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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number:  000-55655

 

NEXEON MEDSYSTEMS INC

(Exact name of Registrant as specified in its charter)

 

 

1910 Pacific Avenue, Suite 20000

Dallas, Texas 75201

(Address of principal executive offices)

 

844-919-9990

(Registrant’s telephone number)

1708 Jaggie Fox Way

Lexington, Kentucky 40511

(Former name or former address, if changed since last report)

_________________________

 

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, a 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.

 

 

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

As of August 11, 2017, the issuer had 26,526,641 shares of Common Stock, $0.001 par value, issued and outstanding. 

 

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NEXEON MEDSYSTEMS INC

 

TABLE OF CONTENTS

 

			Page No.
Cautionary Note Regarding Forward-Looking Statements			3
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements		4
	Consolidated Balance Sheets		4
	Consolidated Statements of Operations		5
	Consolidated Statements of Cash Flows		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3.	Defaults Upon Senior Securities		28
Item 4.	Mine Safety Disclosures		28
Item 5.	Other Information		28
Item 6.	Exhibits		28
SIGNATURES			29

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     

This document contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

 

While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current judgment regarding the direction of our business, actual results may vary from any estimates, predictions, projections, assumptions, or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

 

PART I.

FINANCIAL INFORMATION

            

Item 1.

Financial Statements

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

  

  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

     

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 1.   Nature of Organization

Organization and Operations

Nexeon MedSystems Inc (“Nexeon” or the “Company”) was incorporated in the State of Nevada on December 7, 2015. We are a development stage enterprise focusing on the development and commercialization of physician-driven, medical device innovations. As a bioelectronics company developing active medical devices for the treatment of chronic medical conditions, we are developing solutions with a unique blend of traditional device technologies such as electronics, software, mechanical engineering, and material science. The Company’s primary purposes are to develop and commercialize the drug-eluting balloon technology acquired in the acquisition of Nexeon MedSystems, Inc., a private Delaware corporation (“NXDE”) and to commercialize the implantable neurotechnology and recording platform to be applied for the relief of chronic diseases and disorders, upon completing the acquisition of Nexeon Medsystems Belgium, SPRL (“NMB”), as well as acquire medical device manufacturing capability. During 2016, the Company formed the following wholly-owned subsidiaries: Nexeon Medsystems Europe, SARL (“Nexeon Europe”), Nexeon Medsystems Puerto Rico Operating Company Corporation (“NXPROC”), and Pulsus Medical LLC. Nexeon Europe is the holding company for NXPROC and NMB, subject to the acquisition. NXPROC is focused on research and development, software development and data analysis for the implantable neurotechnology. Pulsus Medical, LLC will conduct research and development on the cardiovascular disease technology.

Unless the context otherwise requires, references to “we,” “our,” “us,” “Nexeon” or the “Company” in these Notes mean Nexeon MedSystems Inc, a Nevada corporation, on a consolidated basis with its wholly-owned subsidiaries, as applicable.

Note 2.   Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Nexeon MedSystems Inc and its wholly-owned subsidiaries NXPROC, Nexeon Europe and Pulsus Medical, LLC as of June 30, 2017 and December 31, 2016 and for the three month periods ended June 30, 2017 and 2016. The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements of the Company, and related notes thereto, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as June 30, 2017 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended June 30, 2017 are not necessarily indicative of the operating results for the full fiscal year or any future period. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 3.   Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has not generated any revenues since inception and has an accumulated a deficit of $4,018,260 at June 30, 2017. The Company currently has limited liquidity, and has not completed its efforts to establish a source of recurring revenues sufficient to cover operating costs over an extended period of time. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern. 

Management expects to seek potential business opportunities for merger or acquisition of existing companies. Management, while not especially experienced in matters relating to public company management, will rely upon their own efforts and, to a much lesser extent, the efforts of the Company’s shareholders, in accomplishing the business purposes of the Company.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 4.   Summary of Significant Accounting Policies

Development Stage Company

The Company is considered to be in the development stage as defined in ASC 915 “Development Stage Entities.” The Company is devoting substantially all of its efforts to the development of its business plans. The Company has elected to adopt early application of Accounting Standards Update No. 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements,” and does not present or disclose inception-to-date information and other remaining disclosure requirements of Topic 915.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.

All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained under audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

If the Company is required to pay interest on the underpayment of income taxes, the Company recognizes interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If the Company is subject to payment of penalties, the Company recognizes an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when the Company changes its judgment about meeting minimum statutory thresholds related to the initial position taken.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 4.   Summary of Significant Accounting Policies (Continued)

Fair Value Measurements

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 —quoted prices in active markets for identical assets or liabilities

Level 2 —quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 —inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The Company currently has no assets or liabilities valued at fair value on a recurring basis.

Principals of Consolidation

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries. All material inter-company accounts, transactions, and profits have been eliminated in consolidation.

Investments in Non-Consolidated Subsidiaries

Investments in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company's ability to exercise significant influence over the operating and financial policies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company's proportionate share of the investees' net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and the Company's share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. The Company accounts for its investment in MicroTransponder, Inc. under the cost method due to the lack of significant influence.

Long-lived Assets

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. The Company did not recognize any impairment losses during the three and six months ended June 30, 2017.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 4.   Summary of Significant Accounting Policies (Continued)

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 “Contracts in Entity's Own Equity.” We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants at each reporting date to determine whether a change in classification between assets and liabilities is required.

Property and Equipment

Property and equipment are stated at cost. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized based upon the lesser of the term of the lease or the useful life of the asset and such expense is included in depreciation expense. Repair and maintenance costs are expensed as incurred. The Company capitalizes all furniture and equipment with cost greater than $500 and benefiting more than one accounting period in the period purchased.

