UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2017

 

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

 

For the transition period from ___________ to ____________

 

Commission file number:  000-55655

 

NEXEON MEDSYSTEMS INC

(Exact name of registrant as specified in its charter)

 

Nevada   81-0756622
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1910 Pacific Avenue, Suite 20000,

Dallas, Texas 75201

(Address of principal executive offices)

 

844-919-9990

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:   None.

 

Securities registered under Section 12(g) of the Exchange Act:  Common Stock, $0.001 par value

Name of each exchange on which registered:  OTC QB Marketplace

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☐   No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ☐   No  þ

 

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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  þ   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 such shorter period that the registrant was required to submit and post such files).   Yes  þ   No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☐

 

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.

 

  Large accelerated filer   ☐ Accelerated filer   ☐  
  Non-accelerated filer    ☐ Smaller reporting company  þ   
(Do not check if smaller reporting company) Emerging growth company   þ  

 

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

 

The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $12,432,280.

 

As of April 5, 2018, the registrant had 27,615,185 shares of its $0.001 par value common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:  None.

 

 

 

 

 

NEXEON MEDSYSTEMS INC

 

TABLE OF CONTENTS

 

    Page No.
     
Cautionary Note Regarding Forward-Looking Statements ii
     
PART I.    
     
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 27
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosures 27
     
PART II.    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28
Item 6. Selected Financial Data 30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34
Item 8. Financial Statements and Supplementary Data F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 35
     
PART III.    
     
Item 10. Directors, Executive Officers and Corporate Governance 36
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 48
Item 13. Certain Relationships and Related Transactions, and Director Independence 49
Item 14. Principal Accountant Fees and Services 53
     
PART IV. FINANCIAL INFORMATION  
     
Item 15. Exhibits and Financial Statement Schedule 54
Item 16. Form 10-K Summary
     
SIGNATURES 55

 

i

 

 

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.

 

 ii

 

 

PART I.

 

ITEM 1. BUSINESS

 

Nexeon MedSystems, Inc. is a neuromodulation medical device manufacturing company focused on the development and commercialization of its neurostimulation technology platform for the treatment of various disorders via electrical stimulation of tissues associated with the nervous system. Our consolidated operations include operations of the following wholly-owned subsidiaries: Nexeon Medsystems Europe, SARL (“Nexeon Europe”), Nexeon Medsystems Puerto Rico Operating Company Corporation (“NXPROC”), Nexeon Medsystems Belgium, SPRL (“NMB”), which owns and operates Medi-Line, S.A. (“Medi-Line”) and Pulsus Medical LLC. Nexeon Europe is the holding company for NXPROC and NMB. NXPROC is focused on advanced computational biology and deep learning utilization associated with the Internet of Medical Things (“IoT”) technology. Pulsus Medical, LLC conducts research and development related to cardiovascular disease technology.

 

Business Overview

 

We are a medical device company focused on the development, manufacturing, and commercialization of neurostimulation technology for the treatment of various neurological disorders through electrical stimulation of neural tissues. Our neurostimulation technology platform, has the potential to provide treatment to patients in several established neurostimulator markets including Deep Brain Stimulation (“DBS”), Peripheral Electrical Nerve Stimulation (“PENS”), Sacral Nerve Stimulation (“SNS”), Spinal Cord Stimulation (“SCS”), Vagus Nerve Stimulation (“VNS”), and other emerging neurostimulator markets.

 

Our first commercial application of our platform will be the Viant™ Deep Brain Stimulation System (the “Viant™ System”). We will pursue regulatory approval of the Viant™ System for Parkinson’s Disease in the United States, and for Parkinson’s Disease, Essential Tremor, and Dystonia in Europe.

 

The Viant™ System continues to meet critical milestones in its development program. In the first quarter of 2017, we completed the ISO 13485 certification process, which is a pivotal hurdle prior to regulatory submissions to the CE Mark authorities. Design verification, process validation and testing requirements are nearly complete, and management expects we will complete the technical file in 2018 with the exception of some longer duration biocompatibility and shelf life tests. The Company expects to receive a CE Mark in 2019. As related to the United States, in early 2018, we completed the pre-submission meetings with the FDA to determine scope of requirements for approval of the Viant™ System and as a result of that meeting Nexeon intends to submit an FDA Premarket Approval (“PMA”) application without a clinical study.

 

We have also advanced our platform for use in neurostimulation using non-dilutive, international, National Institutes of Health (“NIH”), and state grants. In the first quarter of 2018, we successfully completed and delivered the final tranche of devices to Galvani Bioelectronics (a joint venture between GlaxoSmithKline (“GSK”) and Verily, a subsidiary of Alphabet, Inc., formerly Google) for use in preclinical studies under the Galvani Bioelectronics Initiative.

 

We have additional opportunities to license the platform to companies focused on enhancements to a comprehensive system offering for closed-loop, chronic disease therapeutics, including advanced computational biology, deep learning utilizing Internet of Medical Things technology, imaging solutions, e-health programs, and big data management and optimization, among others.

 

We were incorporated in the State of Nevada on December 7, 2015. Our principal corporate office is located at 1910 Pacific Avenue, Suite 20000, Dallas, Texas 75201 and our phone number is (844) 919-9990. Our website is www.nexeonmed.com.

 

Market Overview

 

The neurostimulation market is comprised of four large markets (SCS; SNS; DBS; and VNS), along with several smaller, emerging markets, each focused on the treatment of a particular disease state through delivery of electrical stimulation to particular targeted sites in the body. We plan to compete in the DBS market with our Viant™ system, and we are evaluating our strategic options for competing in the PENS, SCS, SNS, and VNS markets. According to the Grandview Market Research report, the combined SCS, DBS, and SNS market sizes were approximately $3 billion for 2016.

 

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Our Neurostimulation Technology Platform

 

Our neurostimulator technology platform was developed to provide the most innovative capabilities currently available on the market and to provide physicians and patients with improved solutions and tailored treatment options. Our platform is fundamental to the design of the Viant™ DBS System and provides the foundation for the development of future products. The key value propositions of our platform include:

 

  Innovative core technology. The engine of our neurostimulator technology platform, the implantable pulse generator (“IPG”), is based on more than 10 years of development. The custom-made chip was developed using our advanced engineering and design capabilities to have a broad spectrum of electrical outputs.

 

Figure 1 – Select Components of the NNS™ Device

 

     
  Multiple independent current sources. Our neurostimulator technology platform can deliver stimulation from 16 independent current sources across a broad range of frequencies and pulse widths. This capability optimizes current delivery and improves field control allowing for current steering and precision therapy.
     
  Advanced sensing capabilities. Advanced sensing capabilities provide the ability to capture biopotentials to monitor the physiologic response to stimulation, and support research towards the development and optimization of adaptive or closed-loop deep brain stimulation. The recorded signals can be processed on the IPG, or streamed for subsequent storage and analysis.
     
  Customized programmability. The technologies in our platform are designed to allow physicians to easily configure therapy to maximize clinical efficiency. These products are capable of documenting feedback from patients, and thereby providing physicians and patients with the flexibility to select from several different stimulation programs and optimize treatment.

 

Rechargeability. The majority of neurostimulators on the market are not rechargeable requiring periodic replacement. Our neurostimulator platform is rechargeable to reduce the need for replacement surgeries and enable biopotential recording without concern of shortening the device life.

 

Diverse lead portfolio. Our diverse lead portfolio includes a family of directional leads for targeted DBS therapy, and a self-sizing cuff electrode for stimulation of peripheral nerves. Our platform can deliver tailored therapy to a wide spectrum of patients.

 

Upgradeable technology enables next generation offerings. Our Neurostimulation System’s proprietary chip set and hardware is capable of being configured for use in next generation treatment offerings due to its flexible stimulation and recording capabilities. It can deliver higher frequencies and a broader array of stimulation patterns than all devices currently on the market. Upgrades can be provided to previously implanted patients via a software or firmware upgrade. We believe these capabilities provide a solid foundation for new treatment options in DBS and other neuromodulation therapies.

 

Our Product – The Viant™ Deep Brain Stimulation System

 

The Viant™ DBS device is designed to deliver effective therapeutic results faster, and to sustain them for the long-term. Viant™ is designed to deliver multiple current source stimulation, combined with sensing capabilities, in a single rechargeable device. Viant™’s on-board sensing capabilities have been developed to provide clinicians with the ability to measure and analyze the brain activity adjacent to the DBS leads to quickly and confidently locate the best location to stimulate in a matter of minutes rather than hours using current trial-and-error programming schemes. Clinicians can then focus their efforts on using Viant™’s multiple current source stimulator to take full advantage of the capabilities of directional leads.

 

Viant™’s sensing capabilities were also designed to enable clinicians and researchers to capture and stream brain recordings to an external device for subsequent analysis. The software in Viant™, and the products in Nexeon’s platform, can be transcutaneously updated, so that physicians and patients will be able to benefit from the latest technology as it becomes available without the need for replacement revision surgery.

 

The Viant™ DBS system consists of implantable and external components (Figure 1 above) that work synergistically to deliver precise electrical pulses with specified parameters to target brain structures. Remote controls for the physician and for the patient enable communication with the implant. Each remote control offers different options. The energy source of the system can be recharged through the skin after device implantation by use of the patient remote control in combination with a charger. We currently anticipate CE Mark approval and commercial launch of the device in major European markets in 2019. US approval would potentially occur after CE Mark approval.

 

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Viant™ Implantable Components

 

Implantable Pulse Generator: The IPG (stimulator) contains a rechargeable battery and electronics that generate precise electrical pulses that are carried by the extensions and leads to the brain. The IPG has 16 independent current sources and can be connected to one or two extensions. It is a programmable device and can deliver customized programs for each patient. The IPG is surgically implanted under the skin in the chest.

 

Directional Leads: The leads are thin, insulated cables that carry electrical pulses from the IPG to the brain. On one end of the lead is a connector to make mechanical and electrical connection with an extension, and on the other end is an array of electrodes to deliver the electrical pulses to the brain structure. The Nexeon directional lead has segmented electrode contacts arranged in a 1-3-3-1 pattern to facilitate current steering during DBS therapy.

 

Extensions: The extensions are thin, insulated cables that connect on one end with the IPG, and on the other end with a lead.

 

Viant™ External Components

 

Patient Remote Control (RC): The patient RC is a rechargeable, cellphone-sized device that works like a remote control and allows patients to adjust their stimulation within prescribed limits, change programs, monitor their IPG battery level and status; and when connected to the charger, transcutaneously charge their IPG.

 

Charger: The charger is used to charge the implanted IPG. To charge, the charger is connected to the RC, and placed over the implanted IPG. The system continuously monitors the charging process and optimizes it for safe and efficient charging.

 

Clinician Programmer (CP): The CP allows clinicians to communicate with the IPG and optimize stimulation parameters and current steering for each individual patient. Clinicians can also interrogate the integrity of the IPG and electrode leads. The CP has a database that keeps individual patient records with all programmed parameters and recorded data.

 

Surgical Accessories: The Viant™ DBS System also includes various accessories for implantation such as tunneling tools, lead fixation devices, and torque wrenches to assist the physician in the surgical procedure.

 

Competition

 

The medical device industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products and other market activities of industry participants. We intend to compete in the DBS market for movement disorders. In the U.S. and European DBS market, the competitors include Abbott Laboratories, formerly known as St. Jude Medical (“Abbott”), Boston Scientific, and Medtronic.  Abbott, Boston Scientific and Medtronic are publicly-traded companies or divisions of publicly-traded companies, all of whom have significantly greater resources than we have. In addition, these competitors also have established operations, long commercial histories, more extensive relationships with physicians, and wider product offerings within neuromodulation and other medical device product categories than we have. This may provide these competitors with greater negotiating power with customers and suppliers and with more opportunities to interact with the stakeholders involved in purchasing decisions.  Furthermore, although we have no current plans to enter the Chinese market, PINS Medical and SceneRay Corporation are established Chinese DBS companies that could begin to distribute their products in Europe and/or the United States. In addition, Aleva Neurotherapeutics has announced its intention to enter the European DBS market in late 2018, and other companies may likewise attempt to bring new products or therapies to this market. All of these companies will continue to develop new products that directly compete with our products, and their greater resources may allow them to respond more quickly to new technologies, new treatment indications or changes in customer requirements. For all of these reasons, it may be more difficult to compete successfully against these or future competitors.

 

We believe the primary competitive factors in the neurostimulation market are:

 

  Technological innovation, product enhancements and speed of innovation

 

  Sales force experience and access

 

  Ease of use

 

  Product support and service

 

  Clinical studies and research

 

  Effective marketing and education

 

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  Pricing and reimbursement rates

 

  Product reliability, safety and durability

 

  Company brand recognition

 

Our Competitive Strengths

 

Comprehensive Offerings. We can support our customers’ new product offerings from product concept through market introduction and thereafter, by providing seamless design, engineering, prototyping and manufacturing offerings.

 

Single Source for Complete Systems. We assist our customers in developing new implants, and we design and produce neurostimulator systems for specific neurological disease.

 

Precision Manufacturing Expertise. Our extensive expertise and knowhow enable us to produce large volumes of specialized products to our customers’ precise standards, which we believe makes us a supplier of choice to the largest orthopedic companies as well as addressing the broader needs of smaller customers. Our core production competencies include net shaped forging, precision casting, thermo forming, precision sheet metal working and machining/ finishing.

 

Over the past several years, we have developed high precision machining capabilities to better serve the spine implant market.

 

Quality and Regulatory Compliance. Our quality systems are based upon and are in compliance with International Organization for Standardization (“ISO”) requirements and, where applicable, United States Food and Drug Administration (“FDA”) regulations. We believe our level of quality and regulatory compliance systems meet or exceed our customers’ expectations. We continue investing in this area to strengthen our leadership position.

 

Customers. Our OEM Solutions business supplies products primarily to manufacturers in the medical device market.

 

Our Strategy

 

To successfully achieve our objectives, we are pursuing the following strategy:

 

Complete Viant™ development and transfer to manufacturing. We will continue to invest in completing the development and building the manufacturing capacity necessary to support the approval and commercial launch of the Viant™ DBS System. We will continue to partner with contract manufacturers to utilize their manufacturing capabilities and achieve operating efficiencies.

 

Build our sales and marketing organization. In the second quarter of 2018, we will begin to build our international sales organization through a combination of distributors, independent sales agents, and a limited number of direct employees in anticipation of a 2019 launch in major European markets. Our representatives will target movement disorder specialists located primarily at large academic centers, as well as their referring network of neurologists in countries with existing reimbursement coverage for these therapies.

 

Submit Viant System for FDA Approval and CE mark. Upon completion of the product dossier, we will submit to the FDA for a pre-market approval and to the notified body, DEKRA, for CE Mark.

 

Invest in research and development to further drive product innovation. We are investing in preclinical and clinical research to demonstrate and further the innovation of our Viant™ DBS device. We anticipate this investment may result in further product innovations and expanded labeling and new indications for the Viant™ DBS System. These innovations are expected to include next generation IPG capabilities, additional lead offerings, and advancements in algorithmic programming.

 

Regulatory

 

In the European Economic Area (EEA) we are subject to the requirements of the EU Active Implantable Medical Devices Directive 90/385/EEC (“AIMDD”) which mandate that our product receive a CE Mark prior to being placed on the market in the EEA. To obtain a CE Mark, we must prepare a technical file for our product, and undergo a conformity assessment by a notified body, which is an organization authorized under the AIMDD to conduct conformity assessments. Following successful completion of a conformity assessment the notified body will grant a CE Mark.

 

We expect to complete the Viant™ DBS System technical file in the first half of 2019 and submit it for a conformity assessment with our notified body, DEKRA Certification B.V., shortly thereafter. While there have been some recent increases in the stringency of the relevant EU regulatory requirements, and there can be no assurances, absent unanticipated additional requirements or delays, we currently anticipate receiving the CE Mark for the Viant™ DBS System in the first half of 2019.

 

The Viant™ DBS System is classified as a Class III medical device under the Food and Drug Act. The Food and Drug Act requires submission and FDA approval of a PMA application before marketing of a Class III device can begin. The PMA application process is considerably more demanding than the Class I and Class II 510(k) premarket notification process. The Company has used the FDA’s pre-submission process to engage the FDA to clarify the path to ultimate product approval. At this time, the Company intends to submit to the FDA in 2019 for a PMA for the Treatment of Parkinson’s Disease without a clinical study.

 

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Sales and Marketing

 

We currently have no sales force as we are engaged in completing the product and preparing to make regulatory submissions. In 2017, we hired a Vice President of Sales and Marketing to develop and execute our detailed commercial plan. We intend to build a US-based marketing team to promote awareness of our products by training and educating physicians, exhibiting at tradeshows and conducting focused promotions.

 

We expect to begin to build our international sales organization in late 2018. To achieve operating efficiencies, we expect to use a combination of distributors, independent sales agents, and a limited number of direct employees. Our representatives will target movement disorder specialists located primarily at large academic centers, as well as their referring network of neurologists in countries with existing reimbursement coverage for these therapies.

 

Product Development Pipeline

 

We have invested significant finances and effort towards engineering/product development of the first generation auricular vagus nerve stimulation (“aVNS”) device. In early 2017, we received Ethics Committee and Competent Authority approval to examine the effects of aVNS on cardiac activity in healthy adults. The study was completed in Belgium at the Universite’ Catholique de Louvain under the principal investigator Jean-Benoit Le Polain (Cardiac Electrophysiologist). We enrolled 20 healthy subjects that received right ear cymba concha stimulation during simultaneous telemetric ECG monitoring (Polar H7). Each subject underwent 10 min of baseline ECG recording, 10 min of aVNS+ECG recording, and 10 min of recovery ECG recording (no aVNS). All subjects received biphasic stimulation at 5 Hz (separate trials), pulse duration of 200 µs, and personalized current intensity (average = 2.7 mA). In comparison to baseline ECG, we observed significant increase heart rate variability (HRV) during aVNS: increased R-R interval (19 of 20 subjects, p<0.001), and increased root mean square of successive differences (RMSSD; 14 of 20 subjects, p<0.001). Additionally, aVNS demonstrated a significant increase in the high frequency component (parasympathetic activity) of HRV (13 of 20 subjects, p<0.001).

 

The aVNS system is a non-invasive, battery-operated, self-administered device to transcutaneously stimulate the auricular branch of the vagus nerve (ABVN). The device is composed of a handheld generator and one earpiece. The earpiece makes electrical contact with the skin via specially designed disposable self-adhesive hydrogel electrodes. One electrode is designed to be placed into the Cymba Concha which is innervated by the ABVN.

 

According to the Journal of Cardiology, Atrial fibrillation (AF) is the most common cardiac arrhythmia, and is associated with substantial risk of mortality. According to the Journal of Cardiology, AF currently affects more than 2.5 million Americans and the affected population is steadily growing with our aging society. AF independently increases the risk of stroke by 4- to 5-fold, is an independent risk factor for stroke recurrence, and is responsible for at least 15-20% of all ischemic strokes. In addition to its associated health risks and diminished quality of life, AF is a financial burden on the US Healthcare system, with annual Medicare costs currently estimated at $16 billion.

 

This study is designed as a prospective, single-center pilot study to assess the feasibility of aVNS with the Nexeon MedSystems aVNS system as a treatment for paroxysmal AF. Each subject will be screened and then undergo a 30-day baseline evaluation to document pre-treatment AF burden. If subject does not have a ICP or ILR, subjects will be given a HM (LiveTec, Total Medical Solutions, Netherlands) to achieve 30-day baseline evaluation, and monitoring during and after treatment. Subjects meeting the requisite documented AF burden in the baseline phase will be trained to use the Nexeon MedSystems aVNS system and Brain HQ online cognitive training software. This visit will be classified as “Day 0.” The subject will be instructed to deliver therapy with the Nexeon MedSystems aVNS system at home for 30 minutes per day for a total of 30 days (± 5 days). Concurrently, subjects will be instructed to use Brain HQ at home for ~5 minutes per day for a total of 30 days (± 5 days). Subjects will be randomly assigned into 1 of 2 groups; Group 1 (n=10) begins Brain HQ cognitive training before stimulation, Group 2 (n=10) begins Brain HQ cognitive training after stimulation. At the Day 30 visit, the auricular stimulation will stop; the subjects will return to the clinic for ICP, ILR, or HM interrogation to document AF during the treatment phase, blood marker collection, and cognitive assessments. The subject will return to the clinic for a 60-day visit, study participation will end at this visit. The expected duration of subject participation is approximately 3 months from enrollment until the end of study participation. 

 

Research and Development

 

For the years ending December 31, 2017 and December 31, 2016, our research and development expenses were $2,942,981 and $759,502, respectively, primarily reflecting the costs associated with our research and discovery efforts related to the design and development of our proposed medical devices. It is expected that the Company’s research and development 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).

 

Original Equipment Manufacturer, Medi-Line S.A.

 

On September 1, 2017, we acquired NMB which owns and operates Medi-Line and the Medi-Line medical device and is an Original Equipment Manufacturer (“OEM”). Medi-Line provides high quality and efficiency in the development, engineering, and manufacturing of medical devices for the med-tech and pharmaceutical industries. Medi-Line makes up our OEM Solutions segment.

