PART
I
Nxt-ID
is an emerging technology company engaged in the development of proprietary products, solutions and solutions that serve multiple
end markets, including Security, Healthcare, Finance and Internet of Things (IoT). Our innovative MobileBio® security technologies
that serve these end markets include encryption and payments, biometrics, security and privacy, sensors and miniaturization technologies.
Our core competencies and intellectual property in biometrics, security, sensors, and miniaturization – developed through
intensive research and development over the past decade –enable us to target and serve multiple large and growing end markets
globally.
We
believe that our MobileBio® products will provide distinct advantages within the m-commerce market by improving mobile
security. Currently most mobile devices are protected simply by PIN numbers which are easily duplicated on another device,
and can easily be spoofed or hacked. Our security paradigm is Dynamic Pairing Codes (“DPC”). DPC is a new,
proprietary method to secure users, devices, accounts, locations and servers over any communication media by sharing key
identifiers, including biometric-enabled identifiers, between end-points by passing dynamic pairing codes (random numbers)
between end-points to establish sessions and/or transactions without exposing identifiers or keys. The ongoing high-level
breaches of personal credit card data demand new securities to offer higher levels of consumer protection through the use of
biometrics and other proprietary solutions. Our strategic plan envisions using our core biometric facial and voice
recognition algorithms to develop security applications (both cloud based and locally hosted) that can be used for companies
(for industrial uses, such as enterprise computer networks) as well as individuals (for consumer uses, such as smartphones,
tablets or personal computers), law enforcement, the defense industry, and the U.S. Department of Defense.
NXT-ID
has numerous patents pending. Many of these patents pending focus on tokenization and protection, as well as payment
methodology, voice biometrics, and other biometric forms of directed payment.
In
healthcare, our business initiatives were bolstered by the acquisition of LogicMark, which we completed in the third quarter of
2016. LogicMark serves a market that enables two-way communication, sensors, biometrics and security to make home care for chronic
medical conditions, including “aging in place,” a reality. There are three major trends driving this market: 1) an
aging population, 2) a desire to “age in place” and 3) the acute need to lower cost of care. These trends together
have produced a large and growing market for us to serve. LogicMark has built a business around emergency communications in healthcare.
We have a strong business with the US Department of Veterans Affairs (VA) today serving veterans who suffer from chronic conditions
that often require emergency assistance. This business is steady and growing. Our strategic plan calls for expanding LogicMark’s
business into other retail and enterprise channels to better serve the expanding demand for secure and remote healthcare.
Remote
healthcare, which includes health monitoring and management using IoT and cloud-based processing, is an emerging area for LogicMark.
The long-term trend toward more home-based care is a massive shift that is being driven by demographics (an aging population)
and basic economics. People also value autonomy and privacy which are important factors in determining which solutions will suit
the market. Consumers are beginning to enjoy the benefits of smart home technologies and online digital assistants. One of the
promising applications of our VoiceMatch™ technology is enabling secure commands for restricted medical access. This solution,
when coupled with the NXT-ID BioCloud™, combines biometrics with encryption and distributed access control.
Security
and privacy concerns are already central to the adoption of IoT solutions that provides a large opportunity for the Company to
collaborate and license their technology to the consumer-facing firms that aim to address the IoT opportunity.
In
the finance area, the technology pioneered in the Nxt-ID “Wocket” has continued to develop in both range of capability
while shrinking in size. This provides a technology package that can be integrated into a “smart wallet” that has
the same technology as Apple Pay or into a card that can be used for a variety of transactions including – magnetic stripe
emulation (Wi-Mag), Near Field Communication (NFC), tokens, barcode/QR codes and there can also be an EMV chip and a Bluetooth
Beacon for remote sensing and response applications. Versions of this technology package provide a functional and secure “vault”
that allows for full consumer control and customization by OEMs and solution providers.
Our
finance business is being driven by the development of an innovative smartcard that leverages “Wocket” technology.
The smartcard is called “Flye” and it is being developed in partnership with World Ventures Holdings, LLC. (WVH).
The Flye card offers new and unique features compared to any other “smartcards” in the market. It handles the core
functions like loading in multiple cards, gathering loyalty points while opening up new opportunities Flye is targeted at WorldVentures
members who care about travel, food and entertainment. These concerns demand more than payments and include loyalty programs and
security features for peace of mind when traveling. The Flye card is designed to work in synchrony with the WorldVentures smartphone
application. It is a “tethered” solution, albeit a wireless one. WorldVentures has a comprehensive vision for their
card that includes the ability to delivery highly tailored membership experience.
With
respect to IoT, Nxt-ID has joined the Cisco Solution Partner program to provide biometric and encryption solutions in conjunction
with other ecosystem partners. Cisco sees security as integral to IoT. They are integrating security directly into network infrastructure
to enable companies to use their IoT networks in a secure fashion.
