NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 purpose is to develop and commercialize
its 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 Inc. (“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 its merger with
Nexeon MedSystems, Inc., a private Delaware corporation (“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, S.A.
(“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. The Company believes Medi-Line provides the medical device manufacturing
expertise and experience needed to scale its business. Medi-Line is a leading global source of innovative medical device
solutions, with existing customers that include Fortune 50 companies and neurostimulator companies. On September 27, 2017 Nexeon
MedSystems Inc began trading on the OTCQB platform under the symbol “NXNN”.
NOTE
2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The accompanying unaudited consolidated
financial statements include the accounts of Nexeon MedSystems Inc and its wholly owned subsidiaries NXPROC, Nexeon Europe, Pulsus
Medical, LLC, and NMB as of September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018
and 2017. The financial statements include the accounts of Medi-Line and INGEST as of September 30, 2018 and December 31, 2017
and for the three and nine months ended September 30, 2018 and the month of September 2017 for the three and nine months ended
September 30, 2017. 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 for Form
10-Q and Article 8 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, 2017. 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 of September 30, 2018, and the results of operations and cash flows for the periods presented.
The results of operations for interim periods 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.
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 require 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.
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 assets. 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.
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.
Inventories
The
value of inventories, comprised solely of finished goods, are stated at the lesser of net realizable value or cost, determined
using the first-in, first-out (“FIFO”) method. To value inventory, management must estimate excess or obsolete inventory,
as well as inventory that is not of saleable quality. This valuation involves an inherent level of risk and uncertainty due to
the unpredictability of trends in the industry and customer demand for the Company’s products. In assessing the ultimate
realization of inventories, management must make judgments as to future demand requirements, and compare those with the current
or committed inventory levels. Reserve requirements generally increase as demand decreases due to market conditions and technological
and product life-cycle changes. Write-downs of excess and obsolete inventories were $0 and $0 in the nine months ended September
30, 2018 and 2017, respectively. Future events and variations in valuation methods or assumptions may cause significant fluctuations
in this estimate, and could have a material impact on the Company’s results.
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 three and nine months ended September 30, 2018 and 2017, 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 Medi-Line and pre-clinical neurostimulation
device sales at NMB.
In
May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires
a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration
that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU
No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The
Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The
new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method.
The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the
majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify
any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained
earnings was required upon adoption.
Under
the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in
an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues
following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues
from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in
time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred
if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
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 that some portion or all of the deferred tax assets
will not be realized.
ASC
Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements,
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions
for any of the reporting periods presented.
All
tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that
the position will be sustained under audit, including resolution of any related appeals or litigation processes. After the initial
analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
If
the Company is required to pay interest on the underpayment of income taxes, the Company recognizes interest expense in the first
period the interest becomes due according to the provisions of the relevant tax law.
If
the Company is subject to payment of penalties, the Company recognizes an expense for the amount of the statutory penalty in the
period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position
was initially taken, the expense is recognized in the period when the Company changes its judgment about meeting minimum statutory
thresholds related to the initial position taken.
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 ongoing 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), the Cancer Prevention and Research Institute of Texas and the Puerto Rico Science, Technology
and Research Trust 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 grant 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 September 30, 2018, the Company has
$819,615 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 $568,844 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 period-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 period. 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.
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, patent licenses, trade secrets and know-how, and customer relationships acquired by the Company,
which are recorded at fair value and are assigned an estimated useful life, and amortized on a straight-line basis over their
estimated useful lives (ranging from 3 to 19 years) for assets with definitive lives. 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.
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, par value $0.001 per share (“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 to 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 nine months ended September
30, 2018 and 2017, the Company recognized stock-based compensation expense aggregating $362,482 and $217,605, respectively, for
Common stock options issued to Company personnel, directors, and consultants. During the nine months ended September 30, 2018 and
2017, the Company paid stock-based compensation consisting of restricted Common stock to non-employees consultants and issued or
recorded as Equity instruments to be issued an aggregate of $112,561 and $0, 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 have, or are not believed by management to have, a material impact on the Company’s
present or future consolidated financial statements.
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 an acquisition agreement (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 “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 was USD $1,000 (the “Acquisition Price”). Upon Nexeon
Europe exercising the Right to Purchase, the Acquisition Agreement was automatically deemed converted into and considered a share
transfer agreement for the purchase of the NMB Shares, and the Acquisition Price became the purchase price of the NMB Shares and
was deemed to have been satisfied by Nexeon Europe to RS as of the date of the Acquisition Date.