Research and Development

The Company expenses all research and development costs as incurred. Research and development expenses include, but are not limited to, product development, clinical and regulatory expenses, payroll and other personnel expenses, materials, supplies, and consulting costs.

Stock-Based Compensation

ASC 718 requires companies to measure all stock compensation awards using a fair value method and recognize the related compensation cost in its financial statements. Beginning with the Company’s quarterly period that began on January 1, 2016, the Company adopted the provisions of FASB ASC 718 and expenses the fair value of employee stock options and similar awards in the financial statements. The Company accounts for share-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The simplified method is used to determine compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.

The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized as expense over the service period.

The Company recognized stock-based compensation aggregating $161,848 and $10,204 for common stock options issued to Company personnel, directors and/or consultants during the six months ended June 30, 2017 and 2016, respectively. Also during the six months ended June 30, 2017 and 2016, the Company paid stock-based compensation consisting of common stock issued to non-employees aggregating $378,927 and $0, respectively, and to affiliates aggregating $0 and $252, respectively.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 4.   Summary of Significant Accounting Policies (Continued)

Acquired Intangibles

Acquired intangibles include patents and patent licenses acquired by the Company, which are recorded at fair value, assigned an estimated useful life, and are amortized on a straight-line basis over their estimated useful lives ranging from 3 to 19 years. The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.

Recently Issued Accounting Pronouncements

The Company has considered recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period, and management believes that such pronouncements did not, or are not to have a material impact on the Company’s present or future consolidated financial statements.

Note 5.   Income Taxes

As of June 30, 2017, the Company has approximately $4,018,260 of net operating losses (“NOL”) carryovers to offset taxable income, if any, in future years which begin to expire in fiscal 2036. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets relating to the NOL period because it is more likely than not that all of the deferred tax assets will not be realized.

Note 6.   Notes Payable

As of June 30, 2017, the Company held a note payable with a stockholder in the amount of $10,000 which bears interest at the rate of 12% per annum and matures on March 31, 2018. As of June 30, 2017, accrued interest payable related to the note was $2,788.

The Company has a revolving credit card with BB&T Financial with an outstanding balance of $13,851 as of June 30, 2017, a credit limit of $60,000 and a current APR of 25.4%, and a revolving credit card with Comerica Bank with an outstanding balance of $3,649 as of June 30, 2017, a credit limit of $11,000 and a current APR of 0%.

Note 7.   Notes Receivable

In connection with the Acquisition Agreement (See Note 11. Related Party Transactions) and based on the assumption that Nexeon Europe will acquire 107,154 shares of NMB, Nexeon Europe and NMB entered into the Loan Agreement and Promissory Note pursuant to which Nexeon Europe agreed to loan NMB an aggregate of €1,000,000. The loan will mature on the first business day after the one (1) year anniversary of the agreement, or January 11, 2018. The loan accrues interest at a rate of 5% per annum, which interest shall be payable on the maturity date. On May 1, 2017, the terms of the loan were amended to increase the aggregate principal amount of the loan to €1,500,000. As of June 30, 2017, $1,514,361 has been loaned to NMB pursuant to the terms of the Loan Agreement and Promissory Note and $20,448 has been recorded as accrued interest income.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

 

Note 8.   Equity

Common Stock Issuances

During the six months ended June 30, 2017, the Company:

(i)

Issued an aggregate of 201,002 shares of common stock for certain legal, corporate structuring and research and development consulting services rendered by third-party consultants. The foregoing shares were valued at $201,002. $2,925 is included in Equity instruments to be issued for consulting compensation earned but not yet issued as of June 30, 2017.

(ii)

On March 17, 2017 the Company offered to current warrant holders who participated in the 2016 Private Placement which closed on December 2, 2016, the opportunity to convert their warrants into common stock of the Company on the following terms (the “Warrant Conversion Offer”). The offer terms included the exercise of seventeen (17) warrants for seventeen (17) shares of the Company’s common stock at an exercise price of $0.01 per share for every one hundred (100) warrants owned. The remaining eighty-three (83) warrants per hundred warrants owned would be cancelled. The offer was on an all-or-nothing basis to convert all warrants held by each warrant holder (the “Warrant Conversion Offer”). As of June 30, 2017, 593,598 warrants have been exercised for an aggregate of 593,598 shares of the Company’s common stock and 2,898,151 warrants were cancelled in connection with the Warrant Conversion Offer. The total proceeds from the exercise of the 593,598 warrants pursuant to the Warrant Conversion Offer were $5,936.

 

(iii)

During the six months ended June 30, 2017, the Company conducted a private placement of up to 2,000,000 shares of common stock to accredited investors only, pursuant to which it would receive up to $2,500,000 in proceeds (the “2017 Private Placement”). The shares of common stock were offered at $1.25 per share. As of June 30, 2017, the Company had received $985,000 from the sale of common stock and issued 788,000 shares of common stock pursuant to the 2017 Private Placement.

 

(iv)

On December 15, 2016, Mr. Rosellini sold, assigned, and transferred all his right, title, and interest in and to the license owned by him related to the Siemens Patents to the Company pursuant to a Patent License Asset Purchase Agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, during the six months ended June 30, 2017, 3,050,000 shares of the Company’s restricted common stock were issued to Mr. Rosellini valued at $3,050,000.  See Note 11 – Related Party Transactions, Patent License Agreement (Siemens Patents) and Patent License Asset Purchase Agreement.

(v)

On April 1, 2017, the Company issued 175,000 shares of the Company’s common stock in exchange for an increase of $175,000 in the loan to NMB. The shares were issued to AtidTek, LLC for certain project management and engineering services provided to NMB. The shares were valued at $175,000. See Note 11 – Related Party Transactions, January 10, 2017 Acquisition Agreement.