 

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Product Line

 

Medi-Line currently manufactures radiopharmacy and urology products and provides worldwide production and supply chain capabilities for these products to its customers. Medi-Line offers a wide range of services, including product and process development, validation and verification, technical and regulatory file writing, packaging, biocompatibility, and sterilization support services. Customers of Medi-Line are active in fields as diverse as urologic implants, neurosurgery, interventional gastro-enterology, implantable neurostimulation, radiopharmacy, PET Scan imagery, special high added value catheters, as well as microthin cuff catheters.

 

Facilities

 

Our OEM Solutions segment has manufacturing facilities in two facilities in Belgium. We continue to make investments to modernize our production facilities, improve our production processes and develop superior technical skills that complement our manufacturing capabilities. These investments have allowed us to continue to improve the quality of our products, increase our manufacturing capacity and improve our efficiency. We currently manufacture our neurostimulator system in our class 10,000 clean room in Niel, Belgium.

 

We operate our OEM business out of a building in Liege, Belgium. This building consists of two clean rooms validated (1 cleanroom assembly ISO class 7 or C 1 cleanroom ISO class 8 or D) offering 600m2 of production space to meet industry quality requirements of medical devices. Our manufacturing processes include:

 

Extrusion (range of tubes starting at 0.25mm OD in a wide selection of raw materials;
Injection Molding (complex component injection in most thermoplastics);
Assembly (bonding, welding, finishing, packaging);
Disposable devices;
Catheter & catheter-like products;
Radiopharmacy single use supplies;
Surgical devices;
Implants: active & non-active;
Clean room manufacturing Class C (ISO7); and
Extrusion, injection molding.

 

The majority of products that we produce are customized to the unique specifications of our customers. Our ability to maintain flexible operations is an important factor in maintaining high levels of productivity. We endeavor to use “just-in-time” manufacturing and flexible manufacturing cells in our production processes. Just-in-time manufacturing is a production technique that minimizes work-in- process inventory and manufacturing cycles. Manufacturing cells are clusters of individual manufacturing operations and work stations grouped in a circular configuration, with the operators placed centrally within the configuration. Cell manufacturing provides flexibility by allowing efficient changes to the number of operations each operator performs, which enhances our ability to maintain product volumes that are consistent with our customers’ requirements and reduce our level of inventory.

 

Sales and Marketing

 

Our OEM Solutions sales and marketing efforts have been limited to date, with most new business coming in the form of referrals. We intend to grow our business by emphasizing our design and engineering expertise, internally developed products, manufacturing capabilities, international distribution network and ability to provide customers with a comprehensive product offering. We present our products to customers in a concept which offers the customer a collaborator for developing complete implant, instrument and case solutions while working to create and respond to opportunities for any one of our product offerings. We believe there is an opportunity to leverage our existing relationships among our customer base to achieve greater penetration of our customized products.

 

Quality Assurance

 

We maintain a comprehensive quality assurance and quality control program, which includes the control and documentation of all material specifications, operating procedures, equipment maintenance and quality control methods. Our quality systems are based upon FDA requirements and the ISO standards for medical device manufacturers. We believe that all our facilities are currently in substantial compliance with regulations applicable to them.

 

All aspects of the supply chain are integrated into our overall quality system. Our suppliers are evaluated and audited to assure compliance with all international trade compliance quality standards. Relative to our manufacturing processes we maintain and adhere to specific standard operating procedures within our quality systems to ensure compliance with our customers’ requirements for their products. Our deep brain neurostimulator business likewise operates under a comprehensive quality system to ensure compliance with all product quality and customer obligations. The suppliers we utilize in the distribution process are evaluated and audited to assure compliance to all international trade compliance quality standards.

 

We are not aware of any significant quality issues or concerns, although if we experience a breakdown in our quality systems that result in the sale or manufacture of noncompliance products we could incur costs and loss of business, recalls, lawsuits or other adverse results.

 

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Customers

 

In our OEM Solutions business, we sell to over 40 customers. Sales to our 2 largest customers represented 76% sales revenue in 2017. All sales are shipped directly to our customers.

 

Intellectual Property

 

We rely on a combination of patent, trade secret, copyright, trademark and other intellectual property to protect our proprietary rights. The patents have been deliberately written to provide broad and specific protection. Issued and pending U.S. and foreign method and technology patents protect the Company’s intellectual property. Our strategy to create temporal barriers to others and to protect proprietary positions is to continue to acquire and file for U.S. and foreign patent applications related to our technology, inventions, and improvements to enhance our business and competitive advantages. Continuing to rigorously analyze competitive IP applications and their prosecution history will ensure that this freedom to operate position remains viable. As development of new products and prosecution of pending patent applications progresses, we will continue to strategically file additional applications, including continuations, continuations-in-part, and divisional applications, to protect the new developments and those already being prosecuted.

 

We possess a patent portfolio for each of our products under development ensuring the ability to operate, which is critical to successful commercialization of our platforms. In addition, maintaining a focus in the Internet of Medical Things allows us to utilize issued and pending patents for maximum commercial benefit and growth.

 

In addition to patent protection, we utilize other available intellectual property rights to protect our developments. For example, we utilize copyrighted software, manuals, and reports. We also maintain many trade secrets that are essential to our business. We have implemented procedures to maintain such secrecy required of such trade secrets. Finally, we have filed for and obtained several trademark registrations related to the branding of our products. This multifaceted approach provides us with what we believe to be the maximum protection available for our product development.

 

 7 

 

 

The following patents and applications relate to our technology for communicating between an implantable medical device and a remote computer system or health care provider.

 

  US 6385593 Apparatus and method for automated invoicing of medical device systems
  US 6804558 System and method of communicating between an implantable medical device
  US 7076303 Apparatus and method for automated invoicing of medical device systems
  DE 60321826.1 Seamless communication between an implantable medical device and a remote system
  EP 15853585 B1 Seamless communication between an implantable medical device and a remote system

 

The following patents and applications relate to our micro-perforated balloon catheter system for use in the treatment of restenosis associated with hemodialysis.

 

  NANOTUBE-REINFORCED BALLOONS FOR DELIVERING PATENTS
  US 8187221 Therapeutic agents within or beyond the wall of blood vessels, and methods of making and using same
  JP 5481479 Therapeutic agents within or beyond the wall of blood vessels, and methods of making and using same
  EP 9771434.9 Therapeutic agents within or beyond the wall of blood vessels, and methods of making and using same

 

  IRIS FILTER-SHEATH CATHETER SYSTEM FOR EMBOLISM PROTECTION PATENTS
  US 8728113 Interventional catheter for retrograde use having embolic protection capability and methods of use
  US 8257384 Interventional catheter for retrograde use having embolic protection capability and methods of use
  US 7837702 Interventional catheter for retrograde use having embolic protection capability and methods of use
  EP 6847981.5 Interventional catheter for retrograde use having embolic protection capability and methods of use

 

  APPARATUS AND METHODS FOR RENAL STENTING PATENTS       
  US 8702744 Apparatus and methods for renal stenting
  EP 6770151.6 Apparatus and methods for renal stenting
  AU 2006244070 Apparatus and methods for renal stenting
  JP 4990887 Apparatus and methods for renal stenting

 

  METHODS AND APPARATUS FOR TREATING AN INJURED NERVE PATHWAY PATENTS
  US 7842304 Methods and apparatus for treating an injured nerve pathway
  US 8603512 Methods and apparatus for treating an injured nerve pathway

 

  SYSTEMS AND METHODS FOR ATRAUMATIC IMPLANTATION OF BIO-ACTIVE AGENTS PATENTS
  US 7632262 Systems and methods for atraumatic implantation of bio-active agents
  US 8377032 Systems and methods for atraumatic implantation of bio-active agents
  EP 9736537.3 Systems and methods for atraumatic implantation of bio-active agents
  EP 5773060.8  Systems and methods for atraumatic implantation of bio-active agents
  EP 11150671.3 Systems and methods for atraumatic implantation of bio-active agents
  AU 2005274775 Systems and methods for atraumatic implantation of bio-active agents
  JP 4774403 Systems and methods for atraumatic implantation of bio-active agents

 

  APPARATUS AND METHODS FOR TREATING TISSUE USING PASSIVE INJECTION SYSTEMS PATENTS
  US 7338471 Apparatus and methods for treating tissue using passive injection systems
  US 7862551 Apparatus and methods for treating tissue using passive injection systems
  AU 2005274774 Apparatus and methods for treating tissue using passive injection systems
  JP 4934029 Apparatus and methods for treating tissue using passive injection systems
  GB & FR 1773440 Apparatus and methods for treating tissue using passive injection systems
  DE 602005030269.7 Apparatus and methods for treating tissue using passive injection systems

 

  IMPLANTABLE DEVICE FOR TREATING DISEASE STATES AND METHODS OF USING SAME PATENTS
  US 7651696 Implantable device for treating disease states and methods of using same

 

 

METHODS AND APPARATUS FOR TREATING INFARCTED REGIONS OF TISSUE FOLLOWING PATENTS

  US 7819856 Acute myocardial infarction
  US 8062283 Acute myocardial infarction

 

  APPARATUS FOR THE DELIVERY OF DRUGS OR GENE THERAPY PATENTS
  US 7648495 Into a patient's vasculature and methods of use

 

 8 

 

 

The following is a list of the Siemens originated patents underlying the license for the intellectual property which 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.

 

Country   Patent #   Apln. #   Pub. #
AUSTRIA   AT521160   5109169.2   EP1646185
AUSTRIA   AT530961   3735054.3   EP1470457
AUSTRIA   AT615998   5108954.8   EP1643324
AUSTRIA   AT334459   4100499.5   EP1494191
BELGIUM   BE1494191   4100499.5   EP1494191
BRASIL   PI0710612   BR0710612    
BRASIL       PI0821881-1    
CANADA   2647652   2647652.0   2647652
CANADA   2662014   2662014.0   2662014
CANADA   2711225   2711225.0   2711225
CANADA   2836941   2836941.0   2836941
CHINA       200780032280.2   CN101512976
CHINA   CN101422019   200780012887.4   101422019
CHINA   CN101971568   200880123790.5   101971568
CHINA       201410392441.0   CN104243248
EPO   EP1470456   3707570.2   EP1470456
EPO   EP1470457   3735054.3   EP1470457
EPO   EP1494191   4100499.5   EP1494191
EPO   EP1626532   5012617.6   EP1626532
EPO   EP1643324   5108954.8   EP1643324
EPO   EP1646185   5109169.2   EP1646185
EPO   EP2225854   8869509.3   EP2225854
EPO       7101252.0   EP1783959
EPO       7774303.7   EP2005713
EPO       13172203.5   EP2642696A3
EPO       13172204.3   EP2642697A3
FINLAND   FI1470456   3707570.2   EP1470456
FRANCE   FR1470456   3707570.2   EP1470456
FRANCE   FR1470457   3735054.3   EP1470457
FRANCE   FR1626532   5012617.6   EP1626532
FRANCE   FR1643324   5108954.8   EP1643324
FRANCE   FR1646185   5109169.2   EP1646185
FRANCE   FR2225854   8869509.3   EP2225854
FRANCE   FR1494191   4100499.5   EP1494191
GERMANY       10317962.3    
GERMANY   DE602005029532.1   5109169.2   EP1646185
GERMANY   DE602005039869.4   5108954.8   EP1643324
GERMANY   DE602005042990.5   5012617.6   EP1626532
GERMANY   DE602008030307.1   8869509.3   EP2225854
GERMANY   DE60330750.7   3707570.2   EP1470456
GERMANY   DE60338908.2   3735054.3   EP1470457
GERMANY   DE502004001017.2   4100499.5   EP1494191
GERMANY       112007001804.0    
GREECE   GR1494191   4100499.5   EP1494191
IRELAND   IE1494191   4100499.5   EP1494191
IRELAND   1470456   3707570.2   1470456
ITALY   IT1470457   3735054.3   EP1470457
ITALY   IT1626532   5012617.6   EP1626532
ITALY   IT1643324   5108954.8   EP1643324
ITALY   IT1646185   5109169.2   EP1646185
ITALY   IT2225854   8869509.3   EP2225854
ITALY   IT1494191   4100499.5   EP1494191
MEXICO   MX313282   MX/a/2010/007211    
MEXICO   MX322526   MX/a/2013/010239    

 

 9 

 

 

Country   Patent #   Apln. #   Pub. #
NETHERLANDS   NL1470456   3707570.2   EP1470456
NETHERLANDS   NL1470457   3735054.3   EP1470457
NETHERLANDS   NL1626532   5012617.6   EP1626532
NETHERLANDS   NL1643324   5108954.8   EP1643324
NETHERLANDS   NL1646185   5109169.2   EP1646185
NETHERLANDS   NL1494191   4100499.5   EP1494191
SOUTH KOREA   100989017   1020087024880.0    
SOUTH KOREA   101272384   1020107014107.0    
SOUTH KOREA   KR101202914B1   1020107014718.0    
SPAIN   ES2270271   4100499.5   EP1494191
SWEDEN   SE1470456   3707570.2   EP1470456
SWEDEN   SE1470457   3735054.3   EP1470457
SWEDEN   SE1626532   5012617.6   EP1626532
SWEDEN   SE1643324   5108954.8   EP1643324
SWEDEN   SE1646185   5109169.2   EP1646185
SWEDEN   SE2225854   8869509.3   EP2225854
SWEDEN   SE1494191   4100499.5   EP1494191
SWITZERLAND   CH1470456   3707570.2   EP1470456
SWITZERLAND   CH1470457   3735054.3   EP1470457
SWITZERLAND   CH1626532   5012617.6   EP1626532
SWITZERLAND   CH1643324   5108954.8   EP1643324
SWITZERLAND   CH1646185   5109169.2   EP1646185
SWITZERLAND   CH2225854   8869509.3   EP2225854
SWITZERLAND   CH1494191   4100499.5   EP1494191
UNITED KINGDOM   GB1470456   3707570.2   EP1470456
UNITED KINGDOM   GB1470457   3735054.3   EP1470457
UNITED KINGDOM   GB1626532   5012617.6   EP1626532
UNITED KINGDOM   GB1643324   5108954.8   EP1643324
UNITED KINGDOM   GB1646185   5109169.2   EP1646185
UNITED KINGDOM   GB2225854   8869509.3   EP2225854
UNITED KINGDOM   GB1494191   4100499.5   EP1494191
US       60/352,452    
US   8131399   10/353,142    
US   8538589   13/366,095    
US       10/353,110    
US       10/672,527    
US   7860495   10/915,034    
US       12/629,548    
US   8200273   12/953,244    
US   7139239   10/958,770    
US   7437596   11/538,654    
US   7664573   10/952,705    
US   7746887   11/402,743    
US       60/823,788    
US   9030315   11/846,218    
US       60/823,909    
US       60/823,912    
US   8264371   11/969,111    
US       12/124,452    
US       61/037,739    
US   8224282   12/406,799    
US   8350691   12/269,136    
US   7363036   10/824,800    
WO/PCT       PCT/US2003/002556   WO/2003/064933
WO/PCT       PCT/US2003/002559   WO/2003/065136
WO/PCT       PCT/US2007/007984   WO/2007/123738
WO/PCT       PCT/US2007/077107   WO/2008/027964
WO/PCT       PCT/US2008/013746   WO/2009/088429

 

Employees

 

As of December 31, 2017, we have 62 full-time employees and 3 consultants. None of our employees or consultants are represented by a labor union or covered by a collective bargaining agreement. We have employment agreements with all full-time employees. We consider our relationship with our employees to be very good.

 

 10 

 

 

ITEM 1A. RISK FACTORS

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

 

Consolidation in the healthcare industry could lead to demands for price concessions or limit or eliminate our ability to sell to certain of our potential significant market segments.

 

The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the medical device industry, as well as among our potential customers, including healthcare providers. This, in turn, has resulted in greater pricing pressures which could limit on our ability to sell to important market segments, as group purchasing organizations, independent delivery networks and large single accounts, such as the Veterans Administration in the United States, continue to consolidate purchasing decisions for some of our potential healthcare provider customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances that may exert further downward pressure on our potential product prices and which would adversely impact our business, financial condition and results of operations.

 

We are subject to stringent domestic and foreign medical device regulation and any adverse regulatory action may materially adversely affect our financial condition and business operations.

 

We are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. To varying degrees, each of these authorities monitors and enforces our compliance with laws and regulations governing the development, testing, clinical study, manufacturing, labeling, packaging, marketing and distribution of our medical devices. These laws and regulations are subject to change and to evolving interpretations which could increase costs, prevent or delay future device clearance or approvals, or otherwise adversely affect our ability to market currently cleared or approved devices. The process of obtaining marketing approval or clearance from the FDA and comparable foreign bodies for new products, or for enhancements or modifications to existing products, could:

 

  take a significant amount of time;
     
  require the expenditure of substantial resources;
     
  involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance;
     
  involve modifications, repairs or replacements of our products; and
     
  result in limitations on the indicated uses of our products.

 

We cannot be certain that new medical devices or new uses for existing medical devices will be cleared or approved by the FDA or foreign regulatory agencies in a timely or cost-effective manner, if cleared or approved at all. In addition, the FDA may require post-market testing and surveillance and may, depending on the results, prevent or limit further marketing of products. The failure to receive approval or clearance for significant new products or modifications to existing products or the receipt of an approval of limited or reduced scope could have a material adverse effect on our financial condition and results of operations.

 

 11 

 

 

Both before and after a product is commercially released, we have ongoing responsibilities under the FDCA and FDA regulations, which govern virtually all aspects of a medical device’s design, development, testing, manufacturing, labeling, storage, record keeping, adverse event reporting, sale, promotion, distribution and shipping. Compliance with applicable statutory and regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA, which may result in observations on Form 483, and in some cases warning letters, that require corrective action. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could:

 

  require us to notify health professionals and others that the devices present unreasonable risk of substantial harm to public health;
     
  order us to recall, repair, replace or refund the cost of any medical device that we manufactured or distributed;
     
  detain, seize or ban adulterated or misbranded medical devices;
     
  refuse to provide us with documents necessary to export our products;
     
  refuse requests for 510(k) clearance or PMA of new products or new intended uses;
     
  withdraw 510(k) clearances or PMAs that are already granted;
     
  impose operating restrictions, including requiring a partial or total shutdown of production;
     
  enjoin or restrain conduct resulting in violations of applicable law pertaining to medical devices; and/or
     
  assess criminal or civil penalties against us or our officers and employees.

 

Any adverse regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products. In addition, negative publicity and product liability claims resulting from any adverse regulatory action could have a material adverse effect on our financial condition and results of operations.

 

In addition, the FDCA permits device manufacturers to promote products solely for the uses and indications set forth in the approved product labeling. The U.S. Department of Justice has initiated a number of enforcement actions against manufacturers that promote products for “off-label” uses, alleging, among other things, that “off-label” promotion caused the submission of false and fraudulent claims for reimbursement to federal health care programs in violation of the Federal False Claims Act. Government enforcement action can result in substantial fines, penalties, and/or administrative remedies, including exclusion from government reimbursement programs and entry into Corporate Integrity Agreements (CIAs) with governmental agencies entailing significant additional obligations and costs.

 

Foreign governmental regulations have become increasingly stringent and more common, and we may become subject to even more rigorous regulation by foreign governmental authorities in the future. Changes in clearance, approvals or standards that must be complied with prior to commercial marketing or the enactment of additional laws or regulations may cause delays in or prevent the marketing of a product. Penalties for a company's noncompliance with foreign governmental regulation could be severe, including revocation or suspension of a company's business license and criminal sanctions. Any domestic or foreign governmental medical device law or regulation imposed in the future may have a material adverse effect on our financial condition and business operations.

 

 12 

 

 

Instability in international markets or foreign currency fluctuations could adversely affect our results of operations.

 

We generate a significant amount of our revenue from outside the United States. As a result, we face currency and other risks associated with our international sales. We are exposed to foreign currency exchange rate fluctuations due to transactions denominated primarily in Euros, which may potentially reduce the U.S. Dollars we receive for sales denominated in any of these foreign currencies and/or increase the U.S. Dollars we report as expenses in these currencies, thereby affecting our consolidated results of operations. Fluctuations between the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses. We cannot predict the effects of currency exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the volatility of currency exchange rates.

 

In addition to foreign currency exchange rate fluctuations, there are a number of additional risks associated with our international operations, including those related to:

 

  the imposition of or increase in import or export duties, surtaxes, tariffs or customs duties;
     
  the imposition of import or export quotas or other trade restrictions;
     
  foreign tax laws and potential increased costs associated with overlapping tax structures;
     
  compliance with various U.S. and foreign laws, including the Foreign Corrupt Practices Act, the UK Anti-Bribery Act and import/export laws;
     
  longer accounts receivable cycles in certain foreign countries, whether due to cultural, economic or other factors;
     
  changes in medical reimbursement programs and regulatory requirements in international markets in which we operate; and

 

economic and political instability in international markets, including concerns over excessive levels of sovereign debt and budget deficits in countries where we market our products that could result in an inability to pay or timely pay outstanding payables.