Our
plan also anticipates that we will use our core biometric facial and voice recognition algorithms to develop security applications
(both cloud based and locally hosted) that can be used for companies (for industrial uses, such as enterprise computer networks)
as well as individuals (for consumer uses, such as smart phones, tablets or personal computers), law enforcement, the defense
industry, and the U.S. Department of Defense.
We operate our business in one segment, Hardware and Software Security Systems and Applications. We evaluate
the performance of our business on, among other things, profit and loss from operations before interest, headquarters’ expense
allocations, stock-based compensation expense, income taxes and amortization related to certain intangible assets.
Our
Products
Payments
World
Ventures SmartCard
We
have entered into a distribution agreement with WVH, an international travel company, which has committed to purchase an exclusive
smartcard from the Company for distribution to its membership which is in excess of 500,000 members. WVH also made a strategic
investment in the Company. The smartcard is customized for WorldVentures with additional technologies and wireless features, such
as the ability to seamlessly integrate with WorldVentures’ DreamTrips™ App to wirelessly check in and earn loyalty
points towards free DreamTrips vacations at select restaurants. DreamTrips is a travel club and entertainment community where
members enjoy exciting excursions year-round to extraordinary destinations.
The
prototype was completed in 2016 with deliveries commencing in December 2016. We have an initial purchase order for
$15 million. We have non-cancellable delivery orders of just over $9 million to date, for delivery by the end of the second
quarter of 2017. Subsequent deliveries may be modified or cancelled subject to 90 days advance notice. During the twelve
months ended December 31, 2016, we recorded revenue of $1,357,413 from WVH a related party.
For
additional information on the transaction with WVH, see “Management Discussion and Analysis of Financial Condition and Results
of Operations”.
Nxt-ID
SmartPay™
We
have developed a standalone capability (the “NXT SmartPay”) on various devices with the ability to make payments by
dynamic magnetic stripe or through interacting with a terminal through EMC, NFC or barcode functionality. We are currently pursuing
significant strategic partnerships for this product.
Wi-Mag™
Our
proprietary antenna and payment technology can be embedded in a mobile device to make wireless payments at most point-of sale
(POS) terminals which do not require NFC or EMV allowing users to make payments at most POS terminals in the United States and
abroad. According to LTP research (January 12, 2016), there are about 13.9 million POS terminals in the United States of which
57% are currently Magnetic stripe only. We are currently in discussions with mobile device makers to license this technology.
Internet
of Things
Closely
related to electronic payments is the ability to communicate via many linked devices in a secure fashion. In cooperation with
Nordic Semiconductor, ASA, the Company demonstrated a miniature module within a wearable smart band to enable devices powering
the IoT (Internet of Things). The “IoT Stamp” is an intelligently connected electronics module that
is small enough and low power enough to fit within most devices, even a smart card or a watch band. Key functionality includes
patent pending ultra-low power “buttonless” wake-up, motion activation, and personalized services including identification
services, multi-factor biometric authentication, and payment technologies including NFC and Wi-Mag.
Healthcare
Personal
Emergency Response Systems
LogicMark
is the leading provider of non-monitored Personal Emergency Response Systems (PERS) and is the industry leader in two-way voice
communications. Product offerings include:
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Non-monitored
products that only require a one-time purchase fee, without a recurring monthly contract.
As a result, they are typically the most cost-effective PERS option for the end-user
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Both
traditional (i.e., landline) and mPERS (i.e., cell-based) options
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Non-monitored
products that are sold through VA channel, healthcare distributors and dealers, and retail
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The
non-monitored product is critical to the VA channel as VA will cover cost of the PERS
device, but will not cover the cost of a monthly subscription for monitoring services
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The
Company’s monitored products are primarily sold by dealers and distributors for the monitored channel. LogicMark sells the
device to the dealers/distributors who in turn offer the device to consumers as part of their product/service offering; the service
providers charge consumers a monthly monitoring fee for the associated monitoring service. Significantly, these products are:
(a) monitored by a third-party central station; and (b) compatible with most central stations.
Security
MobileBio
VoiceMatch®
Voicematch®
is a new method of recognizing both speakers and specific words providing innovative multi-factor recognition. Voice authentication
is a more natural biometric method of authentication than fingerprint that allows an individual access to multiple devices. Voicematch
is efficient enough to run on low-power devices and runs on mobile platforms such as Android and iOS, as well as laptops and desktops.
The product helps to address the growing BYOD (Bring your own device) problem for companies by positively identifying the individual
using the mobile device. Voicematch® is a potential original equipment manufacturer (“OEM”) product for smartphone
manufacturers. The product can also be sold as a standard development kit (“SDK”) to provide companies the opportunity
to add a further layer of biometric protection to their websites and smartphone applications for their customers.