The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act, by Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

Warrants

On February 1, 2016, the Company initiated a private placement for the sale of up to 5,500,000 units (the “Units”) at $1.00 per Unit (the “2016 Private Placement”). Each Unit consisted of one share of restricted common stock and one warrant to purchase one additional share of restricted common stock. The 2016 Private Placement was closed on December 2, 2016. The warrants have an exercise price of $2.00 per share and expire 36 months from the date of issue. The warrants have limited transferability to an affiliate of the holder only, cannot be sold as a warrant and do not contain cashless exercise provisions.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 8.   Equity (Continued)

Warrants (Continued)

As of June 30, 2017, we had 636,761 warrants outstanding, all of which are currently exercisable, with a weighted average price of $2.00 per share and a total of 636,761 shares of common stock of the Company have been reserved for issuance upon exercise of the warrants.

Options Grants – 2016 Omnibus Incentive Plan

The Company may, from time to time, issue certain equity awards pursuant to our 2016 Omnibus Incentive Plan (the “2016 Plan”). The 2016 Plan was adopted by our Board of Directors on January 2, 2016 and was subsequently approved by our shareholders. The Company reserved 5,000,000 shares of common stock for issuance pursuant option grants under the 2016 Plan.

During the six months ended June 30, 2017, the Company issued stock options to purchase a total of 695,000 shares of the Company’s common stock under the 2016 Plan, with exercise prices ranging from $1.00 to $1.25 per share, as follows:

(i)

Granted to the Chief Science Officer of Nexeon Medsystems Puerto Rico Operating Company Corporation, a wholly-owned subsidiary of the Company, 100,000 incentive stock options to purchase 100,000 shares of common stock, with an exercise price of $1.00 per share. The options vest in monthly increments of 8,333 shares per month for 11 months and 8,337 options shall vest in the 12th month, with the three-year term for each option beginning upon each date of vesting, and granted 325,000 nonqualified stock options to purchase 325,000 shares of common stock, with an exercise price of $1.00 per share. The options vest in monthly increments of 27,083 shares per month for 11 months and 27,087 options shall vest in the 12th month, with the three-year term for each option beginning upon each date of vesting. The fair value of the options was determined to be $113,073 using the Black-Scholes Option Pricing Model.

(ii)

Granted to a Consultant 150,000 nonqualified stock options to purchase 150,000 shares of common stock, with an exercise price of $1.00 per share. 50,000 options vest on January 2, 2018, 50,000 options vest on January 2, 2019 and 50,000 options vest on January 2, 2020. The fair value of the options was determined to be $35,917 using the Black-Scholes Option Pricing Model.

(iii)

Granted to a Director appointed to the Board of Directors nonqualified stock options to purchase a total of 25,000 shares of common stock, in two grants of 12,500 each, with an exercise price of $1.00 per share. The options are immediately exercisable and each option grant expires four years from the date of grant. The fair value of the options was determined to be $6,788 using the Black-Scholes Option Pricing Model.

(iv)

Granted to a second Director appointed to the Board of Directors nonqualified stock options to purchase a total of 25,000 shares of common stock, in two grants of 12,500 each, with an exercise price of $1.00 per share. The options are immediately exercisable and each option grant expires four years from the date of grant. The fair value of the options was determined to be $6,788 using the Black-Scholes Option Pricing Model.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 8.   Equity (Continued)

Options Grants – 2016 Omnibus Incentive Plan (Continued)

(v)

Granted to our Vice President, Sales and Marketing, an initial grant of 220,000 nontransferable incentive stock options to purchase 220,000 shares of common stock, with an exercise price of $1.25 per share. Each option shall expire 36 months from the date of vesting. The options shall vest at the rate of 6,111 shares per month for a period of 35 months and 6,115 options shall vest in the 36th month. Vesting commences on the first day of the month following the Grant Date. The fair value of the options was determined to be $33,392 using the Black-Scholes Option Pricing Model.

The options were valued at $195,960 using the Black-Scholes option pricing model with the following assumptions:

Aggregate options expense recognized for the six months ended June 30, 2017 was $161,848.

As of June 30, 2017, there were 1,823,000 shares available for grant under the 2016 Plan, excluding the 3,177,000 options outstanding.

As of June 30, 2017, there were 1,750,000 incentive stock options outstanding to purchase an aggregate of 1,750,000 shares of common stock and 1,427,000 non-qualified options outstanding to purchase an aggregate of 1,427,000 shares of the Company's common stock and 1,823,000 shares available for grant under the 2016 Plan.

Stock option activity, both within and outside the 2016 Plan, and warrant activity for the six months ended June 30, 2017, are as follows:

The range of exercise prices and remaining weighted average life of the options outstanding at June 30, 2017 were $1.00 to $1.25 and 2.73 to 7.92 years, respectively. The aggregate intrinsic value of the outstanding options at June 30, 2017 was $789,735.

The range of exercise price and remaining weighted average life of the warrants outstanding at June 30, 2017 were $2.00 and 1.61 to 2.36 years, respectively. The aggregate intrinsic value of the outstanding warrants at June 30, 2017 was $42,456.

 

   

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

 

Note 9   Commitments and Contingencies

The Company is subject to a patent royalty agreement that requires 3% of Net Product Sales received from commercialization of the 35 patents or other intellectual property acquired in the Merger with NXDE to be paid to NXDE, LLC. No sales have been generated from any of the acquired patents or intellectual property.

The Company acquired a non-exclusive license to a portfolio of 86 patents and is subject to a 6% royalty to Magnus IP GmbH of the Net Sales of all licensed products sold, licensed, leased or otherwise disposed of pursuant to the license. No sales have been generated from the licensed intellectual property.