 

 13 

 

 

We have only a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable operations. Since we have a limited operating history, it may be difficult to predict our future operating results.

 

We were incorporated in the State in Nevada on December 7, 2015, and as a result, we have only a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable operations on a consolidated basis. Due to our lack of operating history, our proposed operations are subject to all business risks associated with new enterprises. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the startup of a business and operation in a competitive and regulated industry. We may sustain losses in the future as we implement our business plan. There can be no assurance that we will ever generate revenues to operate profitably. Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment. Our business is dependent upon the implementation of our business plan. We may not be successful in implementing such plan and cannot guarantee that, if implemented, we will ultimately be able to attain profitability.

 

We may need to obtain additional financing to fund our operations.

 

We may need additional capital in the future to continue to execute our business plan. Therefore, we would be dependent upon additional capital in the form of either debt or equity to continue our operations and commercialize our products. At the present time, we are in the process of identifying the circumstances in which we would need to raise additional capital and thus may seek arrangements to raise potential additional capital, including identifying potential investors and negotiating appropriate arrangements with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot get the needed capital, we may not be able to become profitable and may have to curtail or cease our operations.

 

We have a history of losses, and we anticipate that we will continue to incur losses in the future. Our auditors have included in their audit report an explanatory paragraph as to substantial doubt as to our ability to continue as a going concern.

 

We have experienced net losses since our inception. For the year ended December 31, 2017, our net loss was $2,177,641 compared to a net loss of $802,463 for the year ended December 31, 2016. As of December 31, 2017, we had an accumulated deficit of $3,743,438. Our auditors have included in their audit report a “going concern” explanatory paragraph that there is substantial doubt as to our ability to continue as a going concern which assumes the realization of our assets and the satisfaction of our liabilities and commitments in the normal course of business. We anticipate continuing to incur substantial additional losses over at least the next several years due to, among other factors, expenses related to the following: anticipated research and development activities, investor and public relations, Securities and Exchange Commission (“SEC”) compliance efforts, and the general and administrative expenses associated with each of these activities. We may never achieve profitability, and even if we do, we may not be able to sustain being profitable.

 

Restrictions contained in our debt agreements may limit our ability to incur additional indebtedness.

 

Our existing debt agreements (each a “Debt Facility” and collectively, “Debt Facilities”) contain restrictive covenants, including restrictions on our ability to incur indebtedness. These restrictions could limit our ability to effectuate future acquisitions, limit our ability to pay dividends, limit our ability to make capital expenditures or restrict our financial flexibility. Our ability to meet the financial covenants or requirements in our Debt Facilities may be affected by events beyond our control, and we may not be able to satisfy such covenants and requirements. A breach of these covenants or other restrictions contained in a Debt Facility could result in an event of default under one or more of our other Debt Facilities. Upon the occurrence of an event of default under a Debt Facility, and the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under one or more of our other Debt Facilities, together with accrued interest, to be immediately due and payable. If this were to occur, our assets may not be sufficient to fully repay the amounts due under our Debt Facilities or our other indebtedness.

 

 14 

 

 

The Company may experience delays or unforeseen issues during the requisite studies and trials required prior to regulatory approval of our medical devices.

 

Although there are no foreseeable risks with respect to obtaining an Investigational Device Exemption (“IDE”) following biocompatibility and active animal safety testing, even minor issues with the testing and application process can delay the IDE, which will in turn delay the clinical studies and increase the costs to complete the testing. For our FDA Premarket Approval (“PMA”), we will hire a regulatory consultant to facilitate all interactions with the FDA and ensure that we make the most time and capital efficient steps towards regulatory approval.

 

The Company may not be able to compete effectively with larger companies in the medical device space with greater resources and market recognition.

 

Our primary competitor, Medtronic, a provider of medical devices has been involved in the manufacturing and sale of deep brain stimulation devices for several years. In addition, Boston Scientific and Abbott (formerly St. Jude Medical) have a CE mark and PMA approval to market and sell their neurostimulation implant devices in Europe and in the U.S. These companies may have substantially greater financial, research and development, manufacturing, marketing and sales experience, and resources than us. As a result, our competitors may be more successful than us in developing their products, obtaining regulatory approvals, and marketing their products to users. We cannot assure investors that we will be able to compete effectively against current and future competitors.

 

We are dependent on a few significant customers for our businesses and the loss of these customers could have an adverse effect on our business, results of operations and financial condition.

 

In our OEM Solutions business, we sell to over 40 customers. For the year ended December 31, 2017, sales to our 2 largest customers represented 76% of our sales revenue. The loss, or reduction in services to, these significant customers or other discontinuation of their relationship with us for any reason, or if either of these significant customers reduces or postpones purchases that we expect to receive, it could have an adverse impact on our business, results of operations and financial condition.

 

The Company’s neurostimulation device may not be approved for reimbursement which could adversely affect the adoption of our device.

 

Even if the device and treatment are successful and approved for use, reimbursement may not be forthcoming, which could lead to slower than anticipated adoption of our technology. Additionally, new drugs or devices may also affect market acceptance. These risks are mitigated by the current reimbursement standards, which we believe our system will be reimbursed under. Additionally, the Company’s management team is experienced in device reimbursement, in the U.S. and in Germany, as well as throughout the European Union (“EU”). William Rosellini, our Chief Executive Officer, is a published author in the area of Medicare and Medicaid reimbursement. Previously, he has utilized reimbursement consultants to map existing reimbursement codes in order to develop proper data collection and clinical trial design strategies to shorten the path to eventual Medicare reimbursement. Although the Company’s management team is experienced in device reimbursement there can be no guarantee that the Company’s neurostimulation device will be approved for reimbursement, which could adversely affect the adoption of our device.

 

Laws and regulations that could affect the industry in which we operate may be enacted, which could result in a delay or cessation of our research and development activities or the imposition of additional costs that could hinder our ability to achieve and maintain profitable operations.

 

Current laws and regulations with respect to our industry and additional laws and regulations which may be enacted in the future could impose new and/or unexpected operational considerations or constraints upon us. Complying with existing laws or regulations may require significant time and resource allocation for medical device manufacturers, including us. Additionally, changing or new legislation may force us to redesign one or more of our products. In such an event, our proprietary neurostimulation device may have to be altered or modified as to ensure that it is in compliance with all applicable laws and regulations. Such alterations or modifications would cause us to incur substantial research and development costs. Moreover, if we cannot modify or alter our neurostimulation device’s design or functionality, then our device could be rendered obsolete, which would substantially reduce our future profitability and harm our business. Additionally, since we intend to operate both domestically and in the European Union, we must remain cognizant of the legislative and regulatory landscape in both regions. Compliance with these regulations, when applicable, increases the research and development and production costs and could make our proposed products and services less attractive to potential customers.

 

 15 

 

 

International operations conducted by us subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions.

 

We sell medical devices to customers located outside the United States. International operations are subject to the legal, political, regulatory, and social requirements and economic conditions in the jurisdictions in which they are conducted. Risks inherent to international operations and sales, include, but are not limited to, the following:

 

exposure to violations of the Foreign Corrupt Practices Act of 1977, as amended;
    
difficulty in enforcing agreements, judgments, and arbitration awards in foreign legal systems;
    
impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments and the fact that the local currencies of these countries are not freely convertible;
    
inability to obtain maintain, or enforce our intellectual property rights;
    
changes in general economic and political conditions in foreign countries;
    
changes in foreign government regulations and technical standards, including additional regulation of medical devices, which may reduce or eliminate our ability to sell or license in certain markets;
    
requirements or preferences of foreign nations for domestic technologies, which could reduce demand for our technologies;
    
trade barriers such as export requirements, tariffs, taxes, and other restrictions and expenses, which could increase the prices of our technologies and make us less competitive; and
    
longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable, which may reduce the future profitability of foreign sales or licensing.

 

Conducting business in foreign jurisdictions requires us to respond to rapid changes in market conditions in these countries. The Company believes that its overall success as a global business depends on its ability to succeed in different legal, regulatory, economic, social, and political situations and conditions. We may not be able to develop and implement effective policies and strategies in each foreign jurisdiction where we may do business in the future.

 

The Company depends on its key management personnel for its future success.

 

The Company’s success depends largely on the skills of its key management and technical personnel. The loss of one or more of its key management and technical personnel may materially and adversely affect business and results of operations. The Company does not maintain key person insurance for any of its employees. The Company cannot guarantee that it will be able to replace any of its key management personnel in the event that their services become unavailable.

 

We only have a limited number of employees to manage and operate our neurostimulation business segment.

 

As of December 31, 2017, our neurostimulation business segment employed a total of 19 full-time employees and 4 consultants. We cannot assure you that we will be able to retain adequate staffing levels to run our operations and/or to accomplish all of the objectives that we otherwise would seek to accomplish for the neurostimulation business segment.

 

Failure to raise the necessary capital could restrict the Company’s growth, limit its development of new products and services and hinder its ability to compete.

 

The Company needs to raise funds in order to achieve its business objectives. Failure to raise these funds may:

 

Restrict its growth;
   
Limit its development of new products and services; and
   
Hinder its ability to compete.

 

Any of these aforementioned consequences would have a materially adverse effect on the Company’s business, operations, and financial position.

 

We may be subject to product liability claims and may not have sufficient product liability insurance to cover any such claims, which may expose us to substantial liabilities.

 

We may be exposed to product liability claims from users of our products. It is possible that any product liability insurance coverage we obtain will be insufficient to protect us from future claims. Further, we may not be able to obtain or maintain insurance on acceptable terms or that such insurance would be sufficient to cover any potential product liability claim or recall. Failure to obtain or maintain sufficient insurance coverage could have a material adverse effect on our business, prospects, and results of operations if claims are made that exceed our coverage.

 

 16 

 

 

Our revenues will depend upon adequate reimbursement from public and private insurers and health systems.

 

Our success will depend on the extent to which reimbursement for the costs of our devices will be available from third party payers, such as public and private insurers and health systems. Government and other third-party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement of new treatments. Therefore, significant uncertainty usually exists as to the reimbursement status of new healthcare treatments. If we are not successful in obtaining adequate reimbursement for our treatment from these third-party payers, the market’s acceptance of our treatment could be adversely affected. Inadequate reimbursement levels also likely would create downward price pressure on our treatment. Even if we succeed in obtaining widespread reimbursement for our treatment, future changes in reimbursement policies could have a negative impact on our business, financial condition and results of operations.

 

To be commercially successful, we must convince physicians that our devices are safe and effective alternatives to existing medical devices and that our devices should be used.

 

We believe physicians will only adopt our devices if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our devices is a favorable alternative to conventional devices/methods. Physicians may be slow to change their practices for the following reasons, among others:

 

Lack of evidence supporting additional patient benefits and our devices over conventional devices/methods;
   
Perceived liability risks generally associated with the use of new devices; and
   
Limited availability of reimbursement from third party payers.

 

In addition, we believe that recommendations for and support of our devices by influential physicians are essential for market acceptance and adoption. If we do not receive this support or are unable to demonstrate favorable long-term clinical data, physicians and hospitals may not use our devices, which would significantly reduce our ability to achieve revenue and would prevent us from sustaining profitability.

 

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups (“JOBS”) Act and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
   
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
   
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
   
reduced disclosure obligations regarding executive compensation; and
   
exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to report upon the effectiveness of our internal control over financial reporting. When and if we are a “large accelerated filer” or an “accelerated filer” and are no longer a “smaller reporting company,” each as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain a smaller reporting company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to smaller reporting companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer a smaller reporting company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and ensure we have hired sufficient accounting and finance staff.

 

Due to the recent acquisitions of foreign subsidiaries and integration of those entities, management is in the process of evaluating internal controls over financial reporting and as such, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our internal controls over financial reporting were not effective due to the lack of implementation of internal controls over financial reporting across all operating entities. If we fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud. At times we have not had sufficient accounting and supervisory personnel with the appropriate level of technical accounting experience and training necessary or adequate formally documented accounting policies and procedures to support, effective internal controls. As we grow, we will hire additional personnel and engage in external temporary resources and may implement, document and modify policies and procedures to maintain effective internal controls. However, we may identify deficiencies and weaknesses or fail to remediate previously identified deficiencies in our internal controls. If material weaknesses or deficiencies in our internal controls exist and go undetected or un-remediated, our financial statements could contain material misstatements that, when discovered in the future and our operating results could be material impacted and we could fail to meet our future reporting obligations.

 

If we discover material weaknesses or other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

 

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we fail to timely remediate the material weakness or other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, we cannot be certain that material weaknesses or significant deficiencies in our internal controls will not be discovered in the future.

 

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

 

We may be unable to complete or integrate intellectual property acquisitions effectively, which may adversely affect our growth, profitability, and results of operations.

 

We expect future acquisitions of intellectual property to play a significant role in our product development growth. As of the date hereof, we have made four such acquisitions; however, we cannot be certain that we will be able to continue to identify attractive acquisition opportunities, obtain financing for acquisitions on satisfactory terms if needed, or successfully acquire identified targets. Additionally, we may not be successful in integrating acquired intellectual property into our existing operations and realizing anticipated synergies. Competition for acquisition opportunities in the industry in which we operate may increase our costs of acquisitions or causing us to refrain from engaging in acquisitions. These and other factors relating to our acquisition of intellectual property could negatively and adversely impact our growth, profitability, and results of operations.

 

 18 

 

 

Variability in intellectual property laws may adversely affect our intellectual property position.

 

Intellectual property laws, and patent laws and regulations in particular, have been subject to significant variability either through administrative or legislative changes to such laws or regulations or changes or differences in judicial interpretation, and it is expected that such variability will continue to occur. Additionally, intellectual property laws and regulations differ among countries. Variations in the patent laws and regulations or in interpretations of patent laws and regulations in the United States and other countries may diminish the value of our intellectual property and may change the impact of third-party intellectual property on us. Accordingly, we cannot predict the scope of patents that may be granted to us, the extent to which we will be able to enforce our patents against third parties, or the extent to which third parties may be able to enforce their patents against us.

 

We may need to negotiate modifications or extensions of existing intellectual property agreements.

 

We license intellectual property from third parties. We may in the future need to extend, modify, or otherwise negotiate changes to such licenses. There can be no assurance that the third parties with whom we have (or in the future may have) agreements will agree to such modifications, or that if they do, that they will do so on terms favorable to us.

 

We, or the third parties whom we license intellectual property from, may become involved in legal proceedings to protect or enforce our intellectual property rights, which could be expensive and time-consuming.

 

Competitors or others may infringe upon our intellectual property rights. To counteract infringement or unauthorized use, we or third parties whom we license intellectual property from may be required to file patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that certain of our intellectual property is not valid or is unenforceable, or the court may refuse to stop the other party from using the technology at issue on the grounds that our intellectual property rights do not cover such technology.

 

An adverse determination of any litigation or defense proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put outstanding intellectual property applications at risk of not being granted.

 

Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our intellectual property applications. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs, diversion of resources, and distraction of our management. We, or our licensors, may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as comprehensively as in the United States.

 

Furthermore, due to the substantial amount of discovery associated with intellectual property litigation, there is a risk that some of our, or our licensors’, confidential information could be compromised by disclosure. In addition, during the course of this litigation, there could be public announcement of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, then it could have a substantial adverse effect on the price of our common stock. We, or our licensors, may not prevail in any litigation or interference proceeding in which we may be involved in the future. Even if we, or our licensors prevail, such legal proceedings would likely be expensive and time-consuming.

 

RISKS RELATED TO COMMERCIALIZATION

 

If we are unable to obtain required regulatory approvals, we will be unable to market and sell our product candidates.

 

Our product candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing, oversight of clinical investigators, recordkeeping and commercialization. Rigorous preclinical testing and clinical trials and an extensive regulatory review and approval process are required to be successfully completed in the United States and in each foreign jurisdiction in which we offer our products before a new drug or other product can be sold in such jurisdictions. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain, and subject to unanticipated delays. The time required obtaining approval by the FDA, or the regulatory authority in such other jurisdictions is unpredictable and often exceeds five years following the commencement of clinical trials, depending upon the complexity of the product candidate and the requirements of the applicable regulatory agency.

 

In connection with the clinical development of our product candidates, we face risks that:

 

  the product candidate may not prove to be safe and efficacious;

 

  patients may die or suffer serious adverse effects for reasons that may or may not be related to the product candidate being tested;

 

 19 

 

 

  we may fail to maintain adequate records of observations and data from our clinical trials, to establish and maintain sufficient procedures to oversee, collect data from, and manage clinical trials, or to monitor clinical trial sites and investigators to the satisfaction of the FDA or other regulatory agencies;

 

  the results of later-phase clinical trials may not confirm the results of earlier clinical trials; and

 

  the results from clinical trials may not meet the level of statistical significance or clinical benefit-to-risk ratio required by the FDA or other regulatory agencies for marketing approval.

   

Only a small percentage of product candidates for which clinical trials are initiated receive approval for commercialization. Furthermore, even if we do receive regulatory approval to market a product candidate, any such approval may be subject to limitations such as those on the indicated uses for which we may market a particular product candidate.

 

Specifically, design verification, process validation and testing requirements for our Viant™ System are nearly complete and management expects we will complete the technical file in 2018 with the exception of some longer duration biocompatibility and shelf life tests. The Company expects to receive a CE Mark in the first half of 2019. However, to date this has not been granted. We cannot be certain that this will be granted.

 

Our product candidates have not completed sufficient clinical trials to obtain regulatory approval and may never demonstrate sufficient safety and efficacy in order to do so.

 

Our product candidates are in the clinical and pre-clinical stages of development. In order to achieve profitable operations, we alone, or in collaboration with others, must successfully license, develop, manufacture, introduce and market our products. The time frame necessary to achieve market success for any individual product, whether we develop, is long and uncertain. The products we are currently developing will require significant additional research, development and preclinical and clinical testing prior to application for commercial use or sale. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in clinical trials, even after showing promising results in early or later-stage studies or clinical trials. Additionally, we may encounter problems in our clinical trials that may cause us to delay, suspend or terminate those clinical trials.

 

If clinical trials or regulatory approval processes for our product candidates are prolonged, delayed or suspended, we may be unable to commercialize our product candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any revenue from potential product sales.

 

We cannot predict whether we, if our product candidates are licensed, will encounter problems with any of planned clinical trials that will cause us or any regulatory authority to delay or suspend those clinical trials or delay the analysis of data derived from them. A number of events, including any of the following, could delay the completion of our ongoing and planned clinical trials and negatively impact our ability to obtain regulatory approval for, and to market and sell, a particular product candidate:

 

  conditions imposed on us by the FDA or another foreign regulatory authority regarding the scope or design of our clinical trials;
     
  delays in obtaining, or our inability to obtain, required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials;
     
  insufficient supply of our product candidates or other materials necessary to conduct and complete our clinical trials;
     
  slow enrollment and retention rate of subjects in our clinical trials;
     
  serious and unexpected drug-related side effects related to the product candidate being tested; and
     
  delays in meeting manufacturing and testing standards required for production of clinical trial supplies.

 

Commercialization of our product candidates may be delayed by the imposition of additional conditions on our clinical trials by the FDA or any other applicable foreign regulatory authority or the requirement of additional supportive studies by the FDA or such foreign regulatory authority. In addition, clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, the conduct of other clinical trials that compete for the same patients as our clinical trials, and the eligibility criteria for our clinical trials. Our failure to enroll patients in our clinical trials could delay the completion of the clinical trial beyond its expectations. In addition, the FDA could require us to conduct clinical trials with a larger number of subjects than we may have projected for any of our product candidates. We may not be able to enroll a sufficient number of patients in a timely or cost-effective manner. Furthermore, enrolled patients may drop out of our clinical trials, which could impair the validity or statistical significance of the clinical trials.

 

We do not know whether our clinical trials will begin as planned, will need to be restructured, or will be completed on schedule, if at all. Delays in our clinical trials will result in increased development costs for our product candidates, and our financial resources may be insufficient to fund any incremental costs. In addition, if our clinical trials are delayed, our competitors may be able to bring products to market before we do and the commercial viability of our product candidates could be limited.

 

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Our product candidates will remain subject to ongoing regulatory review even if they receive marketing approval, and if we or lose these approvals and the sale of any of our approved commercial products could be suspended.

 

Even if we receive regulatory approval to market a particular product candidate, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, and record keeping related to the product will remain subject to extensive regulatory requirements. If we fail to comply with the regulatory requirements of the FDA and other applicable domestic and foreign regulatory authorities or discover any previously unknown problems with any approved product, manufacturer, or manufacturing process, we could be subject to administrative or judicially imposed sanctions, including:

 

  restrictions on the products, manufacturers, or manufacturing processes;
     
  warning letters;
     
  civil or criminal penalties;
     
  fines;
     
  injunctions;
     
  product seizures or detentions;
     
  pressure to initiate voluntary product recalls;
     
  suspension or withdrawal of regulatory approvals; and
     
  refusal to approve pending applications for marketing approval of new products or supplements to approved applications.

 

Our industry is highly competitive, and our product candidates may become obsolete.