We
currently expect commercial versions of this product to be available in the third quarter of 2017.
FaceMatch®
3D
FaceMatch® and 3D SketchArtist™ are facial recognition products which are available for sale. These products are primarily
designed for access control, law enforcement and travel and immigration. Through our wholly owned subsidiary, 3D-ID, we are a
sub-contractor to Battelle Memorial Institute on the U.S. Department of Defense Technical Information Engineering Services (“TIES”)
contract with a contract ceiling of $995 million. This is an IDIQ (indefinite delivery indefinite quantity) contract and requires
approved contractors to bid on task orders. We have not bid on any task orders to date.
Our
Industries
Payments
The
October 2016 issue of the Nilson Report shows that on a worldwide basis, credit, debit and prepaid cards generated $31.31 trillion
in purchases of goods, services and cash advances in 2015. Losses for fraud in the same period were $21.84 billion, up 20% over
2014. This translates to losses of 6.97 cents per $100. Fraud losses have increased every year since 2010. More than 70% of all
breaches in 2015 occurred in the US. There continues to be a great need for secure payment solutions. Rather than try to predict
the winning technology in this fast paced evolving payment technology industry, our business plan is to develop secure solutions
that can make payments using any form of payment technology from traditional magnetic stripe to NFC, Bluetooth, EMV and barcodes.
We
believe that our Wi-Mag™ technology, possibly in combination with our voice and facial recognition biometric technologies,
will provide an opportunity for smartphone manufacturers who currently do not have a payment solution on their smartphones to
license that capability from us. We believe that this is a large potential opportunity for us. According to statista.com, worldwide
smartphone sales to end users were approximate 1.5 billion units in 2016. Over 1 billion of these units had Android operating
systems.
Internet
of Things (IoT)
Markets
and Markets estimates that the Internet of Things market size will grow from $157.05 Billion in 2016 to $661.74 Billion by 2021,
at a Compound Annual Growth Rate (CAGR) of 33.3% from 2016 to 2021.
BI
Intelligence forecasts there will be 34 billion devices connected to the internet by 2020, up from 10 billion in 2015. IoT devices
will account for 24 billion, while traditional computing devices (e.g. smartphones, tablets, smartwatches, etc.) will comprise
10 billion. Significantly:
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Nearly $6 trillion will be spent on IoT solutions over
the next five years.
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Businesses will be the top adopter of IoT solutions.
They see three ways the IoT can improve their bottom line by 1) lowering operating costs; 2) increasing productivity; and 3) expanding
to new markets or developing new product offerings.
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Governments are focused on increasing productivity,
decreasing costs, and improving their citizens’ quality of life. They are forecast to be the second-largest adopters of
IoT ecosystems.
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Consumers will lag behind businesses and governments
in IoT adoption. Still, they will purchase a massive number of devices and invest a significant amount of money in IoT ecosystems.
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Health
Care
Industry
Arc reports that the Global Medical Alert Systems market is a diversified healthcare monitoring devices market which specifically
caters to the people in time of emergency and in need of immediate medical attention. The market is segmented into PERS and Nurse
Call System (NCS). The PERS devices are used to call for help and medical care during emergency. These devices are also used by
wide patient pool and people in general, to ensure safety and security when living or travelling alone. The global medical alert
systems market caters to different end-users across the healthcare industry including individual users, hospitals and clinics,
assisted living facilities and senior living facilities. Growing demand for home healthcare devices market is mainly driven by
aging population and rising healthcare costs worldwide. This will spur the usage of medical alert systems across the globe as
they promise safety and medical security while being affordable and easily accessible.
The
PERS market is divided into three device segments: landline-based PERS, mobile PERS and standalone devices. The mobile PERS
market is projected to grow at a CAGR of 6.38% from $1.3 billion in 2014 to reach $1.88 billion by 2020. The increased mobile
penetration will be one of the driving factors for this market segment. According to the U.S. Administration of Aging, out of
the total number of the elderly people who are over the age of 65 years having broadband access at home, 90% of them own a cell
phone. However, standalone devices will be the fastest growing segment of this market owing to their compactness, affordability
and accessibility.
Our
Competition
Finance
The
markets for our products are extremely competitive and are characterized by rapid technological change as a result of technical
developments exploited by our competitors, changing technical needs of customers, and frequent introductions of new features.
We expect competition to increase as other companies introduce products that are competitively priced, that may have increased
performance or functionality, or that incorporate technological advances not yet developed or implemented by us. Some of our present
and potential competitors may have financial, marketing, and research resources substantially greater than ours.