Note 10.   Omnibus Incentive Plan

The Company may, from time to time, issue certain equity awards pursuant to our 2016 Omnibus Incentive Plan (the "2016 Plan''). The 2016 Plan was adopted by our Board of Directors on January 2, 2016 and was subsequently approved by our shareholders. As of June 30, 2017, options to purchase a total of 3,177,000 shares of the Company's common stock were issued under the 2016 Plan, 2,957,000 with an exercise price of $1.00 per share and 220,000 with an exercise price of $1.25 per share. 200,916 vested immediately upon grant and the remaining vest in varying amounts ranging from 50,000 to 100,000 annually and monthly increments ranging from 3,333 to 27,087 based on individual stock option agreements. The options have terms as follows: 1,977,000 options have a three-year term starting on each date of vesting, 50,000 options have a four-year term starting on each date of vesting, and 1,150,000 have an eight-year term starting on the date of vesting.

The 2016 Plan is administered by a committee of two or more non-employee independent directors designated by the Board. The committee shall perform the requisite duties with respect to awards granted. The committee currently determines to whom awards are made, the timing of any such awards, the type of securities, and number of shares covered by each award, as well as the terms, conditions, performance criteria, restrictions, and other provisions of awards. The committee has the authority to cancel or suspend awards, accelerate the vesting, or extend the exercise period of any awards made pursuant to the 2016 Plan.

Shares Available under the 2016 Omnibus Incentive Plan

The maximum shares available for issuance under the 2016 Plan are 5,000,000 shares, subject to adjustment as set forth in the 2016 Plan. Any shares subject to an award that expires, is cancelled or forfeited or is settled for cash shall, to the extent of such cancelation, forfeiture, expiration or cash settlement, again become available for awards under the 2016 Plan. The committee can issue awards comprised of restricted stock, stock options, stock appreciation rights, stock units and other awards, as set forth in the 2016 Plan.

Transferability

Except as otherwise provided in the 2016 Plan, (i) during the lifetime of a participant, only the participant or the participant’s guardian or legal representative may exercise an option or stock appreciation right, or receive payment with respect to any other award and (ii) no award may be sold, assigned, transferred, exchanged or encumbered, voluntarily or involuntarily, other than by will or the laws of descent and distribution.

Change in Control

In the event of a merger, the surviving or successor entity (or its parent) may continue, assume or replace outstanding awards as of the date of the relevant transaction and such awards or replacements therefore shall remain outstanding and be governed by their respective terms. Such awards or replacements can be executed in part on the condition that the contractual obligations represented by the award are expressly assumed by the surviving or successor entity (or its parent) with appropriate adjustments to the number and type of securities subject to the award and the exercise price thereof so as to preserve the intrinsic value of the award existing at the time of the relevant transaction. Alternatively, the surviving or successor entity (or its parent) could issue to a participant a comparable equity-based award that preserves the intrinsic value of the original award existing at the time of the relevant transaction and contains terms and conditions that are substantially similar to those of the award.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 10.   Omnibus Incentive Plan (Continued)

Change in Control (Continued)

If and to the extent that outstanding awards under the 2016 Plan are not continued, assumed or replaced in connection with a merger or relevant corporate transaction, then all outstanding awards shall become fully vested and exercisable for such period of time prior to the effective date of the relevant transaction as is deemed fair and equitable by the committee and shall terminate at the effective date of said transaction.

Note 11.   Related Party Transactions

Patent License Agreement (Siemens Patents) and Patent License Asset Purchase Agreement

On September 29, 2016, William Rosellini, our Chief Executive Officer, a director and a majority shareholder of the Company, entered into a patent license agreement (the “License Agreement”) with Magnus IP GmbH, German corporation (“Magnus”). Pursuant to the terms of the License Agreement, Magnus granted to Mr. Rosellini, and his affiliates, a non-exclusive, non-transferable, non-assignable without the right to sublicense worldwide license to a portfolio of 86 patents, referred to herein as the “Siemens Patents”.

The intellectual property relates to IOT technology as described by a system of interrelated computing devices, mechanical and digital machines, objects, animals, and/or people that have unique identifiers and a subsequent ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.  This technology can be utilized in a wide variety of medical device applications, most notably in hospitals, nursing facilities, or patients’ homes.

On December 15, 2016, Mr. Rosellini sold, assigned, and transferred all his right, title, and interest in and to the license owned by him related to the Siemens Patents to the Company pursuant to a Patent License Asset Purchase Agreement (the “Purchase Agreement”). As consideration for the transfer of the Siemens Patents and the license related thereto, the Company paid to Mr. Rosellini the sum of $140,000 in cash and during the six months ended June 30, 2017, issued to Mr. Rosellini 3,050,000 shares of the Company’s restricted common stock valued at $3,050,000.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 11.   Related Party Transactions (Continued)

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 11.   Related Party Transactions (Continued)

During the quarter ended June 30, 2017, 175,000 shares of the Company’s common stock were issued to AtidTek, LLC, a consultant of NMB in exchange for research and development project management and engineering services. The shares were valued at $175,000. The $175,000 common stock issuance has been included in the outstanding balance of the loan to NMB. On May 1, 2017 the terms of the Promissory Note were amended to increase the aggregate principal amount of the loan to €1,500,000.

As of June 30, 2017, 1,514,361 has been loaned to NMB and $20,448 has been recorded in accrued interest income pursuant to the Loan Agreement and Promissory Note.

Related Party Loan

The Company's Executive Vice President of Finance loaned $415 to the Company. The loan was non-interest bearing with no set terms of repayment. As of June 30, 2017, the loan was repaid in full.

