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EX-32.1 - EXHIBIT 32.1 - NEXEON MEDSYSTEMS INCex32_1.htm
EX-31.2 - EXHIBIT 31.2 - NEXEON MEDSYSTEMS INCex31_2.htm
EX-31.1 - EXHIBIT 31.1 - NEXEON MEDSYSTEMS INCex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2017
OR
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission file number:  000-55655
 
NEXEON MEDSYSTEMS INC
(Exact name of Registrant as specified in its charter)
 
Nevada
 
81-0756622
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
 
1708 Jaggie Fox Way, Lexington, Kentucky 40511
(Address of principal executive offices)
 
844-919-9990
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑   No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   
 
Large accelerated filer   ☐
Accelerated filer   ☐
 
 
Non-accelerated filer   ☐
(Do not check if smaller reporting company)
Smaller reporting company  ☑
Emerging growth company  ☐
 
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
    
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑
 
As of May 9, 2017, the issuer had 22,671,122 shares of Common Stock, $0.001 par value, issued and outstanding. 
 

1

 
NEXEON MEDSYSTEMS INC
 
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
3
 
 
 
PART I.  FINANCIAL INFORMATION
 
 
 
 
 
4
 
 
 
 
 
 
4
 
 
5
 
 
6
 
 
7
 
 
 
 
 
19
 
23
 
23
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
 
 
 
24
 
24
 
24
 
25
 
25
 
25
 
25
 
 
 
 
 
26
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.
 
While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current judgment regarding the direction of our business, actual results may vary from any estimates, predictions, projections, assumptions, or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
 
 
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
 
 
March 31,
2017
   
December 31,
2016
 
Assets
           
 
           
Current Assets
           
Cash and cash equivalents
 
$
611,670
   
$
2,039,907
 
Other current assets
   
86,485
     
127,597
 
Notes receivable
   
729,907
     
 
Accrued interest – notes receivable
   
4,570
     
 
Total Current Assets
 
$
1,432,632
   
$
2,167,504
 
 
               
Property and equipment, net
   
838
     
888
 
Investments
   
111,072
     
148,860
 
Patents and license, net of accumulated amortization of 821,320 and 562,714,
respectively
   
8,488,680
     
8,747,286
 
Total Assets
 
$
10,033,222
   
$
11,064,538
 
 
               
Liabilities and Stockholders’ Equity
               
 
               
Current Liabilities
               
Accounts payable
   
190,976
     
112,302
 
Accrued liabilities
   
45,578
     
33,434
 
Due to related party
   
     
415
 
Credit facility
   
17,894
     
14,813
 
Accrued interest payable – stockholder
   
2,489
     
2,193
 
Total Current Liabilities
   
256,937
     
163,157
 
 
               
Notes payable stockholders - long term
   
10,000
     
10,000
 
Total Liabilities
 
$
266,937
   
$
173,157
 
 
               
Stockholders' Equity
               
Common Stock - 75,000,000 shares authorized, $.001 par value; 22,178,882 and
21,711,953 issued and outstanding at March 31, 2017 and December 31, 2016,
respectively
   
22,179
     
21,712
 
Additional paid-in capital
   
9,668,861
     
9,392,007
 
Equity instruments to be issued
   
3,070,000
     
3,070,000
 
Accumulated deficit
   
(2,994,755
)
   
(1,592,338
)
Total Stockholders' Equity
   
9,766,285
     
10,891,381
 
 
               
Total Liabilities and Stockholders' Equity
 
$
10,033,222
   
$
11,064,538
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
 
 
2017
   
2016
 
 
           
Revenues
 
$
   
$
 
 
               
Depreciation and amortization
   
258,655
     
77,942
 
General and administrative expenses
   
623,521
     
48,636
 
Research and development expenses
   
485,823
     
 
 
               
Loss from operations
   
(1,367,999
)
   
(126,578
)
 
               
Other Income (Expense)
               
Interest income
   
4,570
     
 
Interest expense – stockholder
   
(296
)
   
(598
)
Interest expense – other
   
(904
)
   
(667
)
Loss on stock exchange
   
(37,788
)
   
 
 
               
Loss before provision (benefit) for taxes
   
(1,402,417
)
   
(127,843
)
Provision (benefit) for taxes
   
     
 
 
               
Net loss
 
$
(1,402,417
)
 
$
(127,843
)
 
               
BASIC AND DILUTED PER SHARE DATA:
               
Net Loss per common share, basic and diluted
 
$
(0.06
)
 
$
(0.01
)
Weighted average common shares outstanding, basic and diluted
   
21,804,850
     
17,005,622
 

 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
 
 
2017
   
2016
 
 
           
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Loss
 
$
(1,402,417
)
 
$
(127,843
)
Adjustment to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
258,656
     
77,942
 
Stock-based compensation
   
274,483
     
252
 
Accrued interest from note receivable
   
(4,570
)
   
