, which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the severity of COVID-19 and the actions
to contain the coronavirus or treat its impact, among other things.


                                       52

Potential Joint Venture; China Related Activities


In September 2018, we entered into an agreement with Wider Come Limited, a
company formed under the laws of the People's Republic of China ("Wider"),
pursuant to which we and Wider have agreed to investigate the formation of a
joint venture entity to be domiciled in Hong Kong (the "potential Joint
Venture") to conduct additional clinical research and implement a business
distribution plan for our devices in China, Macau, Hong Kong, and Taiwan. We do
not have any existing operations in China and will not in the future. We do have
current distribution in China through Wider, our potential Joint Venture
partner. As of the date of this Annual Report on Form 10-K, (i) our operations
are carried on outside of China; and (ii) the potential Joint Venture does not
maintain any variable interest entity structure or operate any data center in
China. However, because of the intended formation of the potential Joint
Venture, we may become subject to laws of The People's Republic of China (PRC or
China) relating to, among other topics, data security and restrictions over
foreign investments. Further, as a result of the complexity and vagaries of the
legal system in the PRC and recent statements and regulatory actions by the PRC
government relating to data security, our ability to operate the potential Joint
Venture may be adversely affected or subject to change and adversely impact our
ability to offer or continue to offer securities to investors, with the result
that our securities may significantly decline or be worthless. There can be no
assurance that regulators in China will not take a contrary view or will not
subsequently require us to undergo the approval procedures and subject us to
penalties for non-compliance.

In March 2022, we entered into a second supplement to the Joint Venture
agreement with Wider whereby the parties confirmed that the potential Joint
Venture had not yet been established and is subject to further review and
analysis of regulatory issues in China and the United States. Pursuant to the
second supplement, the parties agreed to use their commercial efforts to
complete documentation by September 30, 2022. In light of general economic
conditions in China and the United States, the continued impact of regulatory
issues within China and the United States and trade and political issues between
the two counties, the parties determined to further extend the time frame to
complete establishment of the joint venture to September 30, 2023 and entered
into a Supplement 3 to the potential Joint Venture Agreement to memorialize such
extension. The parties intend to continue to work together to complete the
establishment prior to such extended time. Further, the parties agreed that all
references within the Joint Venture agreements to funding and formation were
amended from December 21, 2018 to be September 30, 2023. We anticipate that the
Joint Venture will be formed by the third quarter of 2023. However, that will be
dependent on the situation at that time.

When and if the Joint Venture is formed and Wider completes sales of our devices
in China on behalf of the potential Joint Venture, we believe that there are no
regulatory or other restrictions that would restrict either (i) the transfer
from China of any proceeds resulting from such sales by Wider to the potential
Joint Venture in Hong Kong, other than standard compliance with China's State
Administration of Foreign Exchange ("SAFE") policies and approval process, or
(ii) our receipt of our share of such proceeds from Hong Kong to us in the
United States, which is not subject to SAFE's policies and approval process. The
Company does not currently believe any of the Company's scientific data
resulting from activities in China by the potential Joint Venture would fall
within the Measures for the Management of Scientific Data promulgated by the
General Office of the PRC State Council. In the event any existing or new laws
or regulations or detailed implementations and interpretations are modified or
promulgated, we and the potential Joint Venture will take all actions to remain
in compliance with any such laws or regulations or detailed implementations and
interpretations thereof. Neither we nor our potential Joint Venture Partner can
at this point speak to any future changes in rules, regulations or the
commercial and potentials situation that lies ahead which could affect the
formation of the Joint Venture.

In September of 2021, the China National Medical Products Administration (NMPA),
the equivalent of the United States 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.