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 three and nine months ended September 30, 2018 and 2017 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.
We
believe 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 and
neurostimulator companies. Medi-Line seeks to provide 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.
Unaudited
Pro Forma Consolidated Results
The
following table provides unaudited pro forma results of operations for the three and nine months ended September 30, 2018 and
2017, as if INGEST and Medi-line had been acquired as of January 1, 2017. 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. 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.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,977,629
|
|
|
$
|
1,985,067
|
|
|
$
|
7,666,827
|
|
|
$
|
5,716,007
|
|
Net income (loss)
|
|
|
(1,391,547
|
)
|
|
|
(438,503
|
)
|
|
|
(3,067,224
|
)
|
|
|
(3,408,754
|
)
|
Net income (loss) per common share, basic and diluted
|
|
|
(0.71
|
)
|
|
|
(0.23
|
)
|
|
|
(1.56
|
)
|
|
|
(1.97
|
)
|
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 $6,810,662 and
a working capital deficit of $1,928,566 at September 30, 2018. 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 all of the projected operating costs of the ongoing 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 will need to seek additional financing for continued operations, but there is no guarantee
such financing will be available or on terms favorable to the Company.
In the third quarter
of 2018, the Company began to consolidate its manufacturing facilities in Niel, Belgium with its Medi-Line operations in Liege,
Belgium. These operations include a facility, equipment, research and development staff, general and administrative. There
is no guarantee these reductions by the Company will alleviate the going concern.
NOTE
5 – LOANS AND LEASES
Loans
and leases consist of the following as of September 30, 2018:
Notes
Payable
12.00%
Senior Secured Convertible Promissory Note:
On August 21, 2017, the 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
35,716 shares of the Company’s Common stock, and (iii) commitment shares equaling 7,143 shares of the Company’s restricted
common stock, valued at $100,000. 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, subject to beneficial ownership limitations of 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, $24.75, 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 including a $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, $1,120,000 is recorded as Current portion of long-term debt, net of original discount.
$(125,705) of the original discount is recorded as Current portion of long-term debt, net of original discount on the balance sheet.
1.27%
Secured bank Loan:
On August 29, 2017, Medi-Line entered into
a credit contract with CBC Banque SA (“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 1.27% per annum,
with a seven-year term having monthly payments of interest and principal of approximately $23,365 (€21,175 EUR). $297,507
of the outstanding balance is recorded as Current portion of long-term debt, net of original discount on the balance sheet, and
$1,456,086 is recorded as Long-term debt, net of original discount 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. $14,562 of the outstanding balance is recorded as Current portion of long-term
debt, net of original discount portion on the balance sheet, and $285,061 is recorded as Long-term debt, net of original discount
on the balance sheet.
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. $16,745 of the outstanding balance is recorded as Current portion of long-term debt,
net of original discount on the balance sheet, and $13,458 is recorded as Long-term debt, net of original discount 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 to $23,947 annually from 2018 through 2032. The current
portion of the liability is recorded as Current portion of long-term debt, net of original discount on the balance sheet in the
amount of $5,987, and $173,613 is included as Long-term debt, net of original discount 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 $12,847 as of September 30, 2018, 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 $11,390 as of September 30, 2018, a
credit limit of $11,000, and a current APR of 0%.
Floating
Rate Secured Line of Credit:
On February 23, 2018, Medi-Line’s
line of credit with CBC Banque was amended to increase the advance amount to €300,000 ($369,561) and to 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
was be available for drawdown through April 30, 2018, at which point the facility was 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. The
outstanding balance as of September 30, 2018 in the amount of $116,012 is recorded as Current portion of long-term debt, net of
original discount on the balance sheet.
Capital Leases
Building
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 (€39,202 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. $181.239 of the outstanding
balance is recorded as Current portion of long-term debt, net of original discount, and $426,448 is recorded as Long-term debt,
net of original discount on the balance sheet.