 
Loss on exchange for stock
   
37,788
     
 
Change in operating assets and liabilities:
               
Other current asset
   
41,111
     
 
Accounts payable
   
78,674
     
50,386
 
Accrued liabilities
   
12,145
     
 
Accrued interest
   
296
     
598
 
Net cash provided by (used in) operating activities
   
(703,834
)
   
1,335
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Issuance of notes receivable
   
(729,907
)
   
 
Net cash used in investing activities
   
(729,907
)
   
 
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of common stock
   
2,838
     
 
Repayment of related party loan
   
(415
)
   
 
Repayment of revolving credit facility
   
     
(1,335
)
Proceeds from revolving credit facility
   
3,081
     
 
Net cash provided by (used in) financing activities
   
5,504
     
(1,335
)
 
               
Net decrease in cash and cash equivalents
   
(1,428,237
)
   
 
Cash and cash equivalents at beginning of period
   
2,039,907
     
 
Cash and cash equivalents at end of period
 
$
611,670
   
$
 
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during period for interest
 
$
904
   
$
666
 
Cash paid during period for taxes
   
     
 
 
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
               
Common stock issued for acquisition
 
$
   
$
4,505,486
 
Common stock issued for conversion of shareholder notes and accrued interest
   
     
1,490,390
 
Common stock issued for investments
   
     
322,360
 

 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 1.   Nature of Organization

Organization and Operations

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

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

Note 2.   Basis of Presentation

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

Note 3.   Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has not generated any revenues since inception and has an accumulated a deficit of $2,994,755 at March 31, 2017. The Company currently has limited liquidity, and has not completed its efforts to establish a source of recurring revenues sufficient to cover operating costs over an extended period of time. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 3.   Going Concern (Continued)

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

Note 4.   Summary of Significant Accounting Policies

Development Stage Company

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

Use of Estimates

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

Income Taxes

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

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

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

If the Company is required to pay interest on the underpayment of income taxes, the Company recognizes interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 4.   Summary of Significant Accounting Policies (Continued)

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.

Fair Value Measurements

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

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

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

Level 1 —quoted prices in active markets for identical assets or liabilities
Level 2 —quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 —inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

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

Principals of Consolidation

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

Investments in Non-Consolidated Subsidiaries

Investments in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company's ability to exercise significant influence over the operating and financial policies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company's proportionate share of the investees' net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and the Company's share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. The Company accounts for its investment in MicroTransponder, Inc. under the cost method due to the lack of significant influence.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 4.   Summary of Significant Accounting Policies (Continued)

Long-lived Assets

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. The Company did not recognize any impairment losses during the three months ended March 31, 2017.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

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

Property and Equipment

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

Research and Development

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

Stock-Based Compensation

ASC 718 requires companies to measure all stock compensation awards using a fair value method and recognize the related compensation cost in its financial statements. Beginning with the Company’s quarterly period that began on January 1, 2016, the Company adopted the provisions of FASB ASC 718 and expenses the fair value of employee stock options and similar awards in the financial statements. The Company accounts for share-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The simplified method is used to determine compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 4.   Summary of Significant Accounting Policies (Continued)

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

The Company recognized stock-based compensation aggregating $91,416 and $0 for common stock options issued to Company personnel, directors and consultants during the three months ended March 31, 2017 and 2016, respectively. Also during the three months ended March 31, 2017 and 2016, the Company paid stock-based compensation consisting of common stock issued to non-employees aggregating $183,067 and $0, respectively, and to affiliates aggregating $0 and $252, respectively.

Acquired Intangibles

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

Recently Issued Accounting Pronouncements

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

Note 5.   Income Taxes

The Company has approximately $2,994,755 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.

Note 6.   Notes Payable

As of March 31, 2017, the Company held a note payable with a stockholder in the amount of $10,000 which bears interest at the rate of 12% per annum and matures on March 31, 2018. As of March 31, 2017, accrued interest payable related to the note was $2,489.

The Company has a revolving credit card with BB&T Financial with an outstanding balance of $14,233 as of March 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 $3,661 as of March 31, 2017, a credit limit of $11,000 and a current APR of 0%.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 7.   Notes Receivable

In connection with the Acquisition Agreement (See Note 11. Related Party Transactions) and based on the contemplation that Nexeon Europe will acquire all of the shares of NMB, Nexeon Europe (Lender) and NMB (Borrower) entered into a Loan Agreement and related Promissory Note pursuant to which Nexeon Europe agrees to make a loan to NMB in the aggregate principal amount of EUR 1,000,000 (One Million Euros) (the “Loan”). The Loan shall mature on the first Business Day falling one (1) year from the date of the Loan Agreement (the “Maturity Date”).

The Loan bears interest at the rate of 5% per annum. Accrued interest on the unpaid principal amount of the Loan shall be payable on the Maturity Date. Accrued interest on any partial repayment of the Loan shall be payable on the earlier of the date of repayment or the first business day of the month following partial repayment.