Warrant Conversion Offer

On March 21, 2017, the Company offered to current warrant holders who participated in the 2016 Private Placement which closed on December 2, 2016, the opportunity to convert their warrants into common stock of the Company on the following terms ("Warrant Conversion Offer"). The offer terms included the exercise of seventeen (17) warrants for seventeen (17) shares of the Company’s common stock at an exercise price of $0.01 per share for every one hundred (100) warrants owned. The remaining eighty-three (83) warrants per hundred warrants owned would be cancelled. The offer was on an all-or-nothing basis to convert all warrants held by each warrant holder.

During the six months ended June 30, 2017, the following officers, directors and related parties have converted warrants pursuant to the Warrant Exchange Offer, as follows:

(i)

Mark C. Bates, our Chief Innovation Officer and a Director, held 370,000 warrants and pursuant to the terms of the Warrant Conversion Offer, converted 62,900 warrants into 62,900 shares of common stock, with 307,100 warrants being cancelled.  The 62,900 shares of common stock were value at $629.

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

(Unaudited)

 

Note 11.   Related Party Transactions (Continued)

Warrant Conversion Offer (Continued)

(ii)

Dr. Michael Rosellini, the father of William Rosellini, our Chief Executive Officer, held 600,000 warrants individually and 617,000 warrants under the Michael Rosellini ROTH IRA.  Dr. Rosellini, pursuant to the terms of the Warrant Conversion Offer, converted 206,890 warrants into 206,890 shares of common stock, with 1,010,110 warrants being cancelled.  The 206,890 shares of common stock are held as follows: 102,000 shares by Dr. Rosellini individually and 104,890 shares by the Michael Rosellini ROTH IRA.  The 206,890 shares of common stock were value at $2,069.

(iii)

Michael Neitzel, a Director, held 500,000 warrants through Yorkville MGB Investments, LLC (“Yorkville”).  Mr. Neitzel is the Managing Partner of Yorkville.  Mr. Neitzel converted 85,000 warrants into 85,000 shares of common stock pursuant to the terms of the Warrant Conversion Offer, with 415,000 warrants being cancelled.  The 85,000 shares of common stock were value at $850.

Note 12.   Subsequent Events

2017 Private Placement

Other Common Stock Issuances

Subsequent to June 30, 2017, the Company issued 3,713 shares of common stock for services rendered by third-party consultants. The shares were valued at $3,713.

Carter, Terry & Company

On July 6, 2017, the Company entered into a placement agent agreement with Carter, Terry & Company (the “Agreement”) for the private placement of equity in the amount of $3,000,000. Carter, Terry & Company will be the exclusive financial advisor to and representative of the Company for an initial period of 30 days, and then reverting to a non-exclusive financial advisor for the next twelve consecutive (12) months commencing on the date of the Agreement, with an option to extend the Agreement an additional six months; provided however, that either party may withdraw from the Agreement at any time upon written notice to the other party. Compensation to Carter, Terry & Company will include a one-time payment of $20,000 and a success fee for debt and/or equity raised on behalf of the Company at the rate of 10% of the amount for any capital raised up to $5,000,000 and 8% of the amount for any capital raised over $5,000,000. This private placement has not commenced as of August 11, 2017. The final terms and conditions are still being finalized.

 

Nexeon Medsystems Belgium, SPRL (“NMB”) Loan
    

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our unaudited interim consolidated financial statements and related notes thereto which are included in Item 1 of this Quarterly Report on Form 10-Q, (ii) the audited financial statements of the Company and NXDE, and related notes thereto, for the period ended December 31, 2016 included in our Form 10 Registration Statement filed with the Securities and Exchange Commission (“SEC”) on October 5, 2016, and (iii) our audited financial statements and related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 29, 2017.

 

Nexeon MedSystems Inc was incorporated on December 7, 2015 in the State of Nevada. We are a development stage enterprise focusing on the development and commercialization of physician-driven medical device innovations. The Company’s consolidated operations include operations of the following wholly-owned subsidiaries: Nexeon Medsystems Europe, SARL (“Nexeon Europe”), Nexeon Medsystems Puerto Rico Operating Company Corporation (“NXPROC”) and Pulsus Medical LLC. Nexeon Europe is the holding company for NXPROC and will be the holding company for NMB upon the acquisition of NMB during Q3 of 2017. NXPROC is focused on research and development, software development, and data analysis for the implantable neurotechnology device, NNS, being developed by NMB. As a result of the acquisition of NMB the Company will have accomplished an expansion of its medical device innovations to include an implantable neurotechnology device with European sales expected to begin in Q1 of 2018. Pulsus will continue to conduct the development and commercialization of the Company’s cardiovascular disease technology, a Micro-Perforated Catheter Balloon Drug Delivery System.

 

As of June 30, 2017, we had an accumulated deficit of $4,108,260. Our net loss was $1,023,505, and $2,425,922 for the three and six months ended June 30, 2017, respectively.  

 

We expect that we will continue to incur significant expenses and increasing operating losses relating to our ongoing activities, particularly as we continue to invest in the development and commercialization of medical devices, which will include the initiation of clinical trials required to receive regulatory approval for our medical devices in both the United States and European Union. Additionally, when we initiate a launch of one or more of our products, we expect to incur substantial commercialization expenses related to the manufacture and distribution, as well as sales and marketing, of these products. In addition, the Company is subject to additional costs associated with operating as a public company. Accordingly, we will need to obtain additional funding to continue operations. Such financing may not be available to us on acceptable terms, or at all. In the event we require additional capital and are unable to secure such funding, we could be forced to delay, reduce, or eliminate our research, development, and commercialization activities.

 

For complete details regarding the business of the Company, see “Item 1. Business” and “Item 2. Properties” included in our Annual Report on Form 10-K filed with the SEC on March 29, 2017.