Equipment
Lease:
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 $1,579 (€1,318 EUR). The remaining balance of the lease in the amount of $23,083 is recorded
as Current portion of long-term debt, net of original discount on the balance sheet.
|
|
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
|
|
|
1,753,593
|
|
1.27% Secured Bank Loan, monthly amortization, 2024 maturity
|
|
|
272,623
|
|
0.72% Secured Bank Loan, monthly amortization, 2020 maturity
|
|
|
30,203
|
|
Floating Rate Secured Line of Credit
|
|
|
116,012
|
|
Loan Subsidy, amortization begins 2018, 2032 maturity
|
|
|
179,600
|
|
Revolving Credit
|
|
|
24,237
|
|
Capitalized Building Lease
|
|
|
607,687
|
|
Capitalized Equipment Lease
|
|
|
23,083
|
|
Less: Original purchase discount, net of amortization
|
|
|
(125,705
|
)
|
Total Debt
|
|
|
4,001,333
|
|
Less: Current portion of debt, net of original discount current portion
|
|
|
(1,673,667
|
)
|
Total Long-Term Debt
|
|
$
|
2,327,666
|
|
KBC
Accounts Receivable Discounting Agreement:
Medi-Line has an accounts receivable discounting
agreement with KBC Commercial Finance, NV (“KBC ComFin”) for up to 35% of Medi-Line’s customer accounts receivables
with no concentration limits per customer. Pursuant to the discounting agreement, Medi-Line will transfer title to KBC ComFin for
all receivables that fall under the scope of agreement. The fee for the advance portion of the receivables transferred to KBC ComFin
is the two-month LIBOR plus 1.5% on annual basis. As KBC ComFin holds the title to the receivables and assumes the insolvency risk
for receivables that are transferred and fall under the scope of the agreement, invoices transferred per the agreement are reduced
from Medi-line’s customer accounts receivable upon transfer and recorded to a KBC ComFin accounts receivable sub-account
and netted against advances and final payments received per the agreement.
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 United States income taxes have been made,
as the Company had no U.S. taxable income for the nine months ended September 30, 2018 and 2017. The effective income tax rate
for the Company for the three months ended September 30, 2018 and 2017 were 21% and 34%, respectively. One of our subsidiaries
generated income, and as of September 30, 2018 we accrued income tax in the amount of $11,928 according to the Belgian corporate
income tax rate and the other operating subsidiaries reported a loss and no tax provision was recorded. Beginning in 2018, the
corporate income tax (“CIT”) levied in Belgium has been reduced to an effective rate of 29.58%. No state, region, or
municipal income tax is levied.
During nine months ended September 30,
2018, the Company’s holding company subsidiary, NXEU, was assessed annual corporate taxes in the amount of $5,038.
As of September 30, 2018, the Company has
approximately $8,485,737 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.
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 United States income tax expense in the nine months ended September 30, 2018.
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 2021.
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.
On
December 27, 2017, NXPROC 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 (“PRIDCO”). The exemption allows NXPROC to obtain
tax credits in the amount of fifty percent (50%) of approved applicable research and development expenses of NXPROC. As of July
23, 2018, the Company has received all government approvals and certifications from PRIDCO and received tax credits in the amount
of $732,340, for research and development activity in 2017, which had been posted to Departamento De Hacienda (the Puerto Rican
Department of Finance) system and the Company has received $593,195 in net proceeds from the sale of all available tax credits
realizing proceeds of 81% of the face value of the tax credits. For the nine months ended September 30, 2018, the Company recorded
a benefit to provision for income taxes in the amount of $593,195.
NOTE
7 – PROPERTY PLANT and EQUIPMENT
Property
plant and equipment at cost and accumulated depreciation as of September 30, 2018 and December 31, 2017 were:
|
|
Estimated useful lives
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Land
|
|
|
|
$
|
96,884
|
|
|
$
|
96,884
|
|
Capitalized building
|
|
39 years
|
|
|
3,017,552
|
|
|
|
3,017,552
|
|
Machinery and equipment
|
|
5 to 15 years
|
|
|
739,088
|
|
|
|
677,734
|
|
Total property plant and equipment – gross
|
|
|
|
|
3,853,524
|
|
|
|
3,792,170
|
|
Less: accumulated depreciation
|
|
|
|
|
(404,057
|
)
|
|
|
(222,338
|
)
|
Total property plant and equipment – net
|
|
|
|
$
|
3,449,467
|
|
|
$
|
3,569,832
|
|
Property plant and equipment depreciation
expense for the nine months ended September 30, 2018 was $186,834, and for the nine months ended September 3, 2017 was $63,413.