As of March 31, 2017, $729,907 has been loaned to NMB and $4,570 has been recorded in accrued interest income pursuant to the Loan Agreement and Promissory Note.

Note 8.   Equity

Common Stock Issuances

During the three months ended March 31, 2017, the Company:

(i)
Issued 183,071 shares of restricted common stock of the Company in exchange for services rendered by third-party consultants. The shares were valued at $183,071.

(ii)
On March 21, 2017 the Company offered to current warrant holders who participated in the 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. Warrant holders have exercised 283,858 warrants, 283,858 shares of the Company’s common stock have been issued and 1,385,891 warrants were cancelled in connection with the warrant conversion offering.

Options Grants – Omnibus Incentive Plan

The Company may, from time to time, issue certain equity awards pursuant to our 2016 Omnibus Incentive Plan (the “2016 Plan”). The 2016 Plan was adopted by our Board of Directors on January 2, 2016 and was subsequently approved by our shareholders. The Company reserved 5,000,000 shares of common stock for issuance pursuant option grants under the 2016 Plan. During the three months ended March 31, 2017, the Company issued stock options to purchase a total of 450,000 shares of the Company’s common stock under the 2016 Plan, all with an exercise price of $1.00 per share, as follows:

(i)
Granted to the Chief Science Officer of NXPROC, a wholly owned subsidiary of the Company, 425,000 three-year incentive stock options to purchase 425,000 shares of common stock, with an exercise price of $1.00 per share. The options vest in monthly increments of 35,416 shares, 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.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 8.   Equity (Continued)

(ii)
Granted to a Director appointed to the Board of Directors, three-year nonqualified stock options to purchase 50,000 shares of common stock, with an exercise price of $1.00 per share. The options vest in quarterly increments of 12,500 shares at the end of each calendar quarter served as a Director of the Company, with the three-year term for each option beginning upon each date of vesting. The fair value of the options was determined to be $13,303 using the Black-Scholes Option Pricing Model.

(iii)
Granted to a second Director appointed to the Board of Directors, three-year nonqualified stock options to purchase 50,000 shares of common stock, with an exercise price of $1.00 per share. The options vest in quarterly increments of 12,500 shares at the end of each calendar quarter served as a Director of the Company, with the three-year term for each option beginning upon each date of vesting. The fair value of the options was determined to be $13,303 using the Black-Scholes Option Pricing Model.

The options were valued at $139,679 using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate
 
1.50%
 
Expected life
 
3.22 years
 
Expected dividends
 
0.00%
 
Expected volatility
 
50.78%
 
Fair value of the Company's common stock
 
$1.00
 

Aggregate options expense recognized for the three months ended March 31, 2017 was $91,416.

As of March 31, 2017, there were 2,218,000 shares available for grant under the 2016 Plan, excluding the 2,782,000 options outstanding.

Warrants

On February 1, 2016, the Company initiated a private placement for the sale of up to 5,500,000 units (the “Units”) at $1.00 per Unit (the “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 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 21, 2017 the Company offered to current warrant holders who participated in the 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.

As of March 31, 2017, 2,458,761 warrants were outstanding.

As of March 31, 2017, 283,858 warrants have been exercised and 1,385,891 warrants have been cancelled.

As of March 31, 2017, a total of 2,458,761 shares of Common Stock of the Company have been reserved for issuance upon exercise of the warrants.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 8.   Equity (Continued)

Stock option activity, both within and outside the Plan, and warrant activity for the year ended December 31, 2016, are as follows:
 
 
 
Stock Options
   
Stock Warrants
 
 
       
Weighted
         
Weighted
 
 
       
Average
         
Exercise
 
 
 
Shares
   
Price
   
Shares
   
Price
 
 
                       
Outstanding at December 31, 2016
   
2,332,000
   
$
1.00
     
4,128,510
   
$
2.00
 
Granted
   
450,000
     
1.00
     
         
Canceled
   
     
     
1,385,891
     
2.00
 
Expired
   
     
     
     
 
Exercised
   
     
     
283,858
     
0.01
 
Outstanding at March 31, 2017
   
2,782,000
   
$
1.00
     
2,458,761
   
$
2.00
 
Exercisable at March 31, 2017
   
688,248
   
$
1.00
     
2,458,761
   
$
2.00
 
 
The range of exercise prices and remaining weighted average life of the options outstanding at March 31, 2017 were $1.00 to $1.00 and 3.21 to 9.12 years, respectively. The aggregate intrinsic value of the outstanding options at March 31, 2017 was $733,454.

The range of exercise prices and remaining weighted average life of the warrants outstanding at March 31, 2017 were $2.00 to $2.00 and 1.86 to 2.61 years, respectively. The aggregate intrinsic value of the outstanding warrants at March 31, 2017 was $148,649.

Note 9   Commitments and Contingencies

The Company is subject to a patent royalty agreement that requires 3% of Net Product Sales received from commercialization of the 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 pursuant to the license. No sales have been generated from the licensed intellectual property.