 

We are engaged in a rapidly evolving field. Competition from other pharmaceutical companies, biotechnology companies and research and academic institutions is intense and likely to increase. Many of those companies and institutions have substantially greater financial, technical and human resources than we do. Those companies and institutions also have substantially greater experience in developing products, conducting clinical trials, obtaining regulatory approval and in manufacturing and marketing pharmaceutical products. Many of our competitors have already succeeded in obtaining regulatory approval for their products and may continue to do so more rapidly than we do. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Our competitors may succeed in developing products that are more effective and/or cost competitive than those we are developing, or that would render our product candidates less competitive or even obsolete. In addition, one or more of our competitors may achieve product commercialization or patent protection earlier than we do, which could materially adversely affect our business.

 

If physicians and patients do not accept our future products or if the market for indications for which any product candidate is approved is smaller than expected, we may be unable to generate significant revenue, if any.

 

Even if any of our product candidates obtain regulatory approval, they may not gain market acceptance among physicians, patients, and third-party payers. Physicians may decide not to recommend our products for a variety of reasons including:

 

  timing of market introduction of competitive products;
     
  demonstration of clinical safety and efficacy compared to other products;
     
  cost-effectiveness;
     
  limited or no coverage by third-party payers;
     
  convenience and ease of administration; and
     
  ineffective marketing and distribution support of its products.

 

If any of our product candidates are approved but fail to achieve market acceptance or such market is smaller than anticipated, we may not be able to generate significant revenue and our business would suffer.

 

 21 

 

 

Our ability to generate product and/or licensing revenues will be diminished if our therapies sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.

 

Our ability abilities to commercialize our therapies, alone or with collaborators, will depend in part on the extent to which reimbursement will be available from private health maintenance organizations and health insurers and other healthcare payers. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers are challenging the prices charged for medical products and services. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenue and profitability. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs and therapeutics. We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payers’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Our future products might not ultimately be considered cost-effective. Even if one of our product candidates is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover such therapies. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for one of our products, once approved, market acceptance of such product could be reduced.

 

Our internal computer systems, or those of our third-party service providers, licensees, licensors, collaborators or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption in our business and operations.

 

Despite the implementation of security measures, our internal computer systems and those of our current and future service providers, licensees, licensors, collaborators and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we are not aware of any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed, on-going or future clinical trials could result in delays in our regulatory approval efforts and significant costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our drug candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development and commercialization of our product candidates could be delayed.

 

Due in part to our limited financial resources, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable indications or therapeutic areas for our product candidates or those that are in-licensed, and/or we may be unable to pursue the clinical trials that we would like to pursue.

 

We have limited technical, managerial and financial resources to determine the indications on which we should focus the development efforts related to our product candidates. Due to our limited available financial resources, we may have curtailed clinical development programs and activities that might otherwise have led to more rapid progress of our product candidates through the regulatory and development processes.

 

We may make incorrect determinations with regard to the indications and clinical trials on which to focus the available resources that we do have. Furthermore, we cannot assure you that we will be able to retain adequate staffing levels to run our operations and/or to accomplish all of the objectives that we otherwise would seek to accomplish. Our decisions to allocate our research, management and financial resources toward particular indications or therapeutic areas for our product candidates may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also cause us to miss valuable opportunities.

 

If the third parties on which we rely for the conduct of our clinical trials and results do not perform our clinical trial activities in accordance with good clinical practices and related regulatory requirements, we may be unable to obtain regulatory approval for or commercialize our product candidates.

 

We use independent clinical investigators and other third-party service providers to conduct and/or oversee the clinical trials of our product candidates and expect to continue to do so for the foreseeable future. We rely heavily on these parties for successful execution of our clinical trials. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the FDA’s requirements and our general investigational plan and protocol.

 

 22 

 

 

The FDA requires us and our clinical investigators to comply with regulations and standards, commonly referred to as good clinical practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the respective trial plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates or result in enforcement action against us.

  

We have limited manufacturing capacity and have relied on, and expect to continue to rely on, third-party manufacturers to produce our product candidates.

 

We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our neurostimulation product candidates, and we lack the resources and the capabilities to do so. As a result, we currently rely, and expect to rely for the foreseeable future, on third-party manufacturers to supply our product candidates. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured our product candidates or products ourselves, including:

 

  reliance on third-parties for manufacturing process development, regulatory compliance and quality assurance;
     
  limitations on supply availability resulting from capacity and scheduling constraints of third-parties;
     
  the possible breach of manufacturing agreements by third-parties because of factors beyond our control; and
     
  the possible termination or non-renewal of the manufacturing agreements by the third-party, at a time that is costly or inconvenient to us.

 

If we do not maintain our key manufacturing relationships, we may fail to find replacement manufacturers or develop our own manufacturing capabilities, which could delay or impair our ability to obtain regulatory approval for our products and substantially increases our costs or deplete profit margins, if any. If we do find replacement manufacturers, we may not be able to enter into agreements with them on terms and conditions favorable to us and there could be a substantial delay before new facilities could be qualified and registered with the FDA and other foreign regulatory authorities. 

 

The FDA and other foreign regulatory authorities require manufacturers to register manufacturing facilities. The FDA and corresponding foreign regulators also inspect these facilities to confirm compliance with current standards. Contract manufacturers may face manufacturing or quality control problems causing drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with the applicable cGMP requirements. Any failure to comply with requirements or other FDA and comparable foreign regulatory requirements could adversely affect our clinical research activities and our ability to develop our product candidates and market our products following approval. 

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop our product candidates and commercialize any products that receive regulatory approval on a timely basis.

 

If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates and any products that we may develop.

 

The testing and marketing of medical products entail an inherent risk of product liability. Although we are not aware of any historical or anticipated product liability claims or specific causes for concern, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates and any products that we may develop. In addition, product liability claims may also result in withdrawal of clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could prevent or inhibit the commercialization of any products that we may develop, alone or with corporate partners.

 

The medical device industry is highly competitive and subject to rapid technological change.

 

If our competitors are better able to develop and market products that are safer, more effective, less costly, or otherwise more attractive than any products that we may develop, our commercial opportunity will be reduced or eliminated.

 

Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products for use in the treatment of cardiovascular disease.

 

 23 

 

 

We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions in the United States and abroad. Most of the companies developing or marketing competing products are publicly traded, or divisions of publicly-traded companies and these companies enjoy several competitive advantages, including:

 

greater financial and human resources for product development, sales and marketing, and patent litigation;
   
significantly greater name recognition;
   
established relations with healthcare professionals, customers, and third-party payers;
   
additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;
   
established distribution networks; and
   
greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products and marketing approved products.

 

For example, Boston Scientific, Abbott Laboratories, and Medtronic, three companies with far greater financial and marketing resources than we possess, have each developed, and are actively marketing neurostimulation devices that have been approved by the FDA. We may be unable to demonstrate that our systems offer any advantages over their stents. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with, or mergers with or acquisitions by, large and established companies or through the development of novel products and technologies.

 

The industry in which we operate has undergone, and is expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances are made. Our competitors may develop and patent processes or products earlier than us, obtain regulatory approvals for competing products more rapidly than us, and develop more effective or less expensive products or technologies that render our technology or products obsolete or non- competitive. We also compete with our competitors in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. If our competitors are more successful than us in these matters, our business may be harmed.

 

If we are unable to establish sales and marketing capabilities or enter and maintain arrangements with third parties to sell and market our products, our business may be harmed.

 

We do not have a sales organization and have no experience as a company in the sales, marketing and distribution of medical devices. To be successful in commercializing our products we must either develop a sales and marketing infrastructure or enter distribution arrangements with others to market and sell our products. We have not yet hired any European sales people or entered any third-party distribution agreements.

 

We currently plan to establish our own direct U.S. sales force. If we develop our own marketing and sales capabilities, our sales force will be competing with the experienced and well-funded marketing and sales operations of our more established competitors. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all. If we are unable to establish sales and marketing capabilities, we will need to contract with third parties to market and sell our products in the United States. To the extent that we enter arrangements with third parties to perform sales, marketing, and distribution services in the United States or internationally, our product revenue could be lower than if we directly marketed and sold our products or related device that we may develop.

 

Furthermore, to the extent that we enter co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. Some of our future distributors may market their own products or distribute other companies’ products that compete with ours, and they may have an incentive not to devote sufficient efforts to marketing our products. If we are unable to establish and maintain adequate sales, marketing, and distribution capabilities, independently or with others, we may not be able to generate product revenue and may not become profitable.

 

The manufacturing facilities of our special process suppliers (e.g., neurostimulation device manufacture, extension manufacture, lead manufacture, sterilization, and calibration) must also comply with strictly enforced regulatory requirements. If we fail to achieve regulatory approval for our own manufacturing facilities or those of our suppliers, our business and our results of operations would be harmed.

 

Completion of our clinical trials and commercialization of our products require access to, or the development of, manufacturing facilities that comply with the FDA’s Quality Systems Regulation and Good Manufacturing Practice requirements. The FDA must approve facilities that manufacture our products for domestic commercial purposes, as well as the manufacturing processes and specifications for the product.

 

 24 

 

 

We depend on single-source suppliers for some of the components in our neurostimulation system. The loss of these suppliers could delay our clinical trials or prevent or delay commercialization of our products.

 

Although we have identified several vendors for the components of our products, some of our components are currently provided by only one vendor, or a single-source supplier. In addition, we do not have long-term contracts with our third-party suppliers of some of the equipment and components that are used in our manufacturing process and we do not carry a significant inventory of most components used in our products. Establishing additional or replacement suppliers for these components and obtaining any additional regulatory approvals that may result from adding or replacing suppliers, will take a substantial amount of time. We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or foreign regulatory authorities. Furthermore, since some of these suppliers are located outside of the United States, we are subject to foreign export laws and U.S. import and customs regulations, which complicate and could delay shipments to us.

 

If we must switch to replacement suppliers, we will face additional regulatory delays and the manufacture and delivery of our products would be interrupted for an extended period, which would delay completion of our clinical trials or commercialization of our products. In addition, we will be required to obtain prior regulatory approval from the FDA or foreign regulatory authorities to use different suppliers or components that may not be as safe or as effective. As a result, regulatory approval of our products may not be received on a timely basis or at all.

 

If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and, as a result, the value of our stock may decline.

 

From time to time, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory, and other product development goals, which we sometimes refer to as milestones. These milestones could include obtaining CE Mark approval in the European Union, the submission of PMA documentation to the FDA, initiation of our pivotal U.S. clinical trials, the enrollment of patients in our clinical trials, the release of data from our clinical trials and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, the value of our stock may decline.

 

We depend on our officers, and if we are not able to retain them or recruit additional qualified personnel, our business will suffer.

 

Due to the specialized knowledge, each of our officers possesses with respect to interventional medicine and our operations, the loss of service of any of our officers could delay or prevent the successful completion of our neurostimulation device development and the commercialization of our products. Each of our officers may terminate their employment without notice and without cause or good reason.

 

Upon receiving regulatory approval for our products, we expect to expand our operations and grow our research and development, product development and administrative operations. Our growth will require hiring a significant number of qualified clinical, scientific, manufacturing, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain, and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

 

If we are unable to manage our expected growth, we may not be able to commercialize our products, including our neurostimulation system.

 

If we obtain CE Mark and FDA approvals for our products, we intend to continue to expand our operations and grow our research and development, product development and administrative operations and invest substantially in our manufacturing facilities. This expansion has and is expected to continue to place a significant strain on our management and operational and financial resources. To manage any expected growth and to commercialize our products, we will be required to improve existing, and implement new, operational, and financial systems, procedures and controls and expand, train, and manage our growing employee base. Our current and planned personnel, systems, procedures, and controls may not be adequate to support our anticipated growth. If we are unable to manage our growth effectively, our business could be harmed.

 

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RISKS RELATED TO OUR COMMON STOCK

 

Our shares may be thinly traded with wide share price fluctuations, low share process and minimal liquidity.

 

Our shares of common stock began trading on the OTCQB exchange on September 27, 2017 and have experienced limited trading activity. The share price may be volatile with wide fluctuations in response to several factors, including:

 

potential investors’ anticipated feeling regarding our results of operations;
   
increased competition;
   
our ability or inability to generate future revenues; and
   
market perception of the future of development of the products and services we offer.

 

In addition, if our shares are quoted on another trading platform or exchange for which we qualify, our share price may be affected by factors that are unrelated or disproportionate to our operating performance. Our share price might be affected by general economic, political, and market conditions such as recessions, interest rates or international currency fluctuations. In addition, stocks traded over the OTC Markets quotation system are usually thinly traded, highly volatile and not followed by analysts. These factors, which are not under our control, may have a material effect on our share price.

 

Because we can issue additional shares of common stock, purchasers of our common stock may suffer immediate dilution, and may experience further dilution in the future.

 

We are authorized to issue up to 75,000,000 shares of common stock. As of April 5, 2017, 27,615,185 shares of common stock are issued and outstanding. Our Board of Directors has the authority to mandate the issuance of additional shares of common stock without the consent of any of our shareholders. Consequently, our shareholders may experience further dilution of their ownership of the Company in the future, which could have an adverse effect on the trading market for our common stock.

 

We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our Board of Director may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

Our common stock is deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.

 

Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

Our stock price may be volatile; you may not be able to resell your shares at or above your purchase price.

 

The market prices for our securities and the securities of companies similar to ours have been highly volatile, with price and volume fluctuations, and may continue to be highly volatile in the future. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock, some of which are beyond our control:

 

announcements of technological innovations or new commercial products by our competitors or us
   
our issuance of equity or debt securities, or disclosure or announcements relating thereto;
   
developments concerning proprietary rights, including patents;
   
regulatory developments in the United States and foreign countries;
   
litigation;
   
economic and other external factors or other disaster or crisis; or
   
period-to-period fluctuations in our financial results.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

The Company does not own any real-estate with the exception of a portion of the excess unused land at the Medi-Line manufacturing facility. The Company leases the following properties:

 

The Medi-Line manufacturing plant and offices located in Angleur (Liege) Belgium with an approximate area of 29,886 sq. ft. are financed under a capital lease for EUR €156,044 annually, (approximately $186,919).

 

NXPROC leases approximately 221 sq. ft. of office space in Rio Piedres, Puerto Rico for $5,640 per year.

 

NMB leases approximately 2,519 sq. ft. of office and clean room space in Niel, Belgium for €51,660 per year (approximately $61,881) and leases approximately 150 sq. ft. of office space in Heverlee, Belgium for €12,865 per year (approximately $15,410).

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 27 

 

 

PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

There is a limited public market for our common shares.  Our common stock has traded on the OTC QB Marketplace operated by the OTC Markets Group, Inc., or “OTCQB,” under the ticker symbol “NXNN” since September 27, 2017.

 

Trading in stocks quoted on the OTCQB platform is often thin and is characterized by wide fluctuations in trading prices due to many factors that may be unrelated to a company’s operations or business prospects.  We cannot assure you that there will be a market in the future for our common stock.

 

The following table sets forth the high and low sales prices for our common stock for each quarterly period since September 27, 2017.

 

   High   Low 
Fiscal Year 2017          
Third Quarter (since September 27, 2017)  $2.00   $2.00 
Fourth Quarter  $2.50   $0.44 
Fiscal Year 2018          
First Quarter (through April 5, 2018)  $1.50   $0.58 

 

Holders

 

As of April 5, 2018, there are 27,615,185 shares of common stock issued and outstanding, which were held by approximately 256 shareholders of record. 

 

Dividends

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the near future. Any further determination to pay dividends on our capital stock will be at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors considers relevant.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2017.

 

   (a)   (b)   (c) 
Plan Category  Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights   Weighted-average Exercise Price of Outstanding Options, Warrants and Rights  

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities

Reflected in Column (a)

 
Equity compensation plans approved by security holders   3,680,200   $1.08    1,319,800 
Equity compensation plans not approved by security holders   

    

    

 
Total   3,680,200   $1.08    1,319,800 

 

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Recent Sales of Unregistered Securities

 

Set forth below is an enumeration of all securities issued by the Company for the year ended December 31, 2017   that have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and have not been previously reported.

 

On March 17, 2017, the Company offered to current warrant holders who participated in our December 2, 2016 private placement (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. Pursuant to the offer, 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. 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 October 9, 2017, the Company issued 150,000 shares of the Company’s restricted common stock through a subscription of the shares for cash to Henri Decloux following NMB’s acquisition of INGEST and Medi-Line. Henri Decloux was one of the two previous owners and sellers of INGEST to NMB. HD Resources, SPRL (“HD”) is owned by Henri Decloux and Medi-Line has contracted with HD for the management of Medi-Line. These shares were valued at $150,000 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 October 9, 2017, the Company issued 81,035 shares of the Company’s restricted common stock to Rosellini Scientific, LLC (“RS”), a company controlled by our Chief Executive Officer, William Rosellini, as repayment for 81,035 shares of the Company’s restricted, common stock RS loaned to NMB for payment of outstanding vendor invoices. On December 29, 2017 an additional 61,884 shares of the Company’s restricted common stock were issued to RS in settlement for a cash loan to NMB from RS and for an adjustment to the market value of the 81,035 shares described above per the debt repayment agreement dated December 29, 2017. In total, the 142,919 shares were valued $119,746. 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 December 7, 2017, 56,000 shares originally issued to Ron Conquest were cancelled pursuant to a resignation and release agreement dated November 7, 2017.

 

On December 29, 2017, the Company issued to Michael Rosellini 77,008 shares of the Company’s restricted common stock as repayment for a loan of 53,214 shares of registered common stock borrowed by the Company and used to pay certain vendors of the Company pursuant to a loan agreement dated December 29, 2017. The shares were valued at $48,130. 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 December 29, 2017, the Company issued 12,500 shares of the Company’s restricted common stock to Michael Rosellini pursuant the exercise notice from Mr. Rosellini dated November 22, 2017. Mr. Rosellini exercised his right to purchase 200,000 shares of the Company’s restricted common stock. The cashless exercise pursuant to the warrant was elected and the Company issued 12,500 shares of restricted common stock pursuant to the exercise. The shares were valued at $20,000. 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 August 21, 2017, the Company offered to current employees the opportunity to purchase shares of the Company’s restricted common stock for a discount through payroll deductions. As of the date of this filing, 203,635 shares of the Company’s restricted common stock were issued. The shares were valued at $127,247. 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.

 

For the year ended December 31, 2017, the Company issued, pursuant to our 2016 Omnibus Incentive Plan (the “2016 Plan”), issued 2,025,200 options grants to purchase 2,025,200 common shares of the Company to Directors, employees and non-employee contractors. 1,045,000 options were granted as non-qualified stock options and 980,200 options were granted as incentive stock options. The range of exercise prices for these options were between $1.00 and $2.00. The term of these options at grant date ranged from 3 to 4 years. The fair value of the options was determined to be $563,754 using the Black-Scholes Option Pricing Model. During the year ended December 31, 2017, 677,000 options to purchase 677,000 common shares of the Company were cancelled. See Note 11 – EQUITY to the Consolidated Financial Statements included herein.

 

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For the year ended December 31, 2017, the Company has issued an aggregate of 715,667 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 $610,893. 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.

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview of Business and Description of Business Segments

 

Overview

 

We are a neuromodulation medical device manufacturing company focused on the development and commercialization of our neurostimulation technology platform for the treatment of various disorders via electrical stimulation of tissues associated with the nervous system. Our consolidated operations include operations of the following wholly-owned subsidiaries: Nexeon Medsystems Europe, SARL (“Nexeon Europe”), Nexeon Medsystems Puerto Rico Operating Company Corporation (“NXPROC”), Nexeon Medsystems Belgium, SPRL (“NMB”), which owns and operates Medi-Line, SA and Pulsus Medical LLC. Nexeon Europe is the holding company for NXPROC and NMB. NXPROC is focused on advanced computational biology and deep learning utilization associated with the Internet of Medical Things technology. Pulsus Medical, LLC conducts research and development related to cardiovascular disease technology.

 

Our operations to date include research and development activities, our merger with Nexeon MedSystems, Inc., a private Delaware corporation (“NXDE”), which included acquisition of certain intellectual property (the “Merger”), the acquisition of NMB with its neurostimulation technology platform and its wholly-owned subsidiaries INGEST and Medi-Line, and the operations of Medi-Line from September 31, 2017 to December 31, 2017, and the closing of two private placement offerings.

 

As of December 31, 2017, we had an accumulated deficit of $3,743,438. For the years ended December 31, 2017 and 2016, our net loss was $2,177,641 and $802,463, 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 research and development and initiate 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 may 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 and development activities, as well as any future commercialization of our products.

 

Prior to the acquisition of Medi-Line and NMB, the Company had not generated any revenues and we financed our operations primarily with net proceeds from the private placements of our common stock and non-dilutive research and development grant awards. The Company’s ability to generate revenues in addition to the Medi-Line manufacturing revenues will depend heavily on the successful completion of the requisite clinical trials and studies necessary to achieve approval to begin marketing our contemplated neurostimulation devices from the relevant regulatory authorities in the United States and the European Union. 