NOTE
8 – INTANGIBLE ASSETS
Intangible
assets that have finite useful lives are amortized over their estimated useful lives. Intangible assets as of September 30, 2018
and December 31, 2017 are as follows:
|
|
Estimated useful lives
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Intangible assets with definitive lives:
|
|
|
|
|
|
|
|
|
|
|
Patents, licenses, and intellectual property
|
|
4 to 20 years
|
|
$
|
10,363,097
|
|
|
$
|
10,363,097
|
|
Fair value of customer relationships at acquisition
|
|
10 years
|
|
|
600,000
|
|
|
|
600,000
|
|
Less: accumulated amortization
|
|
|
|
|
(2,679,450
|
)
|
|
|
(1,773,605
|
)
|
Patents, licenses, and intellectual property – net
|
|
|
|
|
8,283,647
|
|
|
|
9,189,492
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
Fair value of trade secrets and know-how at acquisition
|
|
|
|
|
1,550,000
|
|
|
|
1,550,000
|
|
Intangible asset amortization expense for
the nine months ended September 30, 2018 was $909,241, and for the nine months ended September 30, 2017 was $861,377.
NOTE 9 —
INVENTORIES
Inventory
balances as of September 30, 2018 and December 31, 2017 are as follow:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Raw materials and supplies
|
|
$
|
1,688,415
|
|
|
$
|
1,811,749
|
|
Work in process
|
|
|
732,573
|
|
|
|
334,322
|
|
Finished goods
|
|
|
—
|
|
|
|
60,499
|
|
Total inventories
|
|
$
|
2,420,988
|
|
|
$
|
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. 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. Our first commercial application of the 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 “other,” and not
allocated to segments.
An
analysis and reconciliation of the Company’s business segments and geographic information to the respective information
in the Condensed Consolidated Financial Statements follows. Revenue by geographic area are presented by allocating revenue from
external customers based on where the products are shipped or services are rendered:
Revenue
by Segment:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
1,938,908
|
|
|
$
|
816,325
|
|
|
$
|
7,119,557
|
|
|
$
|
816,325
|
|
Neurostimulation
|
|
|
5,003
|
|
|
|
202,362
|
|
|
|
400,055
|
|
|
|
292,936
|
|
Other
|
|
|
33,718
|
|
|
|
20,992
|
|
|
|
147,215
|
|
|
|
38,027
|
|
Consolidated total
|
|
$
|
1,977,629
|
|
|
$
|
1,039,679
|
|
|
$
|
7,666,827
|
|
|
$
|
1,147,288
|
|
Income (Loss) Before Income Tax by
Segment:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
48,982
|
|
|
$
|
114,720
|
|
|
$
|
223,100
|
|
|
$
|
114,720
|
|
Neurostimulation
|
|
|
(1,386,884
|
)
|
|
|
(1,070,982
|
)
|
|
|
(3,892,894
|
)
|
|
|
(4,144,691
|
)
|
Other
(1)
|
|
|
(59,155
|
)
|
|
|
532,010
|
|
|
|
26,346
|
|
|
|
425,967
|
|
Consolidated total
|
|
$
|
(1,397,057
|
)
|
|
$
|
(424,252
|
)
|
|
$
|
(3,643,448
|
)
|
|
$
|
(3,604,004
|
)
|
(1)
Amounts not allocated to segments include interest income (expense) and other income (expense), and amortization of acquisition
intangible assets.
Sales by Geographic Area:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales Non-domestic locations
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
$
|
886,886
|
|
|
$
|
519,364
|
|
|
$
|
3,530,395
|
|
|
$
|
609,938
|
|
Belgium
|
|
|
557,079
|
|
|
|
229,817
|
|
|
|
2,286,767
|
|
|
|
229,817
|
|
Switzerland
|
|
|
166,674
|
|
|
|
59,253
|
|
|
|
563,641
|
|
|
|
59,253
|
|
Netherlands
|
|
|
184,161
|
|
|
|
85,763
|
|
|
|
533,329
|
|
|
|
85,763
|
|
Norway
|
|
|
142,470
|
|
|
|
120,094
|
|
|
|
487,640
|
|
|
|
120,094
|
|
Rest of world
|
|
|
6,641
|
|
|
|
4,396
|
|
|
|
117,840
|
|
|
|
4,396
|
|
Consolidated sales
|
|
|
1,943,911
|
|
|
|
1,018,687
|
|
|
|
7,519,612
|
|
|
|
1,109,261
|
|
Other operating revenue
|
|
|
33,718
|
|
|
|
20,992
|
|
|
|
147,215
|
|
|
|
38,027
|
|
Consolidated revenue
|
|
$
|
1,977,629
|
|
|
$
|
1,039,679
|
|
|
$
|
7,666,827
|
|
|
$
|
1,147,288
|
|
Long-Lived Assets:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Manufacturing
|
|
$
|
3,422,963
|
|
|
$
|
3,535,516
|
|
Neurostimulation
|
|
|
7,774,609
|
|
|
|
8,643,118
|
|
Other
|
|
|
2,085,542
|
|
|
|
2,130,690
|
|
Consolidated total
|
|
$
|
13,283,114
|
|
|
$
|
14,309,324
|
|
NOTE 11 –EQUITY
We
effected a 1-for-14 reverse stock split of our outstanding Common stock, or, the “Reverse Stock Split”, on June 25,
2018 and, unless otherwise indicated, all per share amounts set forth herein have been retroactively restated to reflect the Reverse
Stock Split.