Note 10.   Omnibus Incentive Plan

The Company may, from time to time, issue certain equity awards pursuant to our 2016 Omnibus Incentive Plan (the "Plan''). The Plan was adopted by our Board of Directors on January 2, 2016 and was subsequently approved by our shareholders. As of March 31, 2017, options to purchase a total of 2,782,000 shares of the Company's common stock were issued under the Plan, all with an exercise price of $1.00 per share. 138,000 vested immediately upon grant and the remaining vest in varying amounts ranging from 100,000 annually to monthly increments ranging from 3,333 to 35,417 based on individual stock option agreements. Each option has a three-year term starting on each date of vesting, with the exception of the options granted to the President / Chief Commercial Officer which have an eight-year term starting on the date of vesting.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 10.   Omnibus Incentive Plan (Continued)

The Plan will be administered by a Committee of two or more non-employee Directors designated by the Board once additional outside Directors have been elected to the Board. Currently only one outside Director serves on the Committee.  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 extending the exercise period of any awards made pursuant to the Plan.

Shares Available under the 2016 Omnibus Incentive Plan

The maximum shares available for issuance under the Plan are 5,000,000, subject to adjustment as set forth in the 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 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 Plan.

Transferability

Except as otherwise provided in the 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.

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

Note 11.   Related Party Transactions

January 6, 2017 Stock Exchange Agreement
 
On January 6, 2017, (the "Effective Date), the Company and Rosellini Scientific, LLC, a Texas limited liability company ("RS") – a company controlled by our CEO William Rosellini, entered into a Stock Exchange Agreement (the “Agreement”). Subject to the terms and conditions set forth the 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. (the “Emeritus Shares”) in exchange for the 100 MTI Shares (the MTI Shares and Emeritus Shares are collective referred to as the “Exchange Shares”).
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 11.   Related Party Transactions (Continued)
 
January 10, 2017 Acquisition Agreement
 
On January 10, 2017, Rosellini Scientific, LLC, (“RS”) – a company controlled by our CEO William Rosellini, and Nexeon Medsystems Europe, S.a.r.l., a Luxembourg private limited liability company (hereinafter referred to as “Nexeon Europe”), which is a wholly-owned subsidiary of the Company, and in the presence of Nexeon Medsystems Belgium, SPRL, a company incorporated under the laws of Belgium, (hereinafter referred to as “NMB”), entered into an Acquisition Agreement. RS is the sole shareholder of NMB owning 107,154 shares (the “Shares”).
 
Pursuant to the Acquisition Agreement, RS is granting 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 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 Agreement shall be automatically deemed converted into and considered a share transfer agreement for the purchase of the Shares and the Acquisition Price shall be considered the Purchase Price of the 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.
 
Pursuant to the terms of the Acquisition Agreement, closing of the transaction is conditioned upon the delivery to Nexeon Europe of a two year audit for years ending December 31, 2015 and 2016 of NMB, to be completed by April 15, 2017, which date has been extended to May, 31, 2017. RS shall be solely responsible and liable for any and all fees, costs and expenses associated with such audit. 

Description of Nexeon Medsystems Belgium, SPRL
 
Nexeon Medsystems Belgium, SPRL, formerly known as Rosellini Scientific Benelux, is wholly-owned subsidiary of RS and is a medical device manufacturing company. NMB was originally formed in 2013 and is located in Liege, Belgium. NMB has previously received a number of subsidies from the government of the Walloon region in Belgium to develop active implantable medical devices.  In addition, NMB has acquired assets related to an implantable neurostimulation device system, the Synapse™, for use in the treatment of neurological diseases.  The Synapse™ was previously issued a CE Mark for use in the treatment of certain movement disorders associated with Parkinson's disease.  It also is being manufactured for a number of commercial partners, including Galvani Bioelectronics and John Hopkin's University, for use in their various research projects.
 
Description of Nexeon Europe
 
Nexeon Europe is a wholly owned subsidiary of the Company formed on October 28, 2016. The Company and Nexeon Europe are part of the Nexeon group of companies (the “Group”) that is currently being restructured in order to achieve a more efficient and cost-effective Group structure.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 11.   Related Party Transactions (Continued)
 
Loan Agreement and Promissory Note
 
In connection with the Acquisition Agreement described above and based on the contemplation that Nexeon Europe shall acquire all of the shares of NMB, Nexeon Europe (Lender) and NMB (Borrower) entered into a Loan Agreement and related Promissory Note pursuant to which Nexeon Europe agrees to make a loan to NMB in the aggregate principal amount of EUR 1,000,000 (One Million Euros) (the “Loan”). The Loan shall mature on the first Business Day falling one (1) year from the date of the Loan Agreement (the “Maturity Date”). The Maturity Date shall be extended and the term of the Loan Agreement automatically renewed for successive thirty (30) day periods unless the NMB notifies the Nexeon Europe within ten (10) days of the then upcoming Maturity Date that it intends to repay the full amount or the then outstanding amount of the Loan prior to the upcoming Maturity Date. NMB may repay, either partially or entirely, the Loan and/or accrued interest thereon at any time prior to the Maturity Date without penalty, upon giving at least two (2) Business Days’ prior written notice to Nexeon Europe. NMB and Nexeon Europe may also agree to settle the Loan through the inter-company account netting procedure or to capitalize as an investment in the subsidiary. 