                                       53




Results of Operations

Comparison of the Years ended December 31, 2022 and 2021



Our financial results for the years ended December 31, 2022 and 2021 are
summarized as follows:

                                                      Years Ended
                                            December 31,      December 31,
                                                2022              2021             Change         Change(1)
                                                                                     $                %
Revenues, net                               $   1,321,357     $     144,065     $  1,177,292             817 %
Cost of Revenues                                  363,212            21,442          341,770           1,594 %
Gross profit                                      958,145           122,623          835,522             681 %

Operating expenses:
Professional fees                                 605,329           697,063          (91,734 )           (13 )%
Salaries and benefits                             694,108           228,738          465,370             203 %
Selling, general and administrative             1,491,739         5,215,423

      (3,723,684 )           (71 )%
Total operating expenses                        2,791,176         6,141,224       (3,350,048 )           (55 )%
Loss from operations                           (1,883,031 )      (6,018,601 )      4,185,570             (70 )%

Other income (expense), net:
Interest expense, net                             (59,382 )         (82,319 )         22,937              28 %
Other income                                      171,681                 -          171,681             100 %
PPP loan forgiveness                               22,916            22,916                -               -

Total other income (expense), net                 135,215           (59,403

)        194,618             328 %
Net loss                                       (1,697,816 )      (6,078,004 )      4,380,188              72 %

Other comprehensive income:

Unrealized gain on short-term investments          36,313                 -

          36,313             100 %
Comprehensive loss                          $  (1,661,503 )   $  (6,078,004 )   $  4,416,501              73 %

(1) Percentages may not foot due to rounding.

Revenues


For the years ended December 31, 2022 and 2021, we generated $1,321,357 and
$144,065, respectively, of revenue primarily from the sale of devices, supplies
and from the reimbursement of costs. In addition, we generated income from
licensing and treatment fee agreements with our customers by charging 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 derive revenue from equipment
by selling electrodes and patient cables to customers for use with our device.
The increase in revenue for 2022 compared to 2021 was primarily due to the sale
of 221 devices in 2022. There were no sales of devices in 2021.

Cost of Revenues and Gross Profit



For the years ended December 31, 2022 and 2021, cost of revenues were $363,212
and $21,442, respectively, yielding a gross profit of $958,145 and $122,623,
respectively, or 73% and 85%, respectively. Such decrease in gross margin was
due to the change in our sources of revenue. In 2021 our revenue was from
licensing fees and the sales of electrodes and patient cables. The licensing
fees have no related costs. Our cost of revenue in 2021 included shipping
supplies and the cost of the electrodes and patient cables. In 2022 our revenue
was primarily from sales of equipment. The equipment has higher related costs of
revenue and related shipping costs.


                                       54




Operating Expenses

Total operating expenses for the years ended December 31, 2022 and 2021 were
$2,791,176 and $6,141,224, respectively. The decrease was primarily due to the
decrease of approximately $4,200,000 in stock-based compensation for the
issuance of our common stock to various employees and consultants for services,
and a decrease in professional fees for legal and accounting of approximately
$100,000 offset by an increase in salaries and related expenses of approximately
$465,000, an increase in research and development costs of approximately
$372,000, an increase in consulting costs of approximately $80,000, and an
increase in insurance of approximately $88,000. The decrease in legal and
accounting fees are primarily due to the treatment of costs relating to our
initial public offering as a direct cost of the offering. The increase in salary
is primarily due to the hiring of our CFO, our Senior Vice President of Quality,
Clinical and Regulatory, and other staff. The increases in research and
development and consulting costs are attributable to the development of our
Gen-2 and Gen-3 devices. The increase in insurance is a result of being a public
company.

Other Income (Expense), net


Other income (expense), net, as of December 31, 2022 and 2021 were $135,215 and
($59,403), respectively, consisting of interest expense net of the PPP loan
forgiveness, settlement income as a result of interest forgiveness, and interest
and dividend income.

Liquidity and Capital Resources



Working Capital

                                   As of
                       December 31,      December 31,
                           2022              2021
Current Assets        $    7,425,462     $     752,659
Current Liabilities        1,948,986         2,363,634
Working Capital       $    5,476,476     $  (1,610,975 )
Current assets increased for the year ended December 31, 2022 primarily as a
result of the proceeds of the Initial Public Offering. Cash and cash equivalents
decreased approximately $500,000, Short-term investments increased approximately
$6,800,000, accounts receivable decreased approximately $10,000, inventory
increased approximately $125,000 and prepaid and other current assets increased
approximately $230,000.