 

Business Segments

 

The Company operates in two distinct business segments within the medical device industry; manufacturing and neurostimulation. The manufacturing segment includes the manufacturing operations of our wholly-owned subsidiary Medi-Line located in Angleur (Liege) Belgium. Medi-Line manufactures single use medical devices for the medical and pharmaceutical sectors including radiopharmacy technology, urology products and sterilization cases and trays and designs, develops, and offers worldwide production and supply chain capabilities for these products to its customers. The neurostimulation segment includes development, manufacturing, and commercialization of neurostimulation technology for the treatment of various neurological disorders through electrical stimulation of neural tissues. The Company’s first commercial application of its platform will be the Viant™ Deep Brain Stimulation System. Operations for the neurostimulation segment are conducted in the United States, Puerto Rico, Belgium and Germany. Other items of revenue, not directly related to manufacturing or neurostimulation revenues are categorized as other operating income. Other operating income and expenses not directly related to a specific segment are identified as Income (expense) not allocated to segments.

 

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Results of Operations

 

Consolidated Sales Revenue

 

In 2017, consolidated revenues increased 121% to $ 3,302,775. The change in consolidated revenues consisted of the following segmented revenue activity:

 

Revenues by Segment

 

   2017   2016   % Change 
Manufacturing  $2,932,664   $    %
Neurostimulation   291,750    1,456,038    (80.0)
Other   78,361    38,843    101.7 
Revenue  $3,302,775   $1,494,881    120.9%

 

Manufacturing Segment: For the year ended December 31, 2017 manufacturing sales were $2,932,664 for the period from September 1, 2017 to December 31, 2017 subsequent to acquisition of Medi-Line on August 30, 2017.

 

Neurostimulation Segment: For the year ended December 31, 2017 neurostimulation sales decreased 80% as compared to the year ended December 31, 2016. The reduction in neurostimulation sales year over year, primarily relates to a one-time option payment in the amount of $1,005,513 for the manufacture and supply of pre-clinical implantable neurostimulator devices in 2016.

 

Other: For the years ended December 31, 2017 and 2016, the Company’s other operating revenues were $78,361 and $38,843, respectively. Other operating income consists primarily of Belgian government credits for employing staff in the research and development sector.

 

Consolidated Earnings (Loss) Before Provision for Taxes on Income

 

Consolidated loss before provision for taxes for the year ended December 31, 2017 was $2,177,641 as compared to a loss of $802,463 for the year ended December 31, 2016.

 

Income Before Tax by Segment

 

   2017   2016   % Change 
Manufacturing  $(31,698)  $     %
Neurostimulation   (6,117,404)   (673,117)   808.8 
Other (1)   3,971,461    (129,346)   (3,170.4)
Income (loss) before taxes  $(2,177,641)  $(802,463)   171.4 %

 

(1) Amounts not allocated to segments include interest income (expense) and other income (expense) and amortization of acquisition intangible assets.

 

Manufacturing Segment: In 2017, the manufacturing segment income before tax as a percent of manufacturing revenues was (1.08%), reflecting activity for the period of ownership by the Company from September 1, 2017 to December 31, 2017 and therefore no comparison to 2016 is provided. During the period, Medi-Line incurred a charge in the amount of $168,933 related to a severance payment for a long-term employee that was terminated. In Belgium, severance payment requirements and accruals are administered by and mandated by the Belgian government and accrue based on time in service.

 

Neurostimulation Segment: In 2017, the neurostimulation segment loss before tax as a percent of revenues was (2,097%). The decrease in income before tax as a percent of neurostimulation revenue reflects increased research and development activities, increase in staff and corporate infrastructure and a decrease in neurostimulation revenue year over year from 2016 which included to a one-time option payment in the amount of $1,005,513.

 

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Cost of Product Sold, Research and Development Expense and Selling, General and Administrative Expense

 

Cost of product sold, research and development expense and selling, general and administrative expense as a percentage of revenue were as follows:

 

   2017   % Rev   2016   % Rev 
Cost of product sold  $2,321,756    70.3%  $39,129    2.6%
Research and development expenses   2,942,981    89.1    759,502    50.8 
Selling general and administrative expenses   2,831,069    85.7%   693,603    46.4%

 

Cost of Product Sold: Consolidated costs of products sold for the year ended December 31, 2017 increased to 70.3% of revenue from 2.6% for the year ended December 31, 2016. The increase was driven by the addition of Medi-Line’s manufacturing activity in 2017 and the option payment of $1,005,513 for the manufacture and supply of pre-clinical implantable neurostimulator devices in 2016.

 

Research and Development Expense: Consolidated research and development expenses for the year ended December 31, 2017 increased to 89.1% of revenue from 50.8% for the year ended December 31, 2016. The increase reflects the increased Research and development activities for the Company’s neurostimulation platform and for manufacturing setup and non-recurring engineering for the Viant™ Deep Brain Stimulation System.

 

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.

  

The Company has been awarded multiple grants and subsidies for its research and development activities and receives these funds as advance payments and reimbursements for applicable project expenses. The Company recognizes the amounts received in accordance with the contracts as a reduction of research and development expenses over the periods necessary to match the contract on a systematic basis to the costs that it is intended to compensate. The Company records, on the balance sheet, Grants receivable upon meeting the criteria discussed above until cash is received. For the years ended December 31, 2017 and 2016, the Company has recorded a credit to research and development expense for $1,648,407 and $445,083 respectively related to these grants and subsidies.

 

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).

 

Selling, 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 accounting services; (ii) capital formation; (iii) investor and public relations services; and (iv) general corporate consulting services.

 

For the year ended December 31, 2017, the Company’s selling, general and administrative expenses increased to 85.7% of revenue from 46.4% for the year ended December 31, 2016. The change was driven by the addition of the Medi-Line activity, the addition of executive and sales staff salaries and wages, stock option expense, increased public reporting and trading expenses, increased capital formation costs and IR/PR costs.

 

It is expected that our selling, 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 and sales and marketing expenses related to the sales of our neusrostimulation 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.

 

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Depreciation and Amortization

 

Depreciation and Amortization expenses consist of amortization of acquired intangibles and depreciation buildings, capital improvements, capitalized building lease, office equipment and furniture and fixtures. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets

 

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. NMB holds patents and licenses totaling $1,053,097 related to our neurostimulation technology and devices. 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 2019 and 2036. 

 

For the years ended December 31, 2017 and 2016, the Company's depreciation expenses were $127,677 and $38,962, respectively. For the years ended December 31, 2017 and 2016, the Company's amortization expenses were $1,170,033 and $597,959 respectively.

 

Interest Income (Expense)

 

For the year ended December 31, 2017, the Company's interest expense, net of interest income was $111,931 and for the year ended December 31, 2016 interest income, net of interest expense was $5,311. For the year ended December 31, 2017, the net interest income (expense) includes interests on bank loans and credit facilities, interest on leasing, interest on mezzanine debt, interest on shareholder notes and amortizing interest for the original discount of mezzanine debt in the amount of $45,711 in 2017. For the year ended December 31, 2016, net interest income (expense) includes interest income on related party loans, interest on leasing, interest on credit facilities and interest on shareholder notes.

 

Other Income (Expense)

 

For the years ended December 31, 2017 and 2016, the Company recorded other income, net of other expenses in the amount of $4,025,031 and recorded an expense in the amount of $173,300, respectively. For the year ended December 31, 2017 and based on the purchase price allocation and third-party valuations for Medi-Line’s real estate, land and intangibles, management recorded a Gain on bargain purchase for the acquisition of INGEST and Medi-Line in the amount of $4,311,554. The Company also recorded other expense in the amount of $37,788 for the loss on the exchange of stock – See Note 13 Related Party Transactions - January 6, 2017 Stock Exchange Agreement, to the Consolidated Financial Statements included herein and an expense in the amount of $174,252 to record the bad debt on the write-off of a note receivable - See Note 13 Related Party Transactions - Nuviant Medical, GmbH Waiver of Debt Agreement, to the Consolidated Financial Statements included herein and recorded an expense in the amount of $74,483 for the impairment of patents assets.

 

Provision for Income Taxes

 

For the years ended December 31, 2017 and 2016, the Company recorded no tax provision.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Prior to the acquisition of NMB and its subsidiary Medi-Line, the Company had not generated any revenues. We have financed our operations to date through private placements, National Institutes of Health awards for research and development projects and from loans from the Company's largest shareholder, RS. The 2016 Private Placement was closed as of December 2, 2016 (the “Closing Date”).  We received $2,864,946 in net cash proceeds from the issuance of 2,864,946 units in the 2016 Private Placement at $1.00 per unit. Each unit consisted 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. The 2017 Private Placement closed on July 20, 2017. The Company received $1,165,000 from the sale of common stock and issued 932,000 shares of restricted common stock. The shares of common stock were offered at $1.25 per share in addition to $150,000 in cash common stock sales. Our wholly owned subsidiary Pulsus Medical, LLC was awarded $751,000 of Federal research grants applicable to Pulsus’ products and these funds which became available to the Company beginning in the quarter ended September 30, 2017. Nexeon MedSystems Inc has been awarded a grant by the Cancer Prevention and Research Institute of Texas which was approved in the amount of $395,156 and received $324,841 in December 2017.

 

NMB has been awarded subsidies from the Public Service of Wallonia - Department of Technology Development and the Research Programs Department. NMB currently has approximately $1,045,929 in remaining awarded funds and is awaiting final approval on one pending grant application from Public Service of Wallonia in the amount of approximately $1,419,000. NMB is also completing the Phase B portion of the contract deliverables to Galvani Bioelectronics, LTD with a value of approximately $380,547.

 

 33 

 

 

Medi-Line has been awarded subsidies from the Public Service of Wallonia - Department of Technology Development and the Research Programs Department. Medi-Line currently has approximately $1,033,680 in remaining awarded funds and is awaiting final approval on one pending grant application from Public Service of Wallonia in the amount of approximately $1,052,542.

 

On December 27, 2017, NXPROC, a wholly-owned subsidiary of the Company was granted a tax exemption pursuant to Act number 73-2008 (“ACT 73”) by the Government of Puerto Rico, Department of Economic Development and Commerce. The exemption allows NXPROC to obtain tax credits in the amount of fifty percent (50%) of approved applicable research and development expenses of NXPROC. These tax credits can be used to offset current year income taxes or if no income tax is due, can be sold to companies operating in Puerto Rico to offset their income tax. In the case of a sale of the tax credits, the tax credits are typically sold at a discount to the dollar value of the credits.

 

During the year ended December 31, 2017, the Company issued an aggregate of 715,667 shares of common stock for certain research and development consulting services, software development, legal, corporate structuring rendered by third-party consultants. The foregoing shares were valued at $610,893

 

During the next twelve months, the Company may elect to issue additional debt or equity either by private placement or a registered offering. There can be no assurance that the Company will be successful in completing any new debt and/or equity financing or receive assignments of grants. If 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 product commercialization.

 

As of December 31, 2017, we had cash on hand of $883,962 and a working capital surplus of $796,323. Based upon our budgeted burn rate, and along with grant funding, we currently have operating capital for approximately two months. The Company has historically relied on equity or debt financings and federal research and development subsidies to finance its ongoing operations.

 

Future Financing; Continued Operations

 

Until such time, if ever, as we can generate substantial revenues to cover the development and commercialization of our neurostimulation technology platform, 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.

 

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 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements included herein 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not required for Smaller Reporting Companies.

 

 34 

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Operations F-4
   
Consolidated Statements of Stockholders’ Equity F-5
   
Consolidated Statements of Cash Flows F-6
   
Notes to Consolidated Financial Statements F-7

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Nexeon Medsystems, Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Nexeon Medsystems, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, The Company has sustained operating losses since inception and has an accumulated deficit of $3,743,438 at December 31, 2017. In addition, the Company does not have sufficient continuing revenue to cover its future operating expenses. The Company currently has limited liquidity and has not completed its efforts to establish an additional source of revenues sufficient to cover operating costs of the on-going neurostimulation research and development activities over an extended period of time. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4 to the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Paritz & Company, P.A.
   
We have served as the Company’s auditor since 2016.
   
Hackensack, New Jersey
April 5, 2018  

 

 F-2 

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31,
2017
   December 31,
2016
 
Assets        
Current Assets          
Cash and cash equivalents  $883,962   $2,124,795 
Accounts receivable   1,877,743    48,842 
Grants receivable   804,152    69,391 
Inventory   2,206,570     
Other current assets   157,621    132,453 
Notes receivable – related party       106,062 
Total Current Assets  $5,930,048   $2,481,543 
           
Property, plant and equipment, net   3,569,832    69,354 
Investments   112,072    148,860 
Intangible assets, net   10,739,492    9,712,090 
Total Assets  $20,351,444   $12,411,847 
           
Liabilities and Stockholders’ Equity          
Current Liabilities          
Accounts payable   2,575,399    277,649 
Accrued liabilities   503,751    113,019 
    Current portion of long-term debt, net of original discount   866,479    51,284 
Advance grant payments   935,817    400,669 
Deferred liabilities   174,230    12,401 
Due to related party       81,008 
Accrued interest   78,049     
Accrued interest payable - stockholders       2,193 
Total Current Liabilities   5,133,725    938,223 
           
Long-term Debt, net of original discount   3,348,730    141,419 
Notes payable – stockholders       10,000 
Total Liabilities  $8,482,455   $1,089,642 
           
Stockholders' Equity          
Common Stock - 75,000,000 shares authorized, $.001 par value; 27,591,441 and 21,711,953 issued and outstanding at December 31, 2017 and December 31, 2016, respectively   27,591    21,712 
Additional paid-in capital   15,497,986    9,759,560 
Equity instruments to be issued   65,839    3,070,000 
Accumulated deficit   (3,743,438)   (1,565,797)
Accumulated other comprehensive income   21,011    36,730 
Total Stockholders' Equity   11,868,989    11,322,205 
           
Total Liabilities and Stockholders' Equity  $20,351,444   $12,411,847 

 

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

 

 F-3 

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPRENSIVE INCOME

 

   For the Years Ended 
   December 31, 
   2017   2016 
Revenues  $3,302,775   $1,494,881 
Cost of revenue   2,321,756    39,129 
Gross profit   981,019    1,455,752 
           
Selling, general and administrative expenses   2,831,069    693,603 
Research and development expenses – other   2,942,981    751,434 
Research and development expenses – related party       8,068 
Depreciation and amortization   1,297,710    636,921 
           
(Loss) from operations   (6,090,741)   (634,274)
           
Other Income (Expense)          
Interest income – related party   2,036    19,049 
Gain on bargain purchase   4,311,554     
Interest expense   (113,967)   (13,738)
Loss on stock exchange   (37,788)    
Write-off of loan of related party loan   (174,252)    
Loss on impairment of asset   (74,483)   (173,500)
           
Loss before provision (benefit) for taxes   (2,177,641)   (802,463)
Provision (benefit) for taxes        
           
Net loss  $(2,177,641)  $(802,463)
           
Other comprehensive income          
Foreign currency translation adjustment   (15,719)   (23,411)
           
Comprehensive loss   (2,193,360)   (825,874)
           
BASIC AND DILUTED PER SHARE DATA:          
Net loss per common share, basic and diluted  $(0.09)  $(0.04)
Weighted average common shares outstanding, basic and diluted   24,861,237    19,044,803 

 

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

 

 F-4 

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

       Additional   Equity       Other Items of     
   Common Stock   Paid-In   Instruments   Accumulated   Comprehensive     
   Shares   Amount   Capital   to be Issued   Deficit   Income   Total 
                             
Balances at December 31, 2015   500,000   $500   $367,553   $   $(763,334)  $60,141   $(335,140)
                                    
Common stock issued for services   423,500    423    171,329                171,752 
Common stock issued for acquisition   16,659,943    16,660    4,811,186                   4,827,846 
Common stock issued for patent license               3,050,000            3,050,000 
Common stock issued for conversion of notes payable and accrued interest   1,287,564    1,288    1,389,335                1,390,623 
Common stock issued for 2016 Private Placement for cash   2,840,946    2,841    2,675,283    20,000            2,698,124 

Stock based compensation

           82,284                82,284 
Warrants issued in 2016 Private Placement for cash           162,823                162,823 

Warrants issued for conversion of notes payable and accrued interest

           99,767                99,767 

Net loss for the year ended December 31, 2016

                   (802,463)       (802,463)
Other items of comprehensive loss                       (23,411)   (23,411)
Balances at December 31, 2016   21,711,953    21,712    9,759,560    3,070,000    (1,565,797)   36,730    11,322,205 
                                    
Common stock issued for services   715,667    716    610,177                610,893 
Common stock issued for 2017 Private Placement for cash   932,000    932    1,164,068                1,165,000 
Common stock issued for cash   150,000    150    149,850                150,000 
Common stock issued for warrant exercise   606,098    606    5,330                5,936 
Common stock issued for 2016 Private Placement for cash   24,000    24    23,976    (20,000)           4,000 
Common stock issued for patent license   3,050,000    3,050    3,046,950    (3,050,000)            
Warrants issued for Leonite Capital Convertible Debt           90,190                90,190 
Common stock issued for Leonite Capital Convertible Debt   100,000    100    99,900                100,000 
Employee payroll stock purchases   203,635    203    127,044                127,247 
Common stock canceled per severance agreement   (56,000)   (56)                   (56)

Stock based compensation

           319,057                319,057 
Common stock issued for 2016 merger shares   (77,725)   (78)   (77,647)   77,725             
Stock issue to related party – repayment of loan   219,927    220    167,657                167,877 
Common stock issue for 2016 merger shares   11,886    12    11,874    (11,886)            

Net loss for the year ended December 31, 2017

                   (2,177,641)       (2,177,641)
Other items of comprehensive loss                       (15,719)   (15,719)
Balances at December 31, 2017   27,591,441   $27,591   $15,497,986   $65,839    (3,743,438)  $21,011   $11,868,989 

 

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

 

 F-5 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Years Ended 
   December 31, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Loss  $(2,177,641)  $(802,463)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,297,710    636,921 
Stock-based compensation   1,260,942    254,036 
Loss on impairment of asset   74,483    173,500 
Loss on exchange for stock   37,788     
Gain on bargain purchase   (4,311,554)    
Bad debt   174,252     
Income tax benefit        
Non-cash interest   45,711     
Change in operating assets and liabilities:          
Accounts receivable   (491,940)   (28,119)
Grants receivable   (511,127)   4,326 
Inventory   (106,006)    
Other current asset   2,813    (130,529)
Accounts payable   1,175,745    (27,628)
Accrued interest receivable – related party       (1,736)
Accrued liabilities   9,658    67,206 
Advance grant payments   484,819    198,859 
Accrued interest payable – other   (3,997)   208 
Deferred liabilities   (74,474)   (56,789)
Net cash provided by (used in) operating activities   (3,112,818)   287,792 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Issuance of notes receivable – related party   (59,819)   (912,392)
Cash paid for acquisitions net of cash acquired   (978,996)   (140,000)
Additions to property plant and equipment   (61,667)   (32,567)
Net cash used in investing activities   (1,100,482)   (1,084,959)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock and issuance of warrants   1,324,936    2,860,946 
Proceeds from debt   1,910,552    137,813 
Repayment of debt   (181,038)   (52,731)
Repayment to related party   (87,369)   (20,088)
Net cash provided by financing activities   2,967,081    2,925,940 
           
Effects of exchange rate changes on cash   5,386    (3,978)
           
Net increase (decrease) in cash and cash equivalents   (1,240,833)   2,124,795 
Cash and cash equivalents at beginning of year   2,124,795     
Cash and cash equivalents at end of year  $883.962   $2,124,795 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid during period for interest  $59,546   $8,275 
Cash paid during period for taxes        
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:        
Original purchase discount on notes  $154,266   $ 
Common stock issued for acquisition       4,505,486 
Common stock issued for conversion of shareholder notes and accrued interest       1,287,564 
Common stock issued for investments       322,360 
Settlement of notes receivable in exchange for intangible assets - related party       805,204 
Equity instruments to be issued for acquisition of patent license       3,050,000 

 

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

 

 F-6 

 

 

NEXEON MEDSYSTEMS INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BUSINESS – NATURE OR ORGANIZATION

 

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.

 

Organization and Operations

 

Nexeon MedSystems Inc was incorporated in the State of Nevada on December 7, 2015. Nexeon MedSystems Inc is a neuromodulation medical device manufacturing company. As a development stage enterprise, the Company’s primary purposes are to develop and commercialize our neurostimulation technology platform for the treatment of various disorders via electrical stimulation of tissues associated with the nervous system. The neurostimulation technology platform was acquired through the acquisition of Nexeon Medsystems Belgium, SPRL (“NMB”). 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 Nexeon Medsystems Belgium, SPRL (“NMB”). NXPROC is focused on advanced computational biology and deep learning utilization associated with the Internet of Medical Things technology. Pulsus Medical, LLC conducts research and development related to cardiovascular disease technology acquired in the acquisition of NXDE. On September 1, 2017, through its wholly-owned subsidiary Nexeon Europe, the Company completed the acquisition of NMB, along with NMB’s wholly owned subsidiaries Medi-Line and its holding company INGEST, SPRL (“INGEST”), which are incorporated under the laws of Belgium. INGEST is the holding company for Medi-Line. Medi-Line provides the medical device manufacturing expertise and experience needed to scale our business.  Medi-Line is a leading global source of innovative medical device solutions with existing customers that include Fortune 50 companies, neurostimulator companies, and the Company. On September 27, 2017 Nexeon Medsystems Inc began trading on the OTCQB stock exchange under the symbol NXNN.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Management Estimates and Assumptions

 

The preparation of the Company’s financial statements are in conformity with accounting principles generally accepted in the United States of America which 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 expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.