The Loan shall bear interest at the rate of 5% per annum. Accrued interest on the unpaid principal amount of the Loan shall be payable on the Maturity Date. Accrued interest on any partial repayment of the Loan shall be payable on the earlier of the date of repayment or the first business day of the month following partial repayment.
 
As of March 31, 2017, $729,907 has been loaned to NMB pursuant to the terms of the Loan Agreement and Promissory Note.
 
Security Agreement

As collateral security for the payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Loan, NMB pledged and granted to Nexeon Europe a security interest in all of NMB’s right, title and interest in, to and under all of its properties, including but not limited to personal and real property, in each case whether tangible or intangible. 

Related Party Loan

The Company's Executive Vice President of Finance loaned $415 to the Company. The loan was non-interest bearing with no set terms of repayment. As of March 31, 2017, the loan was repaid in full.

Note 12.   Subsequent Events

Between April 1, 2017 and the date of this filing, an additional $395,000 has been loaned to NMB pursuant to the Loan Agreement and Promissory Note increasing the outstanding balance of the loan to $1,142,242. $175,000 shares of the Company’s common stock has been issued to a consultant of NMB in exchange for research and development project management and engineering services. The shares were valued at $175,000. The $175,000 common stock issuance has been included in the outstanding balance of the loan to NMB. On May 1, 2017 the terms of the Promissory Note were amended to increase the aggregate principal amount of the loan to EUR 1,500,000 (One Million Five Hundred Thousand Euros).

On March 21, 2017, the Company offered to current warrant holders who participated in the Private Placement which closed on December 2, 2016 (See Note 8 Equity - Warrants), 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.
 
 
NEXEON MEDSYSTEMS INC
AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
 

Note 12.   Subsequent Events (Continued)
 
From April 1, 2017 until the date of this filing, 309,740 warrants have been exercised, 309,740 shares of the Company’s common stock have been issued and 1,512,260 warrants were cancelled in connection with the warrant conversion offering. In total, as of the date of this filing, 593,598 warrants have been exercised, 593,598 shares of the Company’s common stock have been issued and 2,898,151 warrants were cancelled in connection with the warrant conversion offering.

The Company initiated a Regulation D, Rule 506 private placement offering of its Common Stock effective April 26, 2017 to October 31, 2017 to accredited investors only in order to form new equity capital in the amount of $ 2,500,000. The shares of Common Stock are being offered at $1.25 per share. As of the date of this filing, $685,000 had been subscribed under the offering.

From April 1, 2017 until the date of this filing, the Company issued 7,500 shares of Commons Stock for services rendered by third-party consultants. The shares were valued at $7,500.
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following management discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, and with the audited financial statements of the Company, and related notes thereto, for the period ended December 31, 2016 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2017.

Overview of Business

Nexeon MedSystems Inc was incorporated on December 7, 2015. We are a development stage enterprise focusing on the development and commercialization of physician-driven medical device innovations for the treatment of cardiovascular disease. As a bioelectronics company developing active medical devices for the treatment of chronic medical conditions, we are developing solutions with a unique blend of traditional device technologies such as electronics, software, mechanical engineering, and material science. We have never declared bankruptcy, have never been in receivership, and have never been involved in any legal action or proceedings. Since incorporation, we have not made any significant sale of assets.
 
Our operations to date have been limited to organizing and staffing our Company and research and development activities, our Merger with Nexeon MedSystems, Inc., a Delaware corporation (“NXDE”) on February 16, 2016, which included the acquisition of its patent portfolio, organization of a private placement offering which closed on December 2, 2016, and the acquisition on December 15, 2016 of $3,190,000 in patent licenses for the underlying patents referred to as the Siemens Patents. On January 10, 2017, we entered into an exclusive, irrevocable agreement with Rosellini Scientific LLC (“Rosellini Scientific”) pursuant to which we will acquire 100% of the issued and outstanding capital stock of NMB (See Note 11. Related Party Transactions). In conjunction with the acquisition of NMB, we will be continuing the development of the Nexeon Neurostimulation System (the “NNS’) which was developed and manufactured by NMB.

The Nexeon Neurostimulation System

The Nexeon Neurostimulation System (“NNS”) was developed to address the shortcomings of present day neuromodulators.  The NNS is an implantable neurostimulation and recording platform, and is one of the very few implantable stimulation and recording devices that has previously received regulatory approval (Conformité Européenne, or “CE” conformity) for human use in connection with use as a deep brain stimulation system in the treatment of certain movement disorders. NMB is currently in the process of renewing the NNS “CE” conformity regulatory approval. The Multi-Purpose Implant Controller is the engine of the NNS system.