Current liabilities decreased for year ended December 31, 2022 primarily as a
result of the reduction of accounts payable, settlement of accrued interest and
a decrease in deferred revenue. Accounts payable decreased approximately
$185,000, accrued expenses decreased approximately $72,000, lease liability -
current portion increased approximately $10,000, and deferred revenue decreased
approximately $130,000.



Cash Flows

The following table summarizes our consolidated cash flows for the twelve months ended December 31, 2022 and 2021:

December 31,       December

31,


                                                 2022               2021

Net cash used in operating activities $ 2,215,699 $ 1,076,791 Net cash used in investing activities $ 6,794,879 $

            -

Net cash provided by financing activities $ 8,511,543 $ 1,660,133

Net Cash Used In Operating Activities



Net cash used in operating activities was $2,215,699 for the year ended December
31, 2022, as compared to $1,076,791 for the respective period in 2021, primarily
due to the net loss of $1,697,816 and $6,078,004, respectively, as well as
increases in accounts payable, deferred revenue, prepaid assets and inventory.
These amounts were also offset by $270,670 and $4,478,035 of stock compensation
during the periods, respectively.



                                       55

Net Cash Used In Investing Activities

Net cash used in investing activities during the year ended December 31, 2022 and 2021 was $6,794,879 and zero, respectively, which was due to the 2022 purchase of short-term investments.

Net Cash Provided by Financing Activities



Net cash provided by financing activities during the year ended December 31,
2022 and 2021 was $8,511,543 and $1,660,133, respectively, which was primarily
due to the sale of common stock at IPO, for cash in 2022 and 2021.

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 enrollment 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 of collaborators to manufacture sufficient quantity of product for


    development, clinical trials and/ or potential commercialization;

? obtaining and maintaining patent, trademark and trade secret protection for


    our products;



  ? making arrangements with third parties for manufacturing;

? 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.

Liquidity and Capital Resources


At December 31, 2022, the Company had a significant accumulated deficit of $72.4
million. For the year ended December 31, 2022, the Company had a loss from
operations of $1.8 million and negative cash flows from operations of $2.2
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 in China to its acting distributor. The
Company anticipates that it will continue to incur operating losses as it
executes its development plans through 2023, 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 and issuance of convertible notes. The accompanying audited consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. As of the year
ended December 31, 2022, the Company had cash and cash equivalents on hand of
$162,743 and short-term investments of $6,831,192.



                                       56





At the closing on September 16, 2022, the Company sold 2,315,000 Units and
347,250 of Warrants in an Initial Public Offering (the "Initial Public
Offering") at a price of $4.15 per Unit and $0.01 per Warrant for a total of
$9,610,723. The Company incurred offering costs of $1,067,078, consisting of
$878,858 of underwriting fees and expenses and $188,220 of costs related to the
Initial Public Offering.

Although no assurances can be given as to the Company's ability to deliver on
its revenue plans or that unforeseen expenses may arise, management has
evaluated the significance of the conditions and has concluded that because of
the completion of our initial public offering in September 2022, the Company has
sufficient cash and investments on hand to satisfy its anticipated cash
requirements for the next twelve months from the issuance date of these
financial statements.

Critical Accounting Policies and Significant Judgments and Estimates



Our audited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of our audited consolidated financial statements and related disclosures
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, costs and expenses, and the disclosure of contingent assets
and liabilities in our audited consolidated financial statements. We base our
estimates on historical experience, known trends and events and various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. We evaluate
our estimates and assumptions on an ongoing basis. Our actual results may differ
from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3
to our consolidated financial statements appearing elsewhere in this Form 10-K,
we believe that the following accounting policies are those most critical to the
judgments and estimates used in the preparation of our consolidated financial
statements.