 

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.

 

Cash and Cash Equivalents

 

The Company considers those short-term, highly liquid investments with maturities of three months or less as cash and cash equivalents. The Company currently has no cash equivalents.

 

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 recognized impairment losses in the amount of $74,483 during the year ended December 31, 2017.

 

 F-7 

 

 

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 $1,000 and benefiting more than one accounting period in the period purchased.

 

Net Income (Loss) Per Share

 

The Company calculates net income (loss) per share as required by Accounting Standards Codification subtopic 260-10, “Earnings per Share” (“ASC 260-10”). Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. Basic and diluted earnings per share were the same for the years ended December 31, 2017 and 2016, respectively as the Company has no dilutive securities.

 

Revenue Recognition

 

Revenues currently consist of single use medical devices for the medical and pharmaceutical sectors at Med-Line and pre-clinical neurostimulation device sales at NMB. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable. The Company will record revenue when it is realizable and earned and the services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its manufactured products and medical devices when the product is delivered to the customer.

 

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.

 

 F-8 

 

 

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.

 

Research and Development Expenses

 

Research and development expenses are charges to expense 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, consulting costs, and non-recurring engineering costs. These expenses are assigned to the research, development and clinical projects to develop the Company’s implantable neurostimulation, sensing, and recording technology for a variety of clinical therapeutic applications and for manufacturing product development.

 

The Company has been awarded grants subsidies for on-going research and development projects from the National Institutes of Health Department of Health and Human Services, through the Public Service of Wallonia - Department of Technology Development and the Research Programs Department (the Wallonia region is located in South Brussels, in Belgium) and the Cancer Prevention and Research Institute of Texas to support our research projects with potential for commercialization. The Company receives the funding in a combination of advance payments at commencement of a project and through reimbursement requests, invoices, for applicable research and development expenses as expenses are incurred. These grants and subsidies provide non-dilutive funds that do not include a repayment obligation. Participation by the granting agency typically accounts for 50% to 100% of the project costs in grants or subsidies.

 

The Company recognizes the amounts receivable in regard to the grants contracts at fair value when there is reasonable assurance that the contract amount will be received and that all the conditions of the specific contract will be complied with in order to properly match the reimbursements with the specific expenditures that the specific contract intends to reimburse. The Company recognizes the amounts received in accordance with the contracts as a reduction of research and development expenses over the periods necessary to match the contract on a systematic basis to the costs that it is intended to compensate. The Company records, on the balance sheet, Grants receivable upon meeting the criteria discussed above until cash is received. Where the Company receives payments in advance it is recorded as Advance grant payments on the balance sheet and relieved against research and development expense as the associated costs are incurred.

 

As of December 31, 2017, the Company has $804,152 in Grants receivable for project expenses invoiced and to be invoiced, but not yet paid which have been recorded as a reduction of research and development expense in the accompanying statement of operations and $935,817 in Advance payments received and yet to be expended.

 

Foreign Currency Translation and Transactions

 

The Company’s reporting currency is the U.S. dollar. The Company’s operations in Belgium use their local currencies as their functional currency. The financial statements in foreign currency are translated into U.S. Dollars, “USD,” in accordance with ASC Topic 830, Foreign Currency Translation. All assets and liabilities are translated at the year-end currency exchange rate, stockholders’ equity items are translated at the historical rates and income statement items are translated at the average exchange rate prevailing during the year. Translation adjustments resulting from this process are reported under other comprehensive income (“OCI”) in accordance with ASC Topic 220, Reporting Comprehensive Income as a Component of Stockholders’ Equity. Foreign exchange transaction gains and losses are reflected in the statement of comprehensive income.

 

 F-9 

 

 

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.

 

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.

 

Leases

 

Leases are reviewed and classified as capital or operating at their inception in accordance with ASC Topic 840, Accounting for Leases. For leases that contain rent escalations, the Company records monthly rent expense equal to the total amount of the payments due in the reporting period over the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent account, when presented on balance sheet.

 

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.

 

 F-10 

 

 

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.

 

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.

 

During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation expense aggregating $319,057 and $82,284, respectively for common stock options issued to Company personnel, directors and consultants. Stock-based compensation consisting of restricted common stock issued to employees aggregating $127,247 and $0, respectively, and paid stock-based compensation consisting of restricted common stock issued to non-employees aggregating $610,893 and $171,500, respectively. During the years ended December 31, 2017 and 2016, the Company paid stock-based compensation, to affiliates aggregating $0 and $252, respectively.

 

Recently Issued 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 financial statements.

 

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

 

 F-11 

 

 

NOTE 3 – BUSINESS COMBINATIONS

 

On September 1, 2017 (the “Acquisition Date”), the Company, through its wholly-owned subsidiary Nexeon Europe, completed the acquisition of NMB pursuant to the Acquisition Agreement entered into on January 10, 2017, between Rosellini Scientific, LLC (“RS”), a Texas limited liability company controlled by our Chief Executive Officer, William Rosellini, and Nexeon Europe (the “Acquisition”). RS was the sole shareholder of NMB owning 107,154 shares (the “Shares”). Pursuant to the Acquisition Agreement, RS granted to Nexeon Europe the exclusive and irrevocable right to purchase the Shares upon the terms and conditions set forth in the Acquisition Agreement (the “Right to Purchase”). The consideration for the Right to Purchase was US $1,000 (the “Acquisition Price”). Upon Nexeon Europe exercising the Right to Purchase, the Agreement was automatically deemed converted into and considered a share transfer agreement for the purchase of the Shares and the Acquisition Price became the Purchase Price of the Shares and was deemed to have been satisfied by Nexeon Europe to RS as of the date of the Acquisition Agreement.

 

Due to RS controlling both the Company and NMB, the acquisition has been recorded as a combination of entities under common control and the results of NMB for the years ended December 31, 2017 and 2016 are reported retrospectively on a consolidated basis in the Company’s financial statements.

 

Included in the acquisition of NMB, are its wholly-owned subsidiaries, Medi-Line and its holding company INGEST. On August 30, 2017, NMB acquired INGEST and Medi-Line for $1,648,240 (payable as €1,450,000 EUR cash) or $977,996 (€891,496 EUR) net of cash acquired. As part of the transaction, and prior to the acquisition, Nexeon Europe loaned NMB $970,400 (€818,075 EUR) pursuant to the existing loan agreement and promissory note, NMB secured a credit facility in the amount of $330,319 (€275,000 EUR) and Medi-Line loaned NMB $540,032 (€450,000 EUR). Payment of the purchase price included the settlement of a note payable in the amount of $120,007 (€100,000 EUR) and a dividend payable in the amount of $9,901 (€8,250 EUR) to the sellers of INGEST. The balance of the loan and all accrued interest related to the loan agreement and promissory note between Nexeon Europe and NMB along with the $540,032 (€450,000 EUR) loan from Medi-Line to NMB is eliminated through consolidation in the financial statements.

 

Medi-Line provides the medical device manufacturing expertise and experience needed to scale our business.  Medi-Line is a leading global source of innovative medical device solutions with existing customers that include Fortune 50 companies, neurostimulator companies, and the Company. Medi-Line provides high quality and efficiency in the development, engineering, and manufacturing of medical devices for the med-tech and pharmaceutical industries.

 

The acquisition of INGEST and Medi-Line was accounted for using the acquisition method and, accordingly, the results of operations of INGEST and Medi-Line were reported in the Company's financial statements beginning on August 30, 2017, the date of acquisition. The Revenue and Net loss reported in the financial statements for the combined INGEST and Medi-Line for the year ending December 31, 2017 were $2,972,993 and $116,974 respectively. Medi-Line incurred a charge in the amount of $168,933 related to a severance payment for a long-term employee that was terminated. In Belgium, severance payment requirements and accruals are administered by and mandated by the Belgian government and accrue based on time in service.

 

 F-12 

 

 

The following table presents the fair value of assets acquired and liabilities assumed as of the acquisition date on August 30, 2017, based on management’s preliminary allocation as well as the adjustments made up to December 31, 2017, based on the certified valuations:

 

   Preliminary   Final 
   August 30 2017   December 31, 2017 
Purchase price  $1,740,102   $1,740,102 
           
Cash and cash equivalents   670,244    670,244 
Inventory   2,224,907    2,100,668 
Accounts receivable   1,384,957    1,384,957 
Grants receivable   190,002    190,002 
Other current assets   21,819    21,819 
Property, plant and equipment   1,728,151    3,633,826 
Software licenses   35,513     
Note receivable   540,032    540,032 
Intangible assets   445,585    2,150,000 
Total Assets Acquired   7,241,210    10,691,548 
           
Current liabilities   2,452,166    2,225,735 
Deferred charges   12,244    12,244 
Non-current liabilities   2,401,913    2,401,913 
Total Liabilities Assumed   4,866,323    4,639,892 
           
Net Assets Acquired   2,374,887    6,015,656 
Goodwill  $(634,785)  $(4,311,554)

 

The acquisition of INGEST and Medi-Line resulted in approximately $4,311,554 of negative goodwill based on third-party valuations. The negative goodwill is recorded as a bargain purchase in other income on the statements of comprehensive income. The income related to the bargain purchase is not expected to be applicable for tax purposes.

 

Unaudited Pro forma Consolidated Results

 

The following table provides unaudited pro forma results of operations for the years ended December 31, 2017 and 2016, as if INGEST and Medi-line had been acquired as of January 1, 2016. The pro forma results include the effect of certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets and the recognition of grant subsidies. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of INGEST and Medi-Line. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.

 

   December 31, 
   2017   2016 
Revenues  $7,880,467   $8,496,687 
Net income (loss)   (1,837,096)   (504,113)
Net income (loss) per common share, basic and diluted  $(0.07)  $(0.03)

 

 F-13 

 

 

NOTE 4 – 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 sustained operating losses since inception and has an accumulated deficit of $3,743,438 at December 31, 2017. In addition, the Company does not have sufficient continuing revenue to cover its future operating expenses. The Company currently has limited liquidity and has not completed its efforts to establish an additional source of revenues sufficient to cover operating costs of the on-going neurostimulation research and development activities over an extended period of time. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern. The Company is seeking additional financing and for continue operations, but there is no guarantee such financing will be available or on terms favorable to the Company.

 

NOTE 5 – LOANS AND LEASES

 

Loans and leases consist of the following as of December 31, 2017:

 

Notes Payable

 

12.00% Senior Secured Convertible Promissory Note:

On August 21, 2017, Company entered into a securities purchase agreement with Leonite Capital, LLC (“LC”), a Delaware limited liability company to provide the Company with additional resources to conduct its business. Pursuant to the securities purchase agreement, LC purchased a unit consisting of (i) a note in the principal amount of $1,120,000 at an original issue discount of $120,000, (ii) warrants to purchase 500,000 shares of the Company’s common stock, and (iii) the commitment shares equaling 100,000 shares of the Company’s restricted common stock valued at $100,000 (the “Commitment Shares”). Interest is at the rate of 12.00% per annum and the maturity date is 24 months from the date of issue. The note is a senior secured obligation of the Company, with priority over all future indebtedness of the Company. LC shall have the right at any time at LC’s option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable shares of common stock or any shares of capital stock or other securities of the Company into which such common stock shall hereafter be changed or reclassified with a limitation of owning a maximum of 4.99% of outstanding common stock of the Company at time of conversion. The conversion price shall be, at the option of LC, $1.75, subject to a one-time re-pricing 275 days after the closing, or (ii) 80% multiplied by the price per share paid by the investors in a subsequent Equity Financing. An amount of $274,266 was recorded on the balance sheet as an original discount to the consist of $120,000 original discount, $100,000 in restricted common stock and $54,266 as the fair value of the warrants issued in the transaction. The $274,266 will be expensed as interest expense over the 24-month term of the loan. For the LC loan, $373,333 is recorded as Loans and lease payable- current portion and $746,667 is recorded as Loan and lease payable – long-term on the balance sheet. $137,136 of the original discount is recorded as Loans and lease payable- current portion and $91,419 is recorded as Loan and lease payable – long-term on the balance sheet.

 

1.27% Secured bank Loan:

On August 29, 2017, Medi-Line entered into a credit contract with CBC Banque in the original amount of approximately $2,036,362 (€1,700,000 EUR). The loan is secured by a mortgage on the Medi-Line manufacturing facility and carries an interest rate of 1. % per annum with a seven-year term having monthly payments of interest and principal of approximately $23,365 (€21,175 EUR). $281,013 of the outstanding balance is recorded as Loans and lease payable- current portion and $1,662,505 is recorded as Loan and lease payable – long-term on the balance sheet.

 

1.27% Secured Bank Loan:

On August 29, 2017, NMB entered into a credit contract with CBC Banque in the original amount of approximately $329,412 (€275,000 EUR). The loan carries an interest rate of 1.27% per annum with a seven-year term having monthly payments of interest and principal of approximately $4,103 (€ 3,425 EUR). The loan is secured by the shares of NMB. $45,458 of the outstanding balance is recorded as Loans and lease payable- current portion and $268,935 is recorded as Loan and lease payable – long-term on the balance sheet.

 

 F-14 

 

 

0.72% Secured Bank Loan:

On May 7, 2016, Medi-Line entered into a credit contract with CBC Banque in the original amount of approximately $68,781 (€57,420 EUR). The loan carries an interest rate of 0.72% per annum with a 48-month term having monthly payments of interest and principal of approximately $1,454 (€ 1,214 EUR). The loan is secured by the assets of Medi-Line. Proceeds of the loan were used to acquire manufacturing equipment. The loan is secured by the shares of NMB. $17,195 of the outstanding balance is recorded as Loans and lease payable- current portion and $26,028 is recorded as Loan and lease payable – long-term on the balance sheet.

 

Loan Subsidy:

NMB was awarded a loan subsidy through the Public Service of Wallonia in the amount of $598,665 (€499,779 EUR). Of the total amount awarded, $179,600 (€149,934 EUR) is categorized as loan with repayment amounts ranging from $5,986 and $23,947 annually from 2018 through 2032. The current portion of the liability is recorded as Loans and leases payable in the amount of $5,987 and $173,613 is included in long-term debt on the balance sheet. The award amounts in excess of the loan amount are invoiced for reimbursement and recorded as a credit to applicable research and development expenses.

 

Revolving Credit:

The Company has a revolving credit card with BB&T Financial with an outstanding balance of $13,313 as of December 31, 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 $9,860 as of December 31, 2017, a credit limit of $11,000 and a current APR of 0%.

 

KBC Accounts Receivable Factoring Facility:

Medi-Line has an accounts receivable discounting agreement with KBC Commercial Finance for up to 85% of Medi-Line’s customer accounts receivables. The fee for the advances on receivables is the 2-month LIBOR plus 1.5% on annual basis. As of December 31, 2017, the outstanding balance on the credit facility was $49,018 and is recorded as Loans and lease payable- current portion on the balance sheet.

 

0.72% Secured Line of Credit:

Medi-line also has an unsecured line of credit with CBC Banque in the amount of approximately $89,840 (€75,000 EUR). The outstanding balance of this credit line as of December 31, 2017 is $0. The line of credit is secured by the assets of Medi-Line.

 

Capital Leases

 

Building Lease:

Medi-Line has a capital lease payable in the amount of $749,337 to KBC Vendor Lease. On December 13, 2005, Medi-Line entered into a capital lease facility for the financing of the manufacturing facility construction in the amount of $3,425,880 (€2,860,000 EUR) with a 15- year term. Quarterly lease payments excluding VAT are $46,730 (€39,011 EUR). The Company has the right to purchase the building at the end of the lease term for three percent (3%) of the original lease amount. $186,936 of the outstanding balance is recorded as Loans and lease payable- current portion and $562,401 is recorded as Loan and lease payable – long-term on the balance sheet.

 

 F-15 

 

 

Equipment Lease:

NMB has a capital lease payable in the amount of $21,502, which is record as Loans and lease payable- current portion, to Biotech Coaching S.A. On February 4, 2015, the Company entered into a sale-leaseback transaction with Biotech Coaching S.A. for the sale and lease in the original amount of $131,765 (€110,000 EUR) for medical and clean-room equipment. In March 2015, the Company commenced leasing the equipment with a 36-month term. Monthly lease payments excluding VAT are $3,824 (€3,192 EUR). The Company has the right to purchase the equipment at the end of the lease term for a residual value of $1,298 (€1,318 EUR).

 

   Carrying Amount 
Long-Term Debt    
12.00% Senior Convertible Secured Note, amortization begins 2018, 2019 maturity  $1,120,000 
1.27% Secured Bank Loan, monthly amortization, 2024 maturity   1,943,518 
1.27% Secured Bank Loan, monthly amortization, 2024 maturity   314,393 
0.72% Secured Bank Loan, monthly amortization, 2020 maturity   43,223 
Loan Subsidy, amortization begins 2018, 2032 maturity   179,600 
Revolving Credit   23,173 
KBC Accounts Receivable Factoring   49,018 
Capitalized Building lease   749,337 
Capitalized Equipment lease   21,502 
Less: original purchase discount, net of amortization   (228,555)
Total debt   4,215,209 
Less: current portion of debt, net of original discount current portion   (866,479)
Total long-term debt  $3,348,730 

 

Aggregate maturities of long-term obligations commencing in 2018 are:

 

   2018   2019   2020   2021   2022   After 2022 
Loans and notes  $658,041    1,009,136    349,620    351,253    355,518    720,802 
Capital leases   208,438    187,201    187,467    187,733         
Total  $866,479    1,196,337    537,087    538,986    355,518    720,802 

 

NOTE 6 – INCOME TAXES

 

The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as the Company had no U.S. taxable income for the year ended December 31, 2017 and 2016. The effective income tax rate for the Company for both of the years ended December 31, 2017 and 2016 were 34% and 40%, respectively. Some of our subsidiaries generated income and we accrued income tax according to the Belgian corporate income tax rate, but some had a loss and no tax provision was recorded. The Belgium corporate income tax (“CIT”) is levied at a rate of 33% plus a 3% crisis tax, which is a sur-tax on the CIT amount, implying an effective rate of 33.99%. No state, region or municipal income tax is levied.

 

The Belgian government enacted in December 2017 a significant tax reform law. The new tax legislation contains several key tax provisions including the reduction of the corporate income tax rate from the current 33.99% to 29.58% in 2018 and 2019 and 25% from 2020. Additionally, the use of net operating losses which could previously offset 100% of taxable income is now limited to offset only 70% of taxable income. The Company will not have to pay additional current tax due to the enacted changes.

 

 F-16 

 

 

The reconciliation of income tax provision (benefit) at the U.S. statutory rate of 34% for the years ended December 31, 2017 and 2016 to the Company’s effective tax rate is as follows:

 

   Years Ended December 31, 
   2017   2016 
         
Income tax (benefit) at U.S. statutory rate  $(740,000)  $(636,000)
Tax rate difference between Belgium and U.S.        
Permanent difference   (1,526,000)    
Change in valuation allowance   2,266,000    636,000 
Tax provision (benefit) at effective tax rate  $   $ 

 

The provision for income taxes are summarized as follows:

 

      Years Ended December 31,  
      2017       2016  
Federal                
Current   $     $  
Deferred            
Total income tax provision (benefit)   $     $  

 

The tax effects of temporary differences that give rise to the Company’s net deferred tax asset as of December 31, 2017 and 2016 are as follows:

 

   Years Ended December 31, 
   2017   2016 
         
Net loss carryforward U.S. – tax effect  $1,295,000   $ 
Net loss carryforwards Belgium – tax effect   406,000    636,000 
Less valuation allowance   (1,701,000)   (636,000)
Deferred tax asset, net of allowance  $   $ 

 

As of December 31, 2017, the Company has approximately $7,789,555 of net operating losses (“NOL”) carryovers to offset taxable income, if any, in future years which 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.

 

The Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, and a reduction in the Belgian tax rate from 34% to 25%, resulting in a deferred tax expense of approximately $1,202,000 for the year ended December 31, 2017 that is still fully valued against as of December 31, 2017. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. As the company maintains a full valuation allowance, this amount can be seen on the rate reconciliation as an adjustment to deferred tax asset and corresponding valuation allowance.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance. As a result, we have recorded no income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The deferred tax expense recorded in connection with the remeasurement of deferred tax assets is a provisional amount and a reasonable estimate at December 31, 2017 based upon the best information currently available. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

 

 F-17 

 

 

NOTE 7 – PROPERTY PLANT and EQUIPMENT

 

Property Plant and equipment at cost and accumulated depreciation as of December 31, 2017 and 2016 were:

 

   Estimated useful lives  December 31, 2017   December 31, 2016 
Land     $96,884   $ 
Capitalized building  39 years   3,017,552     
Machinery and equipment  5 to 15 years   677,734    149,204 
Total property plant and equipment – gross      3,792,170    149,204 
Less: accumulated depreciation      (222,338)   (79,850)
Total property plant and equipment – net     $3,569,832   $69,354 

 

Property plant and equipment depreciation expense for the years ended December 31, 2017 and 2016 was $127,677 and $38,962, respectively.