Micro-Perforated Catheter Balloon

We have developed a Micro-Perforated Catheter Balloon which includes a novel balloon material that utilizes carbon nanotubes and polymer based on the patent portfolio acquired in the Merger with NXDE of approximately 36 patents. The carbon nanotubes help maintain structural integrity of the Micro-Perforated Catheter Balloon during inflation and drug delivery while allowing a more compliant polymer, such as nylon, to be used. While current drug-coated balloons provide only passive drug delivery, management believes that Micro-Perforated Catheter Balloon brings a much-needed, innovative improvement to intravascular drug delivery by enabling controllable pulsed flow delivery of anti-restenotic drugs to the diseased site. We expect to develop a suite of passive and electrically-active drug eluting balloons that will be owned by our wholly-owned subsidiary, Pulsus Medical LLC, a Kentucky limited liability company and wholly-owned subsidiary of the Company (“Pulsus”).

Siemens Patents

Effective as of December 15, 2016, we acquired a non-exclusive license to a portfolio of 86 patents that originated from Siemens AG. The intellectual property relates to Internet-of-Things (“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.

As of March 31, 2017, we had an accumulated deficit of $2,994,755. Our net loss was $1,402,417 for the three months ended March 31, 2017, compared with a net loss of $127,843 for the three months ended March 31, 2016.  
 
 
We expect the Company will continue to incur significant expenses and increasing operating losses in connection with our ongoing activities, particularly as we continue to invest in research and development and initiate the requisite clinical trials to receive regulatory approval for our medical devices in both the United States and European Union. Additionally, if and 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.

For complete details regarding the business of the Company, see “Item 1. Business” and “Item 2. Properties” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2017.
 
Results of Operations for the Three Months Ended March 31, 2017 and 2016
 
Revenue
 
To date, the Company has not generated any revenues and has financed our operations with net proceeds from the private placement of our common stock completed during the year ended December 31, 2016. The Company’s ability to generate revenues will depend heavily on the successful completion of the requisite clinical trials and studies necessary to achieve approval to begin marketing our contemplated medical devices from the relevant regulatory authorities in the United States and European Union. 
 
Research & Development Activities
 
Research and Development (“R&D”) expenses consist of the costs associated with our research and discovery efforts related to the design and development of our proposed medical devices. Primarily, R&D expenses are expected to include, but may not be limited to: 

·
Facilities, laboratory supplies, equipment and related expenses;
·
Employee-related expenses, which among other things includes salaries, benefits, travel, and stock-based compensation;
·
External R&D activities incurred under arrangements with third-parties such as contract research organizations, manufacturing organizations, consultants, and possibly a scientific advisory board; and
·
License fees and other costs associated with securing and protecting IP.
 
For the three months ended March 31, 2017 and 2016, the Company’s research and development expenses were $485,823 and $0, respectively, primarily reflecting consultants, materials and supplies.
 
It is expected that the Company’s R&D activities and related expenses will increase significantly in the future as we increase the scope and rate of such efforts and begin more expensive development activities, including clinical trials and similar studies as required by the relevant regulatory authorities in our targeted jurisdictions (i.e., the United States and European Union).
 
The successful completion of the requisite clinical trials and studies to bring our contemplated medical devices to the U.S. and E.U. markets is highly uncertain. We cannot reasonably estimate or know the nature, timing, and estimated costs of the related efforts, nor can we make any assurances as to the period, if any, in which material net cash inflows from sales of our medical devices may commence. This uncertainty is due to the numerous risks and variables associated with developing and marketing medical devices, including, but not limited to:
 
·
The scope and degree of progress associated with our research and discovery efforts, as well as related development activities;
·
The extent of expenses incurred in conjunction with the foregoing activities;
·
The safety and efficacy of our medical device as compared to traditional treatment modalities;
·
Our ability to articulate successfully the benefits of our medical device to medical professionals who will be responsible for introducing patients to our product;
·
The results of anticipated clinical studies and trials as required by the relevant regulatory approval processes;
·
The terms and timing of potential regulatory approvals, if any; and
·
The expense of securing licenses to relevant IP and/or the expense of filing, prosecuting, defending, and enforcing patent claims and other IP rights that we either own outright or have licensed.
 
 
Unfavorable developments with respect to any of the foregoing could mean significant changes in the cost and timing associated with our ability to bring our medical device to market and begin generating revenues.
 
General & Administrative Expenses
 
General and administrative expenses generally consist of salaries and similar costs associated with employees, including stock-based compensation expense. This category of expenses may also include facility costs and professional fees related to (i) legal and patent services; (ii) capital formation; (iii) investor and public relations services; and (iv) consulting and accounting services.
 
For the three months ended March 31, 2017 and 2016, the Company’s general and administrative expenses were $623,521 and $48,636, respectively.
 