Results of Operations for the Three Months Ended June 30, 2017 and 2016

Research & Development Activities

 

Research and Development (“R&D”) expenses consist of the costs associated with our research and discovery efforts related to the design and development of our proposed medical devices. Primarily, R&D expenses are expected to include, but may not be limited to: 

 

 

·	Facilities, laboratory supplies, equipment and related expenses;

·	Employee-related expenses, which among other things includes salaries, benefits, travel, and stock-based compensation;

·	External R&D activities incurred under arrangements with third-parties such as contract research organizations, manufacturing organizations, consultants, and possibly a scientific advisory board; and

·	License fees and other costs associated with securing and protecting IP.

For the three months ended June 30, 2017 and 2016, the Company’s research and development expenses were $480,484 and $24,384, respectively, primarily reflecting consultants, materials and supplies.

 

It is expected that the Company’s R&D activities and related expenses will increase significantly in the future as we increase the scope and rate of such efforts and begin more expensive development activities, including clinical trials and similar studies as required by the relevant regulatory authorities in our targeted jurisdictions (i.e., the United States and European Union).

 

The successful completion of the requisite clinical trials and studies to bring our contemplated medical devices to the U.S. and E.U. markets is highly uncertain. We cannot reasonably estimate or know the nature, timing, and estimated costs of the related efforts, nor can we make any assurances as to the period, if any, in which material net cash inflows from sales of our medical devices may commence. This uncertainty is due to the numerous risks and variables associated with developing and marketing medical devices, including, but not limited to:

 

·	The scope and degree of progress associated with our research and discovery efforts, as well as related development activities;

·	The extent of expenses incurred in conjunction with the foregoing activities;

·	The safety and efficacy of our medical device as compared to traditional treatment modalities;

·	Our ability to articulate successfully the benefits of our medical device to medical professionals who will be responsible for introducing patients to our product;

·	The results of anticipated clinical studies and trials as required by the relevant regulatory approval processes;

·	The terms and timing of potential regulatory approvals, if any; and

·	The expense of securing licenses to relevant IP and/or the expense of filing, prosecuting, defending, and enforcing patent claims and other IP rights that we either own outright or have licensed.

 

Unfavorable developments with respect to any of the foregoing could mean significant changes in the cost and timing associated with our ability to bring our medical device to market and begin generating revenues.

 

General & Administrative Expenses

 

General and administrative expenses generally consist of salaries and similar costs associated with employees, including stock-based compensation expense. This category of expenses may also include facility costs and professional fees related to (i) legal and patent services; (ii) capital formation; (iii) investor and public relations services; and (iv) consulting and accounting services.

 

For the three months ended June 30, 2017 and 2016, the Company’s general and administrative expenses were $387,207 and $73,335, respectively.

 

It is expected that our general and administrative expenses will increase in the future as we expand our R&D activities in pursuit of regulatory approval for our contemplated medical devices. Such a rise in expenses could result from:

 

·	Increased number of employees;

·	Expanded infrastructure;

·	Higher legal and compliance costs;

·	Increased complexity of our financial statements that could precipitate a rise in our bookkeeping and accounting costs;

·	Higher insurance premiums; or

·	Increased need for investor and public relation services.

Depreciation and Amortization

Depreciation and Amortization expenses consist of amortization of acquired intangibles and depreciation for office equipment and furniture and fixtures. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets. During the three months ended June 30, 2017, the Company has not acquired any office equipment.

 

 

During the year ended December 31, 2016, the Company acquired $6,120,000 in patents pertaining to the Cardiovascular Disease Technology acquired in the Merger with NXDE and acquired $3,190,000 in patent licenses for the underlying patents referred to as the Siemens Patents. The amortization period for each of the individual patents depends on the legal terms for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. The patents and patent licenses are amortized using the straight-line method over the remaining time until expiration. The majority of these patents and patents underlying the license will expire between 2020 and 2036. 

For the three months ended June 30, 2017 and 2016, the Company's depreciation expenses were $49 and $0, respectively. For the three months ended June 30, 2017 and 2016, the Company's amortization expenses were $258,665 and $155,884 respectively.

Results of Operations for the Six Months Ended June 30, 2017 and 2016

Research & Development Activities

 

Research and Development (“R&D”) expenses consist of the costs associated with our research and discovery efforts related to the design and development of our proposed medical devices. Primarily, R&D expenses are expected to include, but may not be limited to: 

·	Facilities, laboratory supplies, equipment and related expenses;

·	Employee-related expenses, which among other things includes salaries, benefits, travel, and stock-based compensation;

·	External R&D activities incurred under arrangements with third-parties such as contract research organizations, manufacturing organizations, consultants, and possibly a scientific advisory board; and

·	License fees and other costs associated with securing and protecting IP.

 

For the six months ended June 30, 2017 and 2016, the Company’s research and development expenses were $966,307 and $24,384, respectively, primarily reflecting consultants, materials and supplies.

 

It is expected that the Company’s R&D activities and related expenses will increase significantly in the future as we increase the scope and rate of such efforts and begin more expensive development activities, including clinical trials and similar studies as required by the relevant regulatory authorities in our targeted jurisdictions (i.e., the United States and European Union).

 

The successful completion of the requisite clinical trials and studies to bring our contemplated medical devices to the U.S. and E.U. markets is highly uncertain. We cannot reasonably estimate or know the nature, timing, and estimated costs of the related efforts, nor can we make any assurances as to the period, if any, in which material net cash inflows from sales of our medical devices may commence. This uncertainty is due to the numerous risks and variables associated with developing and marketing medical devices, including, but not limited to:

 

·	The scope and degree of progress associated with our research and discovery efforts, as well as related development activities;

·	The extent of expenses incurred in conjunction with the foregoing activities;

·	The safety and efficacy of our medical device as compared to traditional treatment modalities;

·	Our ability to articulate successfully the benefits of our medical device to medical professionals who will be responsible for introducing patients to our product;

·	The results of anticipated clinical studies and trials as required by the relevant regulatory approval processes;

·	The terms and timing of potential regulatory approvals, if any; and

·	The expense of securing licenses to relevant IP and/or the expense of filing, prosecuting, defending, and enforcing patent claims and other IP rights that we either own outright or have licensed.