 

NOTE 8 – INTANGIBLE ASSETS

 

Intangible assets that have finite useful lives are amortized over their estimated useful lives. Intangible assets as of December 31, 2017 and 2016 are as follows:

 

   Estimated useful lives  December 31,
2017
   December 31,
2016
 
Intangible assets with definitive lives:            
Patents, licenses and intellectual property   4 to 20 years  $10,363,097   $10,313,660 
Fair value of customer relationships at acquisition  10 years   600,000     
Less: accumulated amortization      (1,773,605)   (601,570)
Patents, licenses and intellectual property – net      

9,189,492

    9,712,090 
              
Intangible assets with indefinite lives:             
Fair value of trade secrets and know-how at acquisition      

1,550,000

     
              
Total intangible assets – net     $10,739,492   $9,712,090 

 

Intangible asset amortization expense for the years ended December 31, 2017 and 2016 was $1,170,032 and $597,960, respectively.

 

NOTE 9 – INVENTORIES

 

Inventory balances as of December 31, 2017 and 2016 are as follow:

 

   December 31,
2017
   December 31,
2016
 
Raw materials and supplies  $1,811,749   $ 
Work in process   334,322     
Finished goods   60,499     
Total inventories  $2,206,570   $ 

 

NOTE 10 – SEGMENTS OF BUSINESS

 

The Company operates in two distinct business segments within the medical device industry; manufacturing and neurostimulation. The manufacturing segment includes the manufacturing operations of our wholly-owned subsidiary Medi-Line located in Angleur (Liege) Belgium. The neurostimulation segment includes development, manufacturing, and commercialization of neurostimulation technology. Operations for the neurostimulation segment are conducted in the United States, Puerto Rico, Belgium and Germany. Other items of revenue, not directly related to manufacturing or neurostimulation revenues are categorized as other operating income. Other operating income and expenses not directly related to a specific segment are identified as Income (expense) not allocated to segments.

 

   Revenue   Long Lived Assets 
   2017   2016   2017   2016 
Manufacturing  $2,932,664   $   $3,535,516   $ 
Neurostimulation   291,750    1,456,038    8,643,118    9,780,556 
Other   78,361    38,843    2,130,690    888 
Consolidated total  $3,302,775   $1,494,881   $14,309,324   $9,781,444 

 

 F-18 

 

 

   Income Before Tax   Identifiable Assets 
   2017   2016   2017   2016 
Manufacturing  $(31,698)  $   $7,803,409   $ 
Neurostimulation   (6,117,404)   (673,117)   9,421,311    10,141,459 
Other   3,971,461    (129,346)   3,126,724    2,270,388 
Consolidated total  $(2,177,641)  $(802,463)  $20,351,444   $12,411,847 

 

   Additions to Property Plant and Equipment   Depreciation and Amortization 
   2017   2016   2017   2016 
Manufacturing  $50,495   $   $74,344   $ 
Neurostimulation   11,172    31,581    1,203,169    636,822 
Other       986    20,197    99 
Consolidated total  $61,667   $32,567   $1,297,710   $636,921 

 

NOTE 11 – EQUITY

 

Common Stock Issuances

 

During the year ended December 31, 2017, the Company issued an aggregate of 715,667 shares of the Company’s restricted common stock for certain legal, corporate structuring and research and development consulting services rendered by third-party consultants. The foregoing shares were valued at $610,893.

 

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”). Pursuant to the offer, 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.

 

 F-19 

 

 

The Company conducted the 2017 Private Placement, which closed on July 20, 2017 for 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 shares of common stock were offered at $1.25 per share. The Company received $1,165,000 from the sale of common stock and issued 932,000 shares of common stock.

 

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 year ended December 31, 2017, 3,050,000 shares of the Company’s restricted common stock were issued to Mr. Rosellini valued at $3,050,000. See Note 13 – Related Party Transactions, Patent License Agreement (Siemens Patents) and Patent License Asset Purchase Agreement to the Consolidated Financial Statements included herein.

 

On August 21, 2017, the Company entered into a securities purchase agreement with LC to provide the Company with additional resources to conduct its business. Pursuant to the SPA, the Company issued to LC the Commitment Shares as consideration for entering into the SPA with the Company. The shares were valued at $100,000.

 

On September 28, 2017, the Company issued 24,000 shares of common stock to an individual subscriber of the 2016 Private Placement. $20,000 of the subscription was previously recorded in Equity Instruments to be Issued. The remaining $4,000 of the subscription was deposited and the shares were transferred to common stock and Additional paid in capital on the balance sheet. The shares were valued at $24,000.

 

On October 9, 2017, the Company issued 150,000 shares of the Company’s restricted common stock through a subscription of the shares for cash to Henri Decloux following NMB’s acquisition of INGEST and Medi-Line. Henri Decloux was one of the two previous owners and sellers of INGEST to NMB. HD Resources, SPRL (“HD”) is owned by Henri Decloux and Medi-Line has contracted with HD for the management of Medi-Line.

 

On October 9, 2017, the Company issued 81,035 shares of the Company’s restricted common stock to RS, a company controlled by our Chief Executive Officer, William Rosellini, as repayment for 81,035 shares of the Company’s restricted common stock RS loaned to NMB for payment of outstanding vendor invoices. On December 29, 2017 an additional 61,884 shares of the Company’s restricted common stock were issued to RS in settlement for a cash loan to NMB from RS and for an adjustment to the market value of the 81,035 shares described above per the debt repayment agreement dated December 29, 2017. In total, the 142,919 shares were valued $119,746.

 

On November 22, 2017, Michael Rosellini exercised his right to purchase 200,000 shares of the Company’s restricted common stock. The cashless exercise pursuant to the warrant was elected and the Company issued 12,500 shares of restricted common stock pursuant to the exercise.

 

On December 7, 2017, 56,000 shares originally issued to Ron Conquest were cancelled pursuant to a Resignation and Release agreement dated November 7, 2017.

 

On December 29, 2017, the Company issued to Michael Rosellini 77,008 shares of the Company’s restricted common stock as repayment for a loan to the Company per the loan agreement dated December 29, 2017. The shares were valued at $48,130. Michael Rosellini is a shareholder of the Company and father of our Chief Executive Officer.

 

On August 21, 2017, the Company offered to current employees the opportunity to purchase shares of the Company’s restricted common stock for a discount through payroll deductions. As of the date of this filing, 203,635 shares of the Company’s restricted common stock were issued. The shares were valued at $127,247.

 

 F-20 

 

 

Related to the Merger with NXDE, 1,659,943 shares of the Company’s common stock were recorded as issued as of the closing of the merger. The Company had been unsuccessful in contacting five NXDE preferred stock holders and issuing 77,725 shares of the Company’s stock. In 2017, these shares are valued at $77,725 and have been adjusted from Common stock and Additional paid in capital to Equity instruments to be issued until these shares can be issued. On October 25, 2017, the Company issued 11,886 shares of the Company’s common stock to one of the five beneficial owners. The value of these shares is $11,886. As of December 31, 2017, 65,839 shares remain unissued and recorded as Equity instruments to be issued.

 

The issuance of the above 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 at $1.00 per Unit (the “2016 Private Placement”). Each Unit consists 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.

 

On March 17, 2017, the Company offered to current warrant holders who participated in the 2016 Private Placement 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.

 

As of December 31,2017, 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 and 660,761 warrants are outstanding related to the 2016 Private Placement. 24,000 of the outstanding 660,761 warrants were issued in the year ended December 31, 2017 upon completion of the subscription agreement by an individual subscriber of the 2016 Private Placement.

 

On August 21, 2017, the Company entered into a securities purchase agreement with LC to provide the Company with additional resources to conduct its business. Pursuant to the SPA, the Company issued to LC warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $2.50 per share purchased and having a 2-year term and issued warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $3.00 per share purchased and having a 5-year term. The options were valued at $54,266 using the Black-Scholes option pricing model using a risk-free rate of 1.33%, expected volatility of 44.45%, expected life of 2 and 5 years, far value of the Company’s common stock of $1.25 with no expected dividends.

 

In connection with the securities purchase agreement with LC, Michael Rosellini, a shareholder in the Company and father of the Company’s CEO William Rosellini, provided a personal guarantee in the amount of $1,120,000 to induce LC to make the loan to the Company and accept the promissory note in the amount of $1,120,000. As consideration for providing the personal guarantee, the Company issued Michael Rosellini warrants to purchase 200,000 shares of the Company’s common stock with an exercise price of $1.50 per share purchased and having a 2-year term. The options were valued at $35,924 using the Black-Scholes option pricing model using a risk-free rate of 1.33%, expected volatility of 44.45%, expected life of 2 years, far value of the Company’s common stock of $1.25 with no expected dividends. Note 13 –Related Party Transactions Warrants Issued for Personal Guarantee.

 

On November 22, 2017, Michael Rosellini exercised his right to purchase 200,000 shares of the Company’s restricted common stock. The cashless exercise pursuant to the warrant was elected and the Company issued 12,500 shares of restricted common stock pursuant to the exercise.

 

 F-21 

 

  

As of December 31, 2017, 793,598 warrants have been exercised and 2,898,151 warrants have been cancelled.

 

As of December 31, 2017, a total of 1,160,761 shares of common stock of the Company have been reserved for issuance upon exercise of the warrants.

 

Options Grants – 2016 Plan

 

The Company may, from time to time, issue certain equity awards pursuant to our 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 year ended December 31, 2017, the Company issued stock options to purchase a total of 1,895,200 shares of the Company’s common stock under the 2016 Plan, with exercise prices ranging from $1.00 to $2.00 per share and cancelled 677,000 shares with an exercise price of $1.00, 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 options 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 options 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. The total 425,000 options were cancelled as of September 28, 2017 pursuant to the amended employment agreement with the executive.

 

(ii)Granted to a Director appointed to the Board of Directors nonqualified stock options to purchase a total of 50,000 shares of common stock, in four grants of 12,500 each, with a weighted average exercise price of $1.45 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 $20,679 using the Black-Scholes Option Pricing Model.

 

(iii)Granted to a second Director appointed to the Board of Directors nonqualified stock options to purchase a total of 50,000 shares of common stock, in three grants of 12,500 each, with a weighted average exercise price of $1.45 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 $20,679 using the Black-Scholes Option Pricing Model.

 

(iv)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 options 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.

 

(v)Granted to a consultant of the Company nonqualified stock options to purchase a total of 150,000 shares of common stock, with an exercise price of $1.00 per share. The options shall vest at the rate of 50,000 options per year beginning on January 2, 2018, 50,000 options on January 2, 2019 and 50,000 options on January 2, 2020 and each option grant expires three years from the date of vesting. The fair value of the options was determined to be $35,917 using the Black-Scholes Option Pricing Model. The total 150,000 options were cancelled upon resignation of the consultant prior to vesting of the options.

 

 F-22 

 

 

(vi)Granted to a consultant of the Company nonqualified stock options to purchase a total of 380,000 shares of common stock, with an exercise price of $1.00 per share. 84,448 options vested immediately and the remaining 295,552 options vest over 28 months at approximately 10,556 options per month from the grant date and each option grant expires three years from the date of vesting. The fair value of the options was determined to be $128,778 using the Black-Scholes Option Pricing Model.

 

(vii)Three non-executive employees of NMB were granted stock options upon the acquisition of NMB by the Company. Stock options to purchase a total of 725,000 shares of common stock with an exercise price of $1.25 were granted. 161,104 options vested immediately and the remaining 563,896 will vest over 28 months from the grant date at approximately 20,138 per month and each option grant expires four years from the date of vesting. The fair value of the options was determined to be $204,532 using the Black-Scholes Option Pricing Model.

 

(viii)Granted to a consultant of NMB nonqualified stock options to purchase a total of 25,200 shares of common stock, with an exercise price of $1.00 per share. The options vest at a rate of 2,100 per month and vesting commences on the first day of the month following the Grant Date and each option expires three years from the date of vesting. The fair value of the options was determined to be $6,706 using the Black-Scholes Option Pricing Model.

 

(ix)On November 6th, 2017, Mark Bates resigned from his position as Chief Innovation Officer and member of the Board of Directors. Pursuant to the severance agreement between Dr. Bates and the Company, of the original grant of 252,000 options on April 1, 2016, 102,000 options were cancelled, and 150,000 options became fully vested.

 

The options were valued at $563,754 using the Black-Scholes option pricing model with the following weighted average assumptions:

 

Risk-free interest rate   1.56%
Expected life   3.41 years 
Expected dividends   0.00%
Expected volatility   46.51%
Fair value of the Company's common stock  $1.14 

 

Aggregate options expense recognized for the year ended December 31, 2017 was $319,057.

 

As of December 31, 2017, there were 1,319,800 shares available for grant under the 2016 Plan, excluding the 3,680,200 options outstanding.

 

As of December 31, 2017, there were 2,375,200 incentive stock options outstanding to purchase an aggregate of 3,680,200 shares of common stock and 1,305,200 non-qualified options outstanding to purchase an aggregate of 1,305,200 shares of the Company's common stock and 1,449,800 shares available for grant under the 2016 Plan.

 

Stock option activity, both within and outside the 2016 Plan, and warrant activity for the year ended December 31, 2017, are as follows:

 

   Stock Options   Stock Warrants 
       Weighted       Weighted 
       Average       Exercise 
   Shares   Price   Shares   Price 
                 
Outstanding December 31, 2016   2,332,000   $1.00    4,128,510   $2.00 
Granted   2,025,200    1.14    724,000    2.38 
Canceled   (677,000)   1.00    (2,898,151)   2.00 
Expired                
Exercised           (793,598)   0.39 
Outstanding at December 31, 2017   3,680,200   $1.08    1,160,761   $2.32 
Exercisable at December 31, 2017   1,480,400   $1.07    1,160,761   $2.32 

 

 F-23 

 

 

The range of exercise prices and remaining weighted average life of the options outstanding at December 31, 2017 were $1.00 to $2.00 and 2.56 to 6.92 years, respectively.

 

The range of exercise prices and remaining weighted average life of the warrants outstanding at December 31, 2017 were $1.00 to $3.00 and 1.10 to 4.67 years, respectively.

 

NOTE 12 – 2016 OMNIBUS INCENTIVE PLAN

 

The 2016 Plan was adopted by our Board of Directors on January 2, 2016 and was subsequently approved by our shareholders. As of December 31, 2017, options to purchase a total of 3,680,200 shares of the Company's common stock were issued under the 2016 Plan, 2,685,200 with an exercise price of $1.00 per share and 945,000 with an exercise price of $1.25 per share and 25,000 with an exercise price of $1.80 per share and 25,000 with an exercise price of $2.00 per share. 454,656 options vested immediately upon grant and the remaining vest in varying amounts ranging from 100,000 annually to monthly increments ranging from 2,083 to 17,000 based on individual stock option agreements. The options have terms as follows: 1,705,200 options have a three-year term starting on each date of vesting, 825,000 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 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.

 

 F-24 

 

 

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 13 – RELATED PARTY TRANSACTIONS 

 

During the year ended December 31, 2017, the Company had the following transactions with related parties.

 

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

 

During the year ended December 31, 2017, the Company issued to Mr. Rosellini 3,050,000 shares of the Company’s restricted common stock valued at $3,050,000 in connection with the Patent License 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 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 3,050,000 shares of the Company’s restricted common stock valued at $3,050,000.

 

January 6, 2017 Stock Exchange Agreement

 

On January 6, 2017, the Company and RS, a company controlled by our CEO William Rosellini, entered into a stock exchange agreement. Subject to the terms and conditions set forth the stock exchange agreement, on the Effective Date, RS sold, transferred, and assigned to Nexeon all of its right, title and interest in and to 100 shares of common stock of MicroTransponder Inc., a Delaware corporation (the “MTI Shares”) in exchange for 389 shares of common stock of Emeritus Clinical Solutions, Inc. (formerly Telemend, Inc.), a Texas corporation, owned by Nexeon and Nexeon sold, transferred and assigned to RS 389 shares of common stock of Emeritus Clinical Solutions, Inc. in exchange for the 100 MTI Shares.

 

January 10, 2017 Acquisition Agreement

 

On January 10, 2017, RS, a company controlled by our CEO, William Rosellini, and Nexeon Europe, which is a wholly-owned subsidiary of the Company, and in the presence of NMB, entered into an acquisition agreement. RS is the sole shareholder of NMB owning 107,154 shares (the “NMB Shares”).

 

Pursuant to the acquisition agreement, RS granted to Nexeon Europe the exclusive and irrevocable right to purchase the NMB Shares upon the terms and conditions set forth in the acquisition agreement (the “Right to Purchase”). The consideration for the Right to Purchase is US $1,000 (the “Acquisition Price”). Nexeon Europe shall have the right to exercise the Right to Purchase commencing from the date of the acquisition agreement and terminating on December 31, 2017 (the “Acquisition Period”). In the event Nexeon Europe exercises the Right to Purchase, the acquisition agreement shall be automatically deemed converted into and considered a share transfer agreement for the purchase of the NMB Shares and the Acquisition Price shall be considered the purchase price of the NMB Shares and shall be deemed to have been satisfied by Nexeon Europe to RS as of the date of the acquisition agreement. If Nexeon Europe elects not to exercise the Right to Purchase on or before December 31, 2017, then the acquisition agreement shall become null and void and of no further force and effect.

 

 F-25 

 

 

On September 1, 2017, through its wholly-owned subsidiary Nexeon Europe, the Company completed the acquisition of NMB, along with NMB’s wholly owned subsidiaries Medi-Line and its holding company INGEST, which are incorporated under the laws of Belgium. INGEST is the holding company for Medi-Line. The option price of $1,000 is due and payable to RS and is recorded as Due to related party on the balance sheet as of December 31, 2017.

 

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. 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 year ended December 31, 2017, the following officers, directors and related parties have converted warrants pursuant to the Warrant Exchange Offer, as follows:

 

Mark C. Bates, previously 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.

 

Dr. Michael Rosellini, the father of William Rosellini, our Chief Executive Officer, held 617,000 warrants individually and 600,000 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: 104,890 shares by Dr. Rosellini individually and 102,000 shares by the Michael Rosellini ROTH IRA. The 206,890 shares of common stock were value at $2,069.

 

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.

 

Nuviant Medical, GmbH Waiver of Debt Agreement

 

On May 19, NMB entered into a Waiver of debt agreement to waive the outstanding loan balance and accrued interest outstanding pursuant to the September 21, 2015, loan agreement between NMB and Nuviant Medical, GmbH, a related entity to RS. The agreement waives the outstanding balance of the loan and accrued interest in the amount $171,946 and thereby waiving any right or action in respect to this debt. An expense had been recorded as bad debt on the statement of comprehensive income in the amount $174,252. During the year ended December 31, 2017 and prior to the waiver of debt agreement, NMB loaned Nuviant Medical, GmbH $59,027.

 

 F-26 

 

 

RS Loan of Nexeon MedSystems Inc Common Stock and Debt Repayment Agreement Dated December 29, 2017

 

On June 23, 2017, RS transferred 81,035 shares of restricted common stock of the Company to NMB. The shares were valued at $107,292. The loan is non-interest bearing and is to be re-paid to RS in Nexeon MedSystems Inc restricted common stock issued by the Company through an intercompany loan with NMB. The 81,035 shares were exchanged for outstanding payables to vendors of NMB in the amount of $107,292.

 

On October 9, 2017, the Company issued 81,035 shares of the Company’s restricted common stock to RS, a company controlled by our Chief Executive Officer, William Rosellini as repayment for 81,035 shares of the Company’s restricted common stock RS loaned to NMB for payment of outstanding vendor invoices. On December 29, 2017 an additional 61,884 shares of the Company’s restricted common stock were issued to RS in settlement for a cash loan to NMB from RS and for an adjustment to the market value of the 81,035 shares described above per the debt repayment agreement dated December 29, 2017. In total, the 142,919 shares were valued $119,746. 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 Issued for Personal Guarantee

 

In connection with the securities purchase agreement with LC, Michael Rosellini, a shareholder in the Company and father of the Company’s CEO William Rosellini, provided a personal guarantee in the amount of $1,120,000 to induce LC to make the loan to the Company and accept the promissory note in the amount of $1,120,000. As consideration for providing the personal guarantee, the Company issued Michael Rosellini warrants to purchase 200,000 shares of the Company’s common stock with an exercise price of $1.50 per share purchased and having a 2-year term.

 

On November 22, 2017, Michael Rosellini exercised his right to purchase 200,000 shares of the Company’s restricted common stock. The cashless exercise pursuant to the warrant was elected and the Company issued 12,500 shares of restricted common stock pursuant to the exercise.

 

Share Loan Agreement Dated December 29, 2017

 

On December 29, 2017, the Company issued 77,008 shares of restricted common stock pursuant to the share loan agreement with Michael Rosellini as repayment for a loan of 53,214 shares of registered common stock borrowed by the Company and used to pay certain vendors of the Company. The 77,008 restricted shares were valued at $48,130. Michael Rosellini is a shareholder of the Company and father of our Chief Executive Officer.