Revenue Recognition

The Company recognizes revenue when its performance obligations with its
customers have been satisfied. At contract inception, the Company determines if
the contract is within the scope of ASC Topic 606 and then evaluates the
contract using the following five steps: (1) identify the contract with the
customer; (2) identify the performance obligations; (3) determine the
transaction price; (4) allocate the transaction price to the performance
obligations; and (5) recognize revenue when (or as) the entity satisfies a
performance obligation. The Company only recognizes revenue to the extent that
it is probable that a significant revenue reversal will not occur in a future
period.

The Company has existing licensing and treatment fee agreements with its
customers for the use of the Nexalin Device in their practices. These agreements
generally have terms of one year with automatic renewal if certain requirements
are met and amounts due per these agreements are billed monthly. The Company
also sells products related to the provision of services. The Company sells its
Devices in China to its acting distributor and sells products relating to the
use of the Devices. The Company has a Royalty Agreement whereby the manufacturer
of the Company's electrodes will pay a royalty to the Company for a three year
period beginning January 1, 2022. The amount of the Royalty is equal to 20% of
the amount that the manufacturer invoices to the acting distributor for the

sale
of the electrodes.

Revenue Streams

The Company derives revenues from its license agreements by charging a monthly
licensing fee for the duration of the agreement. The Company derives revenues
from equipment by selling additional individual electrodes and patient cables to
customers for use with the Nexalin Device. The Company receives revenue from the
sale in China of its Devices to its acting distributor and from the sale of
products relating to the use of those Devices. The Company derives revenue as a
royalty fee from the China-based manufacturer for electrodes ordered in
connection with the Company's China sales.

Performance Obligations


Management identified that subsequent licensing revenue has one performance
obligation. That performance obligation is satisfied as long as the licensing
contract remains valid and is not terminated. The licensing revenue is invoiced
monthly and is recognized at a point in time in which the invoice is sent to the
customer.


                                       57




Management identified that our equipment revenue has one performance obligation.
That performance obligation is satisfied when the electrodes and devices are
shipped to the customer. We do not offer a warranty on the electrodes 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 our royalty fee has one performance obligation. The
performance obligation is satisfied as long as the royalty agreement remains
valid and is not terminated. The royalty revenue is invoiced when the
manufacturer advises the Company that the invoice has been sent to the customer.

Practical Expedients

As part of ASC 606, the Company has adopted several practical expedients including:

? Significant Financing Component - we do not adjust the promised amount of

consideration for the effects of a significant financing component since we

expect, at contract inception, that the period between when we transfer a

promised goods or services to the customer and when the customer pays for that


    service will be one year or less.

? Unsatisfied Performance Obligations -for all performance obligations related

to contracts with a duration of less than one year, we have elected to apply

the optional exemption provided in ASC Topic 606 and therefore, are 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 - we elected to account for shipping and

handling activities as a fulfilment cost rather than as a separate performance


    obligation.

? Right to invoice - we have the right to consideration from a customer in an

amount that corresponds directly with the value to the customer of our

performance completed to date we may recognize revenue in the amount to which

the entity has a right to invoice.

Recent Accounting Pronouncements


In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic
832). ASU 2021-10 and its amendments will be effective for the Company for
interim and annual periods in fiscal years beginning after December 15, 2021.
The Company believes the disclosure requirements related to governmental
assistance have been appropriately made, specifically pertaining to PPP Loans
that were forgiven by the government in 2021. The total impact of the
forgiveness on the consolidated financial statements was immaterial.


                                       58





In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit
Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on
Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic
842), which amends the effective date of the original pronouncement for smaller
reporting companies. ASU 2016-13 and its amendments will be effective for the
Company for interim and annual periods in fiscal years beginning after December
15, 2022. The Company believes the adoption will modify the way the Company
analyzes financial instruments, but it does not anticipate a material impact on
results of operations. The Company is in the process of determining the effects
adoption will have on its audited consolidated financial statements.

All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

Factors That May Affect Future Results and Financial Condition



The information contained under the caption "Risk Factors" beginning on page 15
of this Form 10-K provides examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Readers should be aware that the occurrence
of any of the events described in these risk factors could have a material
adverse effect on our business, results of operations and financial condition.
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or otherwise.

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