 

Unfavorable developments with respect to any of the foregoing could mean significant changes in the cost and timing associated with our ability to bring our medical device to market and begin generating revenues.

 

General & Administrative Expenses

 

General and administrative expenses generally consist of salaries and similar costs associated with employees, including stock-based compensation expense. This category of expenses may also include facility costs and professional fees related to (i) legal and patent services; (ii) capital formation; (iii) investor and public relations services; and (iv) consulting and accounting services.

 

 

For the six months ended June 30, 2017 and 2016, the Company’s general and administrative expenses were $1,010,728 and $121,972, respectively.

 

It is expected that our general and administrative expenses will increase in the future as we expand our R&D activities in pursuit of regulatory approval for our contemplated medical devices. Such a rise in expenses could result from:

 

·	Increased number of employees;

·	Expanded infrastructure;

·	Higher legal and compliance costs;

·	Increased complexity of our financial statements that could precipitate a rise in our bookkeeping and accounting costs;

·	Higher insurance premiums; or

·	Increased need for investor and public relation services.

Depreciation and Amortization

Depreciation and Amortization expenses consist of amortization of acquired intangibles and depreciation for office equipment and furniture and fixtures. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets. During the six months ended June 30, 2017, the Company has not acquired any office equipment.

During the year ended December 31, 2016, the Company acquired $6,120,000 in patents pertaining to the Cardiovascular Disease Technology acquired in the Merger with NXDE and acquired $3,190,000 in patent licenses for the underlying patents referred to as the Siemens Patents. The amortization period for each of the individual patents depends on the legal terms for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. The patents and patent licenses are amortized using the straight-line method over the remaining time until expiration. The majority of these patents and patents underlying the license will expire between 2020 and 2036. 

For the six months ended June 30, 2017 and 2016, the Company's depreciation expenses were $98 and $0, respectively. For the six months ended June 30, 2017 and 2016, the Company's amortization expenses were $517,212 and $233,826, respectively.

Liquidity and Capital Resources

 

Sources of Liquidity

 

To date, the Company has not generated any revenues. We have financed our operations to date through a private placement (the “2016 Private Placement”) of our common stock and from loans from the Company's largest shareholder, Rosellini Scientific. The 2016 Private Placement was closed as of December 2, 2016 (the “Closing Date”).  We received $2,860,946 in net cash proceeds from the issuance of 2,840,946 units in the 2016 Private Placement and 20,000 units not yet issued at $1.00 per unit. Each unit consists of one share of restricted common stock and one warrant to purchase one additional share of restricted common stock. The warrants have an exercise price of $2.00 per share and expire 36 months from the Closing Date of the 2016 Private Placement.

During the six months ended June 30, 2017, the Company issued an aggregate of 201,002 shares of common stock for certain legal, corporate structuring and research and development consulting services rendered by third-party consultants and issued 175,000 shares of common stock for research and development consulting to a contractor of NMB. The foregoing shares were valued at $376,002. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act, by Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

 

During 2016, Rosellini Scientific transferred approximately $751,000 of Federal research grants applicable to Pulsus’ products to the Company. These awards commence in the third quarter of 2017. Pulsus had previously applied for Matching Funds from the Kentucky SBIR Matching Funds Program funded by the Cabinet for Economic Development (“CED”), Office of Entrepreneurship. The Kentucky SBIR Matching Funds Program was a competitive qualification process and Pulsus did not receive the award. The Company and Pulsus have several additional NIH/SBIR Grant applications pending. 

Future Financing; Continued Operations

 

Until such time, if ever, as the Company can generate substantial revenues, we expect to finance our cash needs through a combination of future debt and equity financing, as well as expected non-dilutive research grant awards. Besides certain grant awards, as described above, the Company does not have any committed external source of funds. To the extent that the Company secures additional capital through the sale of convertible debt or equity securities, the ownership interest of our stockholders may be diluted, and the terms of any such securities we issue may include liquidation or other preferences that adversely affect the rights of common stockholders. In cases where the Company secures certain debt financing, if any such is available, we may become subject to certain covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures, or declaring dividends. In the event the Company is unable to secure needed financing, or is unable to secure such financing on terms we find favorable, we may be forced to delay, limit, or terminate product development and/or future commercialization of the same.

On July 6, 2017, the Company entered into a placement agent agreement with Carter, Terry & Company (the “Agreement”) for the private placement of equity in the amount of $3,000,000. Carter, Terry & Company will be the exclusive financial advisor to and representative of the Company for an initial period of 30 days, and then reverting to a non-exclusive financial advisor for the next twelve consecutive (12) months commencing on the date of the Agreement, with an option to extend the Agreement an additional six months; provided however, that either party may withdraw from the Agreement at any time upon written notice to the other party. Compensation to Carter, Terry & Company will include a one-time payment of $20,000 and a success fee for debt and/or equity raised on behalf of the Company at the rate of 10% of the amount for any capital raised up to $5,000,000 and 8% of the amount for any capital raised over $5,000,000. This private placement has not commenced as of August 11, 2017. The final terms and conditions are still being finalized.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support, or other benefits.

 

Critical Accounting Policies

 

Our management’s discussion and analysis of the Company’s financial condition and results of operations is based on our consolidated financial statements, which were prepared in conformity with generally accepted accounting principles. The preparation of our consolidated financial statements requires us to establish accounting policies and make estimates and assumptions that affect our reported amounts of assets and liabilities at the date of the consolidated financial statements. These consolidated financial statements include some estimates and assumptions that are based on informed judgments and estimates of management. We evaluate our policies and estimates on an on-going basis and discuss the development, selection and disclosure of critical accounting policies with the Board of Directors. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Our consolidated financial statements may differ based upon different estimates and assumptions.