The
Company issued the following securities during the nine months ended September 30, 2018:
Common Stock Issuances
On March 6, 2018, we issued an aggregate
of 1,697 shares of 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. 583 of these shares were issued to Daniel Powell, the Company’s
vice president of sales and marketing at the time of issuance. These shares were issued for services provided by Mr. Powell prior
to his employment by the Company.
On April 19, 2018, we issued an aggregate
of 7,195 shares of restricted common stock for certain research and development and valuation services provided by third-party
consultants. The foregoing shares were valued at $97,721
Common Stock Redemption
On May 22, 2018, the Company redeemed and
cancelled 14,286 shares of its common stock from a former director as consideration for the purchase of certain intellectual property.
Warrants
The Company issued no Warrants for the
nine months ended September 30, 2018.
Options Grants – 2016
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. On July 8, 2018, the Board of Directors
of the Company approved an increase in the number of shares of common stock reserved for issuance pursuant to option grants under
the 2016 Plan to 450,000 shares of common stock
.
During the nine months ended September
30, 2018, the Company issued stock options to purchase a total of 138,198 shares of the Company’s common stock under the
2016 Plan, with exercise prices ranging from $8.00 to $20.00 per share, and cancelled stock options to purchase a total of 54,898
shares of the Company’s common stock under the 2016 Plan, with exercise prices ranging from $11.00 to $17.50 per share, as
follows:
|
(i)
|
On February 28, 2018 and as compensation for service to the Company as chief executive officer,
the Company granted to William Rosellini an incentive stock option to purchase up to 17,858 shares of the Company’s restricted
common stock with an exercise price of $10.64. The option to purchase 8,929 shares of common stock was immediately exercisable,
and the option to purchase the remaining 8,929 shares of common stock vests on the anniversary of the grant date. The Company also
granted a non-qualified stock option to purchase up to 64,286 shares of common stock with an exercise price of $10.64 per share.
The option to purchase 2,679 common shares vests in equal monthly amounts beginning on March 1, 2018. The option to purchase the
Company’s common stock expires three (3) years from the date they become exercisable pursuant to the grant vesting schedule.
The fair value of the options was determined to be $226,009 using the Black-Scholes Option Pricing Model.
|
|
(ii)
|
On February 28, 2018 and as compensation for service to the Company as president and chief commercial
officer, the Company granted to Brian Blischak a non-qualified stock option to purchase up to 4,108 shares of the Company’s
restricted common stock with an exercise price of $10.64 per share. The option was immediately exercisable at date of issue. The
term of the option shall be for a period of eight (8) years from the date of issue. The fair value of the option was determined
to be $12,855 using the Black-Scholes Option Pricing Model.
|
|
(iii)
|
On February 28, 2018 and as compensation for service to the Company as chief financial officer,
the Company granted to Christopher Miller a non-qualified stock option to purchase up to 2,143 shares of the Company’s restricted
common stock with an exercise price of $10.64 per share. The option was immediately exercisable at date of issue. The term of the
option shall be for a period of three (3) years from the date of issue. The fair value of the option was determined to be $6,766
using the Black-Scholes Option Pricing Model.
|
|
(iv)
|
On February 28, 2018 and as compensation for service to the Company as vice president sales and
marketing, the Company granted to Daniel Powell an incentive stock option to purchase up to 786 shares of the Company’s restricted
common stock with an exercise price of $10.64 per share. The option was immediately exercisable at date of issue. The term of the
option shall be for a period of three (3) years from the date of issue. The fair value of the option was determined to be $2,481
using the Black-Scholes Option Pricing Model.