 

NOTE 14 – 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 15 – CONCENTRATION

 

For the year ended December 31, 2017, two of our customers accounted for approximately 45% and 23% of sales. For the year ended December 31, 2016, one of our customer accounted for approximately 94% of sales.

 

For the year ended December 31, 2017, the company purchased approximately 13% of its products from one distributor, as compared to 2016 where no distributor accounted for more than 10% of product purchased.

 

For the year ended December 31, 2017, three of our customers accounted for 54%, 15% and 15% of accounts receivable, as compared to 2016 where no customer accounted for more than 10% of accounts receivable.

 

 F-27 

 

 

NOTE 16 – SUBSEQUENT EVENTS

 

On February 28, 2018, pursuant to the 2016 Plan, the Compensation Committee of the Board of Director’s approved the following stock options grants:

 

(i)Granted to the Company’s Chief Executive Officer, incentive stock option to purchase up to 250,000 shares of common stock with an exercise price of $0.76 per share. 125,000 options vested immediately and the remaining 125,000 options vest on the anniversary of the grant date. Granted non-qualified stock options to purchase up to 900,000 shares of common stock with an exercise price of $0.76 per share. These options vest in equal monthly amounts of 37,500 beginning on March 1, 2018. Each option grant expires three years from the date of vesting. The fair value of the options was determined to be $226,009 using the Black-Scholes Option Pricing Model.

 

(ii)Granted to the Company’s Chief Commercialization officer non-qualified stock options to purchase up to 57,000 shares of common stock with an exercise price of $0.76 per share. These options vested immediately on the grant date. The options expire eight years from the date of vesting. The fair value of the options was determined to be $12,855 using the Black-Scholes Option Pricing Model.

 

(iii)Granted to the Company’s Chief Financial Officer, non-qualified stock options to purchase up to 40,000 shares of common stock with an exercise price of $0.76 per share. These options vested immediately upon grant date. Each option grant expires three years from the date of vesting. The fair value of the options was determined to be $9,021 using the Black-Scholes Option Pricing Model.

 

(iv)Granted to the Vice President Sales and Marketing incentive stock options to purchase up to 11,000 shares of common stock with an exercise price of $0.76 per share. These options vested immediately on the grant date. The options expire three years from the date of vesting. The fair value of the options was determined to be $2,481 using the Black-Scholes Option Pricing Model.

 

(v)Granted to non-executive employees incentive stock options to purchase up to 46,200 shares of common stock with an exercise price of $0.76 per share. 31,200 of these options vested immediately on the grant date and 15,000 vest in equal monthly amounts of 2,500 beginning on March 1, 2018. The options expire three years from the date of vesting. The fair value of the options was determined to be $10,420 using the Black-Scholes Option Pricing Model.

 

On February 23, 2018, Medi-Line’s line of credit with CBC bank was amended to increase the advance amount to €300,000 approximately $368,982 and structure the financing as a straight loan with an interest rate of 1.25% above the EURIBOR rate for the period the funds are drawn down. The €300,000 will be available for drawdown through April 30, 2018 at which point the facility will be reduced to €200,000 and further reduced €100,000 on May 31, 2018. The security includes a pledge of Medi-Line business assets in the amount of €300,000.

 

On March 8, 2018, the Company issued an aggregate of 23,744 shares of the Company’s restricted common stock for certain sales and marketing and software consulting services rendered by third-party consultants. The foregoing shares were valued at $14,840. 8,160 of these shares were issued to Daniel Powell, the Company’s Vice President Sales and Marketing. These shares were issued for services provided by Mr. Powell prior to his employment by the Company. 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 March 31, 2018, pursuant to the 2016 Plan, the Company issued the following stock options per director’s agreements:

 

(i)Granted to a director appointed to the Board of Directors nonqualified stock options to purchase a total of 12,500 shares of common stock with an exercise price of $0.865 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 $3,596 using the Black-Scholes Option Pricing Model.

 

(ii)Granted to a second director appointed to the Board of Directors nonqualified stock options to purchase a total of 12,500 shares of common stock with an exercise price of $0.865 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 $3,596 using the Black-Scholes Option Pricing Model.

 

 

 F-28 

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been no changes in our accountants during the last two fiscal years, and we have not had any material disagreements with our existing accountants during that time.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Due to the recent acquisitions of foreign subsidiaries and integration of those entities, management is in the process of evaluating internal disclosure controls and procedures and as such, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were not effective due to the lack of implementation of disclosure internal controls and procedures across all operating entities. 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. 

 

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness, as of December 31, 2017, of our internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were not effective due to the recent acquisitions of foreign subsidiaries for which internal controls over reporting across all operating entities have not been implemented. Management is in the process of evaluating internal controls over financial reporting across all operating entities which can be effectively executed and monitored.

 

Changes in Internal Control Over Financial Reporting

 

During the year ended December 31, 2017, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 35 

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Identification of Directors and Executive Officers

 

The following table sets forth the name, age, position and office term of each executive officer and director of the Company as of April 5, 2018:

 

Name   Age   Position(s)
         
William Rosellini   38   Chairman and Chief Executive Officer
Brian Blischak   52   President and Chief Commercial Officer
Christopher R. Miller   49   Chief Financial Officer
Daniel Powell   42   Vice President Sales and Marketing
Kent J. George (1)(2)(3)   57   Director
Michael Neitzel (1)(2)(3)   38   Director

 

(1)Member of Audit Committee
(2)Member of Compensation Committee
(3)Member of Nominating Committee

 

William Rosellini, JD, MBA

 

William Rosellini has served as Chief Executive Officer and as a Director of the Company since inception. Since 2005, Mr. Rosellini has served as Chairman of RS, which develops medical rehabilitation devices to support patients post-procedure. We believe that Mr. Rosellini is qualified to serve on our Board of Directors due to his role in founding the Company and in the development of its business strategy, as well as his experience developing medical devices. Rosellini, a former minor-league pitcher, holds five master's degrees in addition to a law degree. He previously founded and led Lexington Technology Group, LLC, a database company commercializing a database solution that was sold to Document Security Systems, Inc. (NYSE: DSS), Sarif Biomedical LLC, a stereotactic microsurgery company which was sold to Marathon Patent Group, Inc. (NASDAQ: MARA). Mr. Rosellini became a board member of Marathon Patent Group, Inc. in 2013 and resigned in 2016. He started Emeritus Medical, Inc, a clinical engineering services company in 2013 and sold it in 2016. Rosellini also founded Microtransponder in 2006 and in 2012, Mr. Rosellini left his position as CEO at Microtransponder. For a discussion of the conflicts of interest involved in Mr. Rosellini’s and other members of management’s other business endeavors see “Conflicts of Interest” below. Mr. Rosellini holds an MBA from the University of Texas System; MS in Accounting from The University of Texas System; an MS in Computational Biology from Rutgers, The State University of New Jersey; an MS in Neuroscience from The University of Texas; an MS of Regulatory Science from the University of Southern California; and a BA in Economics from the University of Dallas.

 

Brian Blischak, MS, MBA

 

Brian Blischak has served as the Company’s President and Chief Commercial Officer since December 1, 2016. Mr. Blischak has over 20 years of experience in the medical device field and 16 years of experience in neuromodulation serving in senior commercial operations and executive roles for ImThera Medical and St. Jude Medical.  Prior to his appointment as President and Chief Commercial Officer, Mr. Blischak served for four years as Senior Vice President of Sales and Marketing at ImThera Medical, Inc., a developer of an implantable neurostimulation system for sleep apnea.  Prior to that, Mr. Blischak spent twelve years in the St. Jude Medical Neuromodulation Division, where he led the commercialization and launch of two major deep brain stimulation product families consisting of over 20 products in more than 15 countries, including the patient recruitment efforts for two pivotal Investigational Device Exemption (“IDE”) studies for Parkinson's Disease and Essential Tremor and two IDE feasibility studies for major depressive disorder. Mr. Blischak holds a MS in Engineering and an MBA from The University of Texas at Austin and a BS in Engineering Physics from the University of Saskatchewan.

 

Christopher R. Miller

 

Mr. Miller served as Interim Chief Financial Officer of the Company commencing January 1, 2016 and was appointed as the Chief Financial Officer on December 1, 2016. Since 2002, Mr. Miller has been providing financial and business development consulting and interim CFO services, with a focus on early-stage companies. From 2006 to 2008, Mr. Miller provided public company valuation, financial modeling and due diligence services to Doherty & Company, LLC, a Los Angeles based broker-dealer specializing in venture capital, private equity funding, mergers and acquisitions advisory and valuations for early-stage companies. From June 2009 to June 2010, Mr. Miller served as a member of the Board of Directors of WindGen Energy, Inc. (WGEI.PK). Other than the foregoing, Mr. Miller does not currently, and has not for the last five years, served as a member of the Board of Directors for any public companies. Mr. Miller holds a BS in Finance from Arizona State University. Mr. Miller holds a B.S. degree in Finance from Arizona State University.

 

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Daniel Powell

 

Mr. Powell has served as Vice President Sales and Marketing since June 26, 2017. Mr. Powell has over 20 years of experience working with advanced technology products, including 12 years in neuromodulation in various leadership roles for LivaNova (formerly Cyberonics, Inc.) and Abbott (formerly St. Jude Medical, Inc.). Prior to medical devices, Mr. Powell held professional consulting roles at EDS and KPMG LLP. Mr. Powell has deep expertise in medical device development and market development for neurological disorders including Parkinson’s Disease, Essential Tremor, Dystonia, Major Depressive Disorder, OCD and Epilepsy. From 2014 to 2016, Mr. Powell led global marketing for LivaNova’s flagship $315M VNS Epilepsy Therapy business. During Mr. Powell’s 2005 to 2014 tenure at St. Jude, he held key roles in the launch of DBS products in Europe, Australia, Latin America, and the Middle East, and led upstream marketing for all neurological implantable electronics. Mr. Powell earned a BA in Accounting from Texas A&M University.

 

Kent J. George, JD

 

Mr. George has served as a Director of the Company since January 1, 2017. Mr. George has been associated with Robinson & McElwee PLLC, a mid-Atlantic corporate law firm, since 1987.  Mr. George served as the Managing Member from 1999 through 2014 and has served as the Chief Executive Officer since 2014. With over three decades of experience in commercial transactions representing public and private companies, Mr. George has been recognized for his work in real estate by Chambers USA since 2014 and is AV peer-rated by Martindale-Hubbell. Mr. George’s practice focuses upon business transactions, including mergers and acquisitions, business litigation, arbitration and dispute resolutions and real estate transactions (retail, industrial, resort, lodging, and other commercial development projects). Mr. George holds a B.A. from Swarthmore College, a J.D. from the University of Chicago and a B.A. and M.A. (Law) from Oxford University.

 

Michael Neitzel, MBA

 

Mr. Neitzel has served as a Director of the Company since January 1, 2017. Mr. Neitzel has been with Cambridge Homes (“Cambridge”) since April 1, 2017 and currently serves as Director of Acquisition, where he leverages his 15 years of experience in real estate acquisition and development to support the company’s growth initiatives. Cambridge is a privately held homebuilder headquartered in Plano, Texas. Prior to Cambridge, Mr. Neitzel served as a Managing Partner for DartPoints Holdings, LLC (“DartPoints”) from January 2014 to March 2017, a data center construction and management firm. Mr. Neitzel currently sits on the Board of Managers for DartPoints. Prior to DartPoints, Mr. Neitzel was with Gehan Homes from 2009 until 2014, a privately held homebuilder headquartered in Dallas, Texas, and has held management positions for both public and private, large-scale building companies where his responsibilities included deal flow sourcing, acquisition, and development and delivery of subdivisions throughout Texas. Mr. Neitzel holds a B.A. in business administration from the University of Kansas and an MBA in finance from Southern Methodist University.

 

Legal Proceedings

 

During the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:

 

  the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

  subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
     
  found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.

 

 37 

 

 

  the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

  the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to our principal executive, financial and accounting officers (or persons performing similar functions), a copy of which is filed as Exhibit 14.1 to the Company’s Form 10 Registration Statement filed with the SEC on July 6, 2016.

 

Board Composition and Election of Directors

 

Our Board of Directors is currently comprised of three members. Pursuant to our Articles of Incorporation and Bylaws, Directors shall hold office until the next annual meeting of the stockholders and until his or her successor shall be elected and qualified. Directors may be removed, with or without cause and from time to time, as provided by Chapter 78 of the Nevada Revised Statues then in effect. Our Nominating Committee reviews director candidates and proposes director nominees.

 

Indemnification of Directors and Officers

 

Our Officers and Directors are indemnified as provided by the Nevada Revised Statutes (“NRS”) and our Bylaws. Under the NRS, unless modified by a corporation’s Articles of Incorporation, a Director is not liable to a corporation, its stockholders, or creditors for damages unless the Director’s action or failure constituted a breach of fiduciary duty and such breach involved intentional misconduct, fraud, or a knowing violation of law. Our bylaws provide that we will indemnify our Directors and Officers to the fullest extent permissible under Nevada law if such person acted in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the Company and, with respect to any criminal action, had no reasonable cause to believe such conduct was unlawful. The Company has entered into Indemnification Agreements with each of its Directors, a copy of which is filed as Exhibit 10.07 of the Company’s Form 10 Registration Statement filed with the SEC on July 6, 2016.

 

The Company may purchase and maintain Directors and Officers liability insurance or make other financial arrangements on behalf of any individual entitled to indemnity. Our Bylaws also provide that we will advance all expenses incurred to any person entitled to indemnity upon receipt of an undertaking by, or on behalf of, such person to repay said amounts should it be ultimately determined that the person was not entitled to indemnification.

 

Audit Committee, Compensation Committee and Nominating Committee

 

As of December 31, 2017, we have formed formal Audit, Compensation and Nominating Committees.

 

Audit Committee

 

The Audit Committee currently consists of two independent directors, Kent J. George, who serves as the committee chairperson, and Michael Neitzel, as well as one non-independent director, William Rosellini. Effective October 31, 2017 and November 6, 2017, Ron Conquest and Mark Bates, respectively, formally resigned from their positions as Vice-President of Finance and Chief Innovation Officer, respectively, and as members of the Board of Directors and the Audit Committee. Our Audit Committee met one time during 2017. All then current members were present.

 

The director independence rules of the NASDAQ Capital Market require listed companies to have an Audit Committee of at least three members, each of whom (in addition to satisfying other conditions) is an independent director. The Company’s Audit Committee currently has one non-independent member and, therefore, would not meet this NASDAQ Capital Market requirement.

 

We have determined that the Company does not have a member of its Board of Directors that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We also currently do not have a formal audit committee charter in compliance with, and as required by, Rule 5605(c)(1) of the NASDAQ Capital Market.

 

Compensation Committee

 

The Compensation Committee consists of two independent directors, Michael Neitzel, who serves as the committee chairperson, and Kent J. George. The compensation committee determines, or recommends to the full Board for determination, the compensation of the chief executive officer and all other executive officers. Effective October 31, 2017 and November 6, 2017, Ron Conquest and Mark Bates, respectively, formally resigned from their positions as Vice-President of Finance and Chief Innovation Officer, respectively, and as members of the Board of Directors and Compensation Committee. Our Compensation Committee met one time during 2017. All then current members were present.

 

We also currently do not have a formal compensation committee charter in compliance with, and as required by, Rule 5605(d)(1) of the NASDAQ Capital Market.

 

 38 

 

  

Nominating Committee

 

The Nominating Committee consists of two independent directors, Michael Neitzel, who serves as the committee chairperson, and Kent J. George. The Nominating Committee selects or recommends nominees for directors. The director independence rules of the NASDAQ Capital Market require listed companies independent directors to select or recommend nominees for directors. Independent directors serving on our nominating committee provides recommendations for directors, therefore, the Company meets this NASDAQ Capital Market requirement. Our Nominating Committee met three times during 2017.

 

Director Independence

 

As of December 31, 2017, our Board of Directors is currently composed of three members, two of whom, Kent J. George and Michael Neitzel, qualify as independent directors in accordance with the published listing requirements of the NASDAQ Capital Market. The NASDAQ Capital Market independence definition includes a series of objective tests, such as that the Directors are not, and have not been for at least three years, one of our employees and that neither the Directors, nor any of their family members, have engaged in various types of business dealings with us.

 

Conflicts of Interest

 

We did not have an Audit or Compensation Committee until January 1, 2017, thus, providing for a potential conflict of interest in that our Directors had the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions prior to the creation of such committees.

 

RS is a company wholly-owned by Mr. Rosellini which acquires interests in other companies such as Nexeon in exchange for RS assets. RS will not acquire any such properties in the future that are not first offered to Nexeon and voted on by its Board of Directors with Mr. Rosellini abstaining. There has been no conflict of interest between Nexeon and Nuviant because Nexeon’s patents were acquired from NXDE, a company with which Mr. Rosellini had no affiliation and because the majority of Nuviant’s assets were acquired from a European company with which Mr. Rosellini had no affiliation prior to the acquisition of the assets by Nuviant

 

RS functions as the personal holding company of Mr. Rosellini. In addition, RS has been the source of private funding as well as Federal and State Grants all of which benefit the Company. Mr. Rosellini’s work week averages 60 to 70 hours per week and approximately 10%, or 6 to 7 hours a week, are devoted to the business of RS. Regardless, Mr. Rosellini is devoting, at a minimum, in excess of 40 hours a week to the Company. Mr. Rosellini is fully aware of his fiduciary responsibilities and to the principles of the Corporate Opportunity Doctrine as they relate to the Company. There can be no assurance that a material conflict of interest will not occur in the future. In the event a potential conflict should occur, it will be fully disclosed to the Company’s Board of Directors for a determination by the Board as to the relevance and/or solution in order to avoid such potential conflict. As of the date of this filing, Mr. Rosellini, to the best of his knowledge and belief, is unaware of any material conflicts.

 

All potential or actual conflicts of interest for all of the Company’s officers and directors have been approved by the Board of Directors (with abstention by the conflicted Director) pursuant to our Code of Business Conduct and Ethics. Such Board approval for conflict of interest transactions is consistent with Nevada corporate law statutes.

 

Family Relationships

 

As of April 5, 2018, there are no family relationships of any kind among our Executive Officers, Directors or persons nominated or chosen by us to become Executive Officers or Directors.

 

 39 

 

 

Emily Hamilton, MD serves as the Director of Emerging Therapy for NXPROC. Dr. Hamilton is the wife of our CEO, William Rosellini.

 

Board Leadership Structure and Role in Risk Oversight

 

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles.   Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined. In addition, having one person serve as both Chairman and Chief Executive Officer eliminates potential for confusion and provides clear leadership for the Company, with a single person setting the tone and managing our operations. The Board oversees specific risks, including, but not limited to:

 

  appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;
     
  approving all auditing and non-auditing services permitted to be performed by the independent auditors;

 

  reviewing annually the independence and quality control procedures of the independent auditors;

 

  reviewing, approving, and overseeing risks arising from proposed related party transactions;

 

  discussing the annual audited financial statements with the management;

 

  meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management; and
     
  monitoring the risks associated with management resources, structure, succession planning, development and selection processes, including evaluating the effect the compensation structure may have on risk decisions.

 

Board of Directors Meetings and Attendance

 

We have no formal policy regarding director attendance at the annual meeting of stockholders. The Board of Directors held nine meetings in 2017.  All Board members were present at all of the meetings with the exception of one meeting. During that meeting, the board member’s consent was provided.

 

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Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act, requires the Company’s officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes of ownership with the SEC. Officers, directors and beneficial owners of more than 10% of the Company's common stock are required by SEC regulations to furnish the Company with copies of all reports that they file with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on a review of the copies of such forms furnished to the Company, the Company believes that during fiscal 2017 its current officers, directors and beneficial owners of more than 10% of the common stock complied with all applicable Section 16(a) filing requirements.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The tables below summarize all compensation awarded to, earned by, or paid to our Executive Officers for all services rendered in all capacities to us for the fiscal period(s) indicated.

 

Summary Executive Compensation

 

                      Non-equity   Nonqualified         
                      incentive   deferred         
              Stock   Option   Plan   compensation   All other     
      Salary   Bonus   Awards   Awards   compensation   earnings   compensation   Total 
Name and Position  Year  ($)   ($)   ($)   ($)   ($)   ($)   ($)   ($) 
(a)  (b)  (c)   (d)   (e)   (f)   (g)   (h)   (i)   (j) 
                                    
William Rosellini  2017  $

2

   $

   $   $   $   $   $   $2 
Chief Executive Officer  2016  $   $10,000   $   $   $   $   $   $10,000 
                                            
Brian Blischak  2017  $250,000   $28,000   $   $   $   $   $15,956   $

293,956

 
President & Chief Commercial Officer  2016  $20,833   $   $   $356,343   $   $   $   $

377,176

 
                                            
Mark C. Bates  2017   27,000                            27,000 
Former Chief Innovation Officer (Resigned effective November 6, 2017)  2016  $9,900   $   $   $47,056   $   $   $   $56,956