It is expected that our general and administrative expenses will increase in the future as we expand our R&D activities in pursuit of regulatory approval for our contemplated medical devices. Such a rise in expenses could result from:
 
·
Increased number of employees;
·
Expanded infrastructure;
·
Higher legal and compliance costs;
·
Increased complexity of our financial statements that could precipitate a rise in our bookkeeping and accounting costs;
·
Higher insurance premiums; or
·
Increased need for investor and public relation services.

Depreciation and Amortization

Depreciation and Amortization expenses consist of amortization of acquired intangibles and depreciation for office equipment and furniture and fixtures. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets. During the three months ended March 31, 2017, the Company has not acquired any office equipment.

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

For the three months ended March 31, 2017 and 2016, the Company's depreciation expenses were $49 and $0, respectively. For the three months ended March 31, 2017 and 2016, the Company's amortization expenses were $258,606 and $77,942, respectively.

Liquidity and Capital Resources

Sources of Liquidity
 
To date, the Company has not generated any revenues. We have financed our operations to date through a private placement (the “Private Placement”) of our common stock and from loans from the Company's largest shareholder, Rosellini Scientific, LLC. The Private Placement was closed as of December 2, 2016 (the “Closing Date”).  We received $2,860,946 in net cash proceeds from the issuance of 2,840,946 Units in the Private Placement and 20,000 Units not yet issued at $1.00 per unit, each Unit consisting 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 Private Placement.

The Company has also issued 362,070 shares of restricted common stock of the Company in exchange for certain legal, investor relations/ public relations, corporate structuring and research and development consulting services rendered by third-party consultants. These shares were valued at $362,070. 
 
 
During the next 12 months, the Company may elect to form additional debt or equity capital 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. In the event that 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.

During 2016, Rosellini Scientific, LLC (“RS”), an affiliate of the Company, transferred approximately $751,000 of Federal research grants applicable to Pulsus’ products to the Company. These awards commence in the first quarter of 2017. Pulsus has applied for Matching Funds from the Kentucky SBIR Matching Funds Program funded by the Cabinet for Economic Development (CED), Office of Entrepreneurship. The Kentucky Science and Technology Corporation (KSTC) administer the Kentucky SBIR Matching Funds Program under a contract with the CED. If the Kentucky Matching Funds applications are approved, the state of Kentucky’s will award up to $150,000 associated with the NIH/SBIR Phase I Grant and up to $500,000 associated with the NIH/SBIR Phase II Grant. The Company and Pulsus have several additional NIH/SBIR Grant applications pending. 

NMB currently has €1,496,000 (approximately US $1,615,000) in remaining funds from previously awarded grants and €1,203,000 (approximately US $1,299,000) in pending grant applications from the La Region Wallone in Belgium. The NMB grant revenues would be beneficial to the Company subject to completing the acquisition of NMB.
 
As of March 31, 2017, we had cash on hand of $611,670 and a working capital surplus of $1,165,095. Based upon our budgeted burn rate, we currently have operating capital for approximately two months. The Company has historically relied on equity or debt financings to finance its ongoing operations. The Company currently has underway a private placement of 2,400,000 shares the Company’s Common Stock to accredited investors only, in order to form new equity capital in the amount of $2,500,000. The shares of Common stock are being offered at $1.25 per share. There can be no guarantee that the Company will be successful in placing the shares. As of the date of this filing, $685,000 had been subscribed under the offering. (See “Future Financing, Continued Operations” below.)

During the three months ended March 31, 2017, the Company has not generated any revenues and has not raise any funds through any new equity or debt financings.
 
Material changes in the financial condition of the Company during the three months ended March 31, 2017 are as follows:
 
In connection with the Acquisition Agreement (See Note 11. Related Party Transactions) and based on the contemplation that Nexeon Europe shall acquire all of the shares of NMB, Nexeon Europe (Lender) and NMB (Borrower) entered into a Loan Agreement and related Promissory Note pursuant to which Nexeon Europe agrees to make a loan to NMB in the aggregate principal amount of EUR 1,000,000 (One Million Euros) (the “Loan”).

As of March 31, 2017, $729,907 has been loaned to NMB and $4,570 has been recorded in accrued interest income pursuant to the Loan Agreement and Promissory Note.

Future Financing; Continued Operations
 
Until such time, if ever, as the Company can generate substantial revenues, we expect to finance our cash needs through a combination of future debt and equity financing, as well as expected non-dilutive research grant awards. Besides certain grant awards, as described above, the Company does not have any committed external source of funds. To the extent that the Company secures additional capital through the sale of convertible debt or equity securities, the ownership interest of our stockholders may be diluted, and the terms of any such securities we issue may include liquidation or other preferences that adversely affect the rights of common stockholders. In cases where the Company secures certain debt financing, if any such is available, we may become subject to certain covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures, or declaring dividends. In the event the Company is unable to secure needed financing, or is unable to secure such financing on terms we find favorable, we may be forced to delay, limit, or terminate product development and/or future commercialization of the same.
 