|
|
(v)
|
On February 28, 2018 and as compensation for their service to the Company, the Company granted
to non-executive employees incentive stock options to purchase up to 3,301 shares of the Company’s restricted common stock
with an exercise price of $10.64 per share. The option to purchase 2,229 shares was immediately exercisable at date of issue, and
the option to purchase 1,072 shares of common stock vests in equal monthly amounts beginning on March 1, 2018. The option
to purchase the Company’s common stock expires three (3) years from the date they become exercisable pursuant to the grant
vesting schedule. The fair value of these options was determined to be $10,420 using the Black-Scholes Option Pricing Model.
|
|
(vi)
|
As compensation for service as a director of the Company, the Company granted to Kent J. George
non-qualified stock options to purchase 893 shares of the Company’s restricted common stock on each date of March 31, 2018,
June 30, 2018 and September 30, 2018 with exercise prices of $12.11, $20.00, and $8.00 per share respectively. The options were
immediately exercisable at date of issue. The term of the options shall be for four (4) years from the date of issue. The fair
value of the options granted were determined to be $12,034 using the Black-Scholes Option Pricing Model.
|
|
(vii)
|
As compensation for service as a director of the Company, the Company granted to Michael Neitzel
non-qualified stock options to purchase 893 shares of the Company’s restricted common stock on each date of March 31, 2018,
June 30, 2018 and September 30, 2018 with exercise prices of $12.11, $20.00, and $8.00 per share respectively. The options were
immediately exercisable at date of issue. The term of the options shall be for four (4) years from the date of issue. The fair
value of the options granted were determined to be $12,034 using the Black-Scholes Option Pricing Model.
|
|
(viii)
|
As compensation for service as a director of the Company, the Company granted to Wes Dittmer non-qualified
stock options to purchase 893 shares of the Company’s restricted common stock common stock on each date of June 30, 2018
and on September 30, 2018 with exercise prices of $20.00 and $8.00 per share respectively. The options were immediately exercisable
at date of issue. The term of the options shall be for four (4) years from the date of issue. The term of the options shall be
for four (4) years from the date of issue. The fair value of the options granted were determined to be $8,439 using the Black-Scholes
Option Pricing Model.
|
|
(ix)
|
On July 22, 2018, the Company granted to a new employee at NXPROC incentive stock options to purchase
up to 38,572 shares of the Company’s restricted common stock with an exercise price of $11.00 per share with vesting over
48 months. The term of the option was for a period of four (4) years from the date of vesting. The fair value of the option was
determined to be $92,789 using the Black-Scholes Option Pricing Model. Prior to vesting the option to purchase 38,572 shares was
cancelled.
|
|
(x)
|
During the three months ended September 30, 2018, incentive stock options to purchase 16,326 shares
of the Company’s restricted common stock were cancelled pursuant to the 2016 Plan for employee separations from the Company.
The range of exercise prices for these cancelled options ranged from $14.00 to $17.50.
|
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(a)(2) of the
Securities Act or Regulation D promulgated thereunder, 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 granted options were valued at $383,828
using the Black-Scholes option pricing model, with the following weighted average assumptions:
Risk-free interest rate
|
|
2.44%
|
Expected life
|
|
3.48 years
|
Expected dividends
|
|
0.00%
|
Expected volatility
|
|
56.12%
|
Fair value of the Company’s Common stock
|
|
$10.89
|
Aggregate options expense recognized for
the nine months ended September 30, 2018, was $362,482.
As of September 30, 2018, there were 103,822
shares available for grant under the 2016 Plan, excluding the 346,178 options outstanding.
As
of September
30, 2018, there were incentive stock options outstanding to purchase an aggregate of 175,266 shares of common
stock, and non-qualified options outstanding to purchase an aggregate of 170,912 shares of the Company’s common stock option activity,
both within and outside the 2016 Plan, and Warrant activity for the nine months ended September 30, 2018, are as follows:
|
|
Stock Options
|
|
|
Stock Warrants
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
|
262,878
|
|
|
$
|
15.07
|
|
|
|
82,926
|
|
|
$
|
19.39
|
|
Granted
|
|
|
138,198
|
|
|
|
10.89
|
|
|
|
—
|
|
|
|
—
|
|
Canceled
|
|
|
(54,898
|
)
|
|
|
12.53
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
346,178
|
|
|
$
|
13.80
|
|
|
|
82,926
|
|
|
$
|
19.39
|
|
Exercisable at September 30, 2018
|
|
|
210,989
|
|
|
$
|
14.17
|
|
|
|
82,926
|
|
|
$
|
19.39
|
|
The range of exercise prices and remaining
weighted average life of the options outstanding at September 30, 2018, were $8.00 to $28.00 and 1.44 to 7.44 years, respectively.