 

The Company’s significant accounting policies are described in more detail in the notes to our consolidated financial statements, above. See Note 4, Summary of Significant Accounting Policies which we believe set forth the most critical accounting policies to aid you in fully understanding and evaluating our financial condition and results of operations.

 

 

New Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Our exposure to market risks is limited to changes in interest rates. We do not use derivative financial instruments as part of an overall strategy to manage market risk. We have no debt outstanding nor do we have any investment in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of June 30, 2017, our disclosure controls and procedures were not effective due to the size and nature of the existing business operation. Given the size of our current operation and existing personnel, the opportunity to implement internal control procedures that segregate accounting duties and responsibilities is limited. Until the organization can increase in size to warrant an increase in personnel, formal internal control procedure will not be implemented until they can be effectively executed and monitored. As a result of the size of the current organization, there will not be significant levels of supervision, review, independent directors nor formal audit committee.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended June 30, 2017, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

Item 1.

Legal Proceedings

 

As of the date of this report, the Company is not currently involved in any legal proceedings.

 

Item 1A.

Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is an enumeration of all securities issued by the Company since December 7, 2015 (inception) that have not been registered under the Securities Act.

Because of the Merger, 100% of NXDE’s issued and outstanding shares of preferred stock were converted into an aggregate of 1,659,943 shares of the Company’s common stock. The Company has been unsuccessful in contacting five NXDE preferred stock holders and issuing 77,725 shares of the Company’s stock. These shares are valued at $77,725 and are included in Equity instruments to be issued until these shares can be issued. The Company has issued 1,582,218 of the 1,659,943 shares of the Company’s common stock exchanged pursuant to the Merger Agreement.

After the Merger, three additional NXDE shareholders converted an aggregate of $34,261 in debt for 34,261 shares of the Company’s common stock and warrants to purchase up to 34,261 shares of common stock at an exercise price of $2.00 per share with a term of 36 months. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by Section 4(a)(2) thereof and/or Rule 506 of Regulation D thereunder, as a transaction by an issuer not involving a public offering.

After the Merger, Rosellini Scientific exchanged a $175,000 promissory note with a term of five years bearing an annual interest rate of 8%, payable to Rosellini Scientific by Emeritus in exchange for 175,000 shares of the Company’s common stock and three-year warrants to purchase up to 175,000 shares of common stock with an exercise price of $2.00 per share. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities by Section 4(a)(2) thereof and/or Rule 506 of Regulation D thereunder, as a transaction by an issuer not involving a public offering. This transaction was rescinded as of June 30, 2016 and the shares were returned.

 

 

On December 15, 2015, the Company issued 500,000 shares of its common stock to Ronald Conquest, the Executive Vice President of Finance, and a director for the sum of $500. Of the 500,000 shares, 212,000 vested upon issuance and the balance shall vest over a 36-month period commencing on January 1, 2016. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by Section 4(a)(2) thereof and/or Rule 506 of Regulation D thereunder, as a transaction by an issuer not involving a public offering.

On January 1, 2016, the Company issued 252,000 shares of common stock to Christopher Miller, the Company’s Chief Financial Officer, for certain accounting and budget-related services rendered as well as serving as Interim CFO until a permanent CFO was hired. The shares vest over a 36-month period. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

On January 2, 2016, the Company issued 1,800,000 shares of common stock to its then Vice President of Clinical Affairs, Dr. Elizabeth Rosellini in exchange for 214 shares of common stock of Emeritus and 60,000 shares of common stock of Nuviant. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act, by Section 4(a)(2) thereof and/or Rule 506 of Regulation D thereunder, as a transaction by an issuer not involving a public offering.

On January 2, 2016, the Company entered into a contribution agreement with Rosellini Scientific, a company controlled by our Chief Executive Officer, William Rosellini and its wholly-owned subsidiary, Belltower Associates, LLC. Pursuant to the contribution agreement, the Company issued 13,200,000 shares of common stock in return for, among other consideration:

During the six months ended June 30, 2017, the Company conducted a private placement of up to 2,000,000 shares of common stock to accredited investors only, pursuant to which it would receive up to $2,500,000 in proceeds (the “2017 Private Placement”). The shares of common stock were offered at $1.25 per share. As of August 11, 2017, the Company has received $1,165,000 from the sale of common stock and issued 932,000 shares of common stock The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

Exhibit Number		Description
3.01 (1)		Articles of Incorporation as filed with the Nevada Secretary of State
3.02 (1)		Certificate of Amendment to the Articles of Incorporation filed with the Nevada Secretary of State
3.03 (1)		Articles of Merger filed with the Nevada Secretary of State
3.04 (1)		Certificate of Merger filed with the Delaware Secretary of State
3.05 (1)		By-laws
4.01 (2)		2016 Omnibus Incentive Plan
4.02 (1)		2016 Omnibus Incentive Plan - Form of Stock Option Award Agreement
10.01 (3)		Agreement and Plan of Merger dated February 8, 2016 between Nexeon MedSystems, Inc., a Delaware corporation, and Nexeon MedSystems Inc, a Nevada corporation
10.02 (1)		Form of Director Indemnification Agreement
14.01 (1)		Code of Business Conduct and Ethics
31.1 *		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document**
101.SCH*		XBRL Extension Schema Document**
101.CAL*		XBRL Extension Calculation Linkbase Document**
101.DEF*		XBRL Extension Definition Linkbase Document**
101.LAB*		XBRL Extension Labels Linkbase Document**
101.PRE*		XBRL Extension Presentation Linkbase Document**

_________________

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.