 
Off-Balance Sheet Arrangements
 
During the three months ended March 31, 2017, we did not engage in any off-balance sheet arrangements as set forth in Item 303(a)(4) of the Regulation S-K. 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 which we believe sets forth the most critical accounting policies to aid you in fully understanding and evaluating our financial condition and results of operations.

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Our exposure to market risks is limited to changes in interest rates. We do not use derivative financial instruments as part of an overall strategy to manage market risk. We have no debt outstanding nor do we have any investment in debt instruments other than highly liquid short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.

Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 17, 2017, our disclosure controls and procedures were not effective due to the size and nature of the existing business operation. Given the size of our current operation and existing personnel, the opportunity to implement internal control procedures that segregate accounting duties and responsibilities is limited. Until the organization can increase in size to warrant an increase in personnel, formal internal control procedure will not be implemented until they can be effectively executed and monitored. As a result of the size of the current organization, there will not be significant levels of supervision, review, independent directors nor formal audit committee.
 
Changes in Internal Control Over Financial Reporting
 
During the quarter ended March 31, 2017, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
As of the date of this report, the Company is not currently involved in any legal proceedings.
 
Item 1A.
Risk Factors
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Set forth below is an enumeration of all securities issued by the Company since December 31, 2016 that have not been registered under the Securities Act.
 
On December 9, 2016, Nexeon Medsystems Puerto Rico, a wholly owned subsidiary of the Company, entered into a services agreement with Adaptive Business Solutions, LLC to provided corporate structuring consulting services in exchange for $60,000 in restricted shares of the Company’s common stock. No stock was issued at the time the agreement was entered into in 2016. As of the date of this filing 45,571 shares of the Company’s common stock have been issued in exchange for services provided.
 
On February 14, 2017, the Company entered into a services agreement with ACORN Management Partners, LLC to provide strategic business outreach and strategic relations services in exchange for a monthly fee of $7,500 and $125,000 in restricted shares of the Company’s common stock. The initial term of the agreement is six months. As of the date of this filing 125,000 shares of the Company’s common stock have been issued in exchange for services provided.
 
 On February 23, 2017, the Company entered into a services agreement with Sichenzia Ross Ference Kesner, LLP to provide drafting and filing of a registration statement on Form S-1for a flat rate of $40,000.  The fee shall be paid $20,000 in cash and $20,000 in restricted shares of the Company’s common stock. As of the date of this filing 20,000 shares of the Company’s common stock have been issued in exchange for services provided.
 
On March 21, 2017 the Company offered to current warrant holders who participated in the Private Placement which closed on December 2, 2016 (See Note 9 Equity), 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.
 
As of the date of this filing 593,598 warrants have been exercised, 593,598 shares of the Company’s common stock has been issued and 2,898,151 warrants were cancelled in connection with the warrant conversion offering.
 
On April 1, 2017 the Company issued 175,000 shares of the Company’s common stock in exchange for an increase of $175,000 in loan to NMB. The shares were issued to AtidTek, LLC for certain project management and engineering services provided to NMB. The shares were valued at $175,000.
 
Unless otherwise stated, the issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated there under, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or contracts relating to compensation as provided under Rule 701. 
 
The recipients of the securities in the foregoing transactions represented their intentions to acquire the securities for investment only and not with a view to the resale or distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had access, through their relationships with the Company, to information about Nexeon MedSystems Inc. 
 
 
Item 3.
Defaults Upon Senior Securities
 
None.
 
Item 4.
Mine Safety Disclosures
 
Not applicable.

Item 5.
Other Information
 
None.
 
Item 6.
Exhibits
 
Exhibit
Number
 
Description
                         
      
 
3.01 (1)
 
3.02 (1)
 
3.03 (1)
 
3.04 (1)
 
3.05 (1)
 
4.01 (1)
 
4.02 (1)
 
10.01 (2)
 
10.02 (1)
 
14.01 (1)
 
31.1 *
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
 
XBRL Instance Document**
101.SCH*
 
XBRL Extension Schema Document**
101.CAL*
 
XBRL Extension Calculation Linkbase Document**
101.DEF*
 
XBRL Extension Definition Linkbase Document**
101.LAB*
 
XBRL Extension Labels Linkbase Document**
101.PRE*
 
XBRL Extension Presentation Linkbase Document**
                                                 
*
Filed herewith
(1)
Previously filed with Form 10 filed on July 6, 2016
(2)
Previously filed with Amendment No. 2 to the Form 10 on September 9, 2016.
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Nexeon MedSystems Inc
 
 
 
 
 
 
Dated:   May 9, 2017
By:
/s/  William Rosellini
 
 
William Rosellini
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
Dated:   May 9, 2017
By:
/s/  Christopher R. Miller
 
 
Christopher R. Miller
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
 
 
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