The range of exercise prices and remaining
weighted average life of the Warrants outstanding at September 30, 2018, were $8.00 to $28.00 and 1.17 to 3.89 years, respectively.
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(a)(2) of the
Securities Act or Regulation D promulgated thereunder, 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.
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. On July 8, 2018, the Board of Directors of the
Company approved an increase in the number of shares of common stock reserved for issuance pursuant to option grants under the
2016 Plan to 450,000 shares of common stock. As of September 30, 2018, options to purchase a total of 346,178 shares of the Company’s
common stock were outstanding under the 2016 Plan with the following exercise prices and terms at grant date:
|
|
As of September 30,
2018
|
|
|
|
Exercise
|
|
|
Options to
|
|
|
|
|
Options to
|
|
|
|
Price
|
|
|
Purchase
Shares
|
|
|
Term (yrs)
|
|
Purchase
Shares
|
|
|
|
$
|
8.00
|
|
|
|
2,679
|
|
|
3
|
|
|
193,851
|
|
|
|
|
10.64
|
|
|
|
92,482
|
|
|
4
|
|
|
66,075
|
|
|
|
|
12.11
|
|
|
|
1,786
|
|
|
8
|
|
|
86,252
|
|
|
|
|
14.00
|
|
|
|
185,518
|
|
|
|
|
|
|
|
|
|
|
17.50
|
|
|
|
57,462
|
|
|
|
|
|
|
|
|
|
|
20.00
|
|
|
|
2,679
|
|
|
|
|
|
|
|
|
|
|
25.20
|
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
28.00
|
|
|
|
1,786
|
|
|
|
|
|
|
|
Total Shares
|
|
|
|
|
|
|
346,178
|
|
|
|
|
|
346,178
|
|
The 2016 Plan is administered by the compensation
committee which currently consists of three independent directors. The committee performs 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 450,000 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.
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 nine months ended September
30, 2018, the Company had the following transactions with related parties.
Common stock Issuance
On March 8, 2018, the Company issued 583
shares of the Company’s restricted Common stock to Daniel Powell, the Company’s vice president sales and marketing,
for certain sales and marketing consulting services rendered by Mr. Powell prior to his employment by the Company. The foregoing
shares were valued at $5,100.
Options Grants – 2016
Plan
On February 28, 2018, the Company issued
the following stock options under the 2016 Plan:
|
(i)
|
As compensation for service to the Company as chief executive officer, the Company granted to William
Rosellini an incentive stock option to purchase up to 17,858 shares of the Company’s restricted common stock with an exercise
price of $10.64. The option to purchase 8,929 shares of common stock was immediately exercisable, and the option to purchase the
remaining 8,929 shares of common stock vests on the anniversary of the grant date. The Company also granted a non-qualified stock
option to purchase up to 64,286 shares of common stock with an exercise price of $10.64 per share. The option to purchase 2,679
common shares vests in equal monthly amounts beginning on March 1, 2018. The option to purchase the Company’s common stock
expires three (3) years from the date they become exercisable pursuant to the grant vesting schedule. The fair value of the options
was determined to be $226,009 using the Black-Scholes Option Pricing Model.
|
|
(ii)
|
As compensation for service to the Company as chief commercialization officer, the Company granted
to Brian Blischak a non-qualified stock option to purchase up to 4,108 shares of the Company’s restricted common stock with
an exercise price of $10.64 per share. The option was immediately exercisable at date of issue. The term of the option shall be
for a period of eight (8) years from the date of issue. The fair value of the option was determined to be $12,855 using the Black-Scholes
Option Pricing Model.
|
|
(iii)
|
As compensation for service to the Company as chief financial officer, the Company granted to Christopher
Miller a non-qualified stock option to purchase up to 2,143 shares of the Company’s restricted common stock with an exercise
price of $10.64 per share. The option was immediately exercisable at date of issue. The term of the option shall be for a period
of three (3) years from the date of issue. The fair value of the option was determined to be $6,766 using the Black-Scholes Option
Pricing Model.
|
|
(iv)
|
As compensation for service to the Company as vice president sales and marketing, the Company granted
to Daniel Powell an incentive stock option to purchase up to 786 shares of the Company’s restricted common stock with an
exercise price of $10.64 per share. The option was immediately exercisable at date of issue. The term of the option shall be for
a period of three (3) years from the date of issue. The fair value of the option was determined to be $2,481 using the Black-Scholes
Option Pricing Model.
|
On March 31, 2018, the Company issued the
following stock options under the 2016 Plan:
|
(i)
|
As compensation for service as a director of the Company, the Company granted to Kent J. George
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise
price of $12.11 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $3,596 using the Black-Scholes Option Pricing Model.
|
|
(ii)
|
As compensation for service as a director of the Company, the Company granted to Michael Neitzel
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted Common stock with an exercise
price of $12.11 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $3,596 using the Black-Scholes Option Pricing Model.
|
On June 30, 2018, the Company issued the
following stock options under the 2016 Plan:
|
(i)
|
As compensation for service as a director of the Company, the Company granted to Kent J. George
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise
price of $20.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $5,778 using the Black-Scholes Option Pricing Model.
|
|
(ii)
|
As compensation for service as a director of the Company, the Company granted to Michael Neitzel
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise
price of $20.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $5,778 using the Black-Scholes Option Pricing Model.
|
|
(iii)
|
As compensation for service as a director of the Company, the Company granted to Wes Dittmer a
non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise price
of $20.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4) years
from the date of issue. The fair value of the option was determined to be $5,778 using the Black-Scholes Option Pricing Model.
|
On July 31, 2018 options to purchase 10,040
shares of the of the Company’s restricted common stock granted to Daniel Powell, the vice president of sales and marketing,
with an exercise price of $17.50 were cancelled pursuant the employees separation from the Company and the 2016 Plan.
On September 30, 2018, the Company issued
the following stock options under the 2016 Plan:
|
(i)
|
As compensation for service as a director of the Company, the Company granted to Kent J. George
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise
price of $8.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $2,661 using the Black-Scholes Option Pricing Model.
|
|
(ii)
|
As compensation for service as a director of the Company, the Company granted to Michael Neitzel
a non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise
price of $8.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4)
years from the date of issue. The fair value of the option was determined to be $2,661 using the Black-Scholes Option Pricing Model.
|
|
(iii)
|
As compensation for service as a director of the Company, the Company granted to Wes Dittmer a
non-qualified stock option to purchase a total of 893 shares of the Company’s restricted common stock with an exercise price
of $8.00 per share. The option was immediately exercisable at date of issue. The term of the option shall be for four (4) years
from the date of issue. The fair value of the option was determined to be $2,661 using the Black-Scholes Option Pricing Model.
|
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(a)(2) of the
Securities Act or Regulation D promulgated thereunder, 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.
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. NXDE, LLC is special purpose entity formed at the time of merger for
the purpose of receiving the above-mentioned royalty payments, if any, and is not an affiliate of the Company or NXDE. 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 nine months ended September 30, 2018, two of our customers accounted for approximately 51.6% and 26.7% of sales. For the nine
months ended September 30, 2017, three of our customers accounted for approximately 39.4%, 25.9%, and 18.2% of sales
For
the nine months ended September 30, 2018, the Company purchased approximately 18.5% of its products from one distributor, as compared
to the nine months ended September 30, 2017, the Company purchased approximately 12.5% of its products from one distributor.
For the nine months
ended September 30, 2018, three of our customers accounted for 50.0%, 22.8%, and 10.5% of accounts receivable, as compared to the
nine months ended September 30, 2017, where two of our customers accounted for 45.2% and 10.6% of accounts receivable.
For the three
months ended September 30, 2018, two of our customers accounted for approximately 66.0% and 29.7% of sales. For the three months
ended September 30, 2017, three of our customers accounted for approximately 42.9%, 19.8%, and 17.5% of sales.
For
the three months ended September 30, 2018, the company did not purchase more than 10% of its products from any single distributor,
as compared to the three months ended September 30, 2017, the Company purchased approximately 16.7% and 12.0% respectively of its
products from two distributors.
NOTE 16 - SUBSEQUENT EVENTS
None.