Competitors
in the digital wallet marketplace include:
Google
Wallet
– A mobile payment system developed by Google that allows its users to store debit cards, credit cards, loyalty
cards, and gift cards among other things, as well as redeeming sales promotions on their mobile phone.
Apple
Pay
– A mobile payment service that lets certain Apple mobile devices make payments at the time of retail and online
checkout.
Paypal
– A mobile service that can send money between other PayPal users and friends, track your balances, check in to pay
from ones phone, and order ahead at restaurants.
Samsung/LoopPay
– A mobile payment system that uses Magnetic Secure Transmission to broadcast a signal to a point of sale payment terminal.
This company was acquired by Samsung Electronics Co. in February 2015.
We
believe that our payment products have certain competitive advantages, particularly that our products are capable of using many
different methods of payment whereas most of our competitors rely solely on NFC which has limited penetration at POS terminals
worldwide.
Health
Care
Our
Business Strategy
Our
primary business strategy is to leverage our technology across various industries in combination with established partners that
can establish meaningful distribution. The initial industries that we have identified are Payments, IoT, Healthcare and Security.
We
have established a strategic partnership with WVH an international direct selling travel company, to supply them with a custom
Smartcard. WVH intends to purchase the product from us for its membership, which is currently in excess of 500,000 members. We
intend to pursue similar relationships with partners that have a connected customer base.
More
and more mobile phones are being used as a source of payment for goods and services. We believe that worldwide mobile payment
volume will continue to grow rapidly in the upcoming years. We are actively marketing our Wi-Mag
™
technology to manufacturers
of smartphones to enable them to compete with payment offerings from the two major brands: Samsung and Apple. We believe that
this will result in significant licensing revenue and is a very scalable business model.
We
have developed several proprietary methods of encryption and tokenization that we believe will help reduce fraud in credit card
transactions. These technologies can be applied both at the point of sale and for online transactions. We intend to market our
encryption capabilities to potential financial partners which, if successful could generate a significant source of recurring
revenue per transaction to us.
With
our LogicMark subsidiary we intend to expand distribution through larger distributors leveraging the consumer value proposition
of a one-time device purchase as opposed to a leased monthly solution. We also intend to apply our technology to the next generation
of PERS devices that will have greater functionality and vital sign monitoring capability.
We
continue to develop opportunities for our biometric and sensor capabilities with the U.S. Department of Defense. We are partnered
with established prime contractors that have or are bidding for contracts through which sales may be made. Our current partners
include Battelle Memorial Institute and Verizon Federal Systems. We are a sub-contractor to Battelle Memorial Institute on the
U.S. Department of Defense Technical Information Engineering Services (“TIES”) contract with a contract ceiling of
$995 million. This is an IDIQ (indefinite delivery indefinite quantity) contract and requires approved contractors to bid on task
orders. We have not bid on any task orders to date.
Our
Intellectual Property
Our
ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We currently
rely and will continue to rely primarily on patents and trade secret laws and confidentiality procedures to protect our intellectual
property rights. We have filed the following 25 patents, one of which has been awarded to date:
METHOD
FOR REPLACING TRADITIONAL PAYMENT AND IDENTITY MANAGEMENT SYSTEMS AND COMPONENTS TO PROVIDE ADDITIONAL SECURITY AND A SYSTEM IMPLEMENTING
SAID METHOD
Filed
October 8, 2013
Application
Number 14/049175
METHOD
FOR REPLACING TRADITIONAL PAYMENT AND IDENTITY MANAGEMENT SYSTEMS AND COMPONENTS TO PROVIDE ADDITIONAL SECURITY AND A SYSTEM IMPLEMENTING
SAID METHOD
Continuation
application of 001 with new claims
Filed
August 31, 2016
Application
Number 15/252468
THE
UN-PASSWORD™: RISK AWARE END-TO-END MULTI-FACTOR AUTHENTICATION VIA DYNAMIC PAIRING
Filed
March 17, 2014
Application
Number 14/217,202
Patent
issued August 2, 2016 with patent number 9,407,619.
Continuation
application filed on March 14, 2016 and assigned file number 12188-031
UNIVERSAL
AUTHENTICATION AND DATA EXCHANGE METHOD, SYSTEM AND SERVICE
Filed
March 17, 2014
Application
Number 14/217,289
METHOD
TO LOCALLY VALIDATE IDENTITY WITHOUT PUTTING PRIVACY AT RISK
Application
filed September 1, 2015
Application
Number 14/842,252
DISTRIBUTED
METHOD AND SYSTEM TO IMPROVE COLLABORATIVE SERVICES ACROSS MULTIPLE DEVICES
Application
filed February 8, 2016
Application
Number 15/018,496
VOICE
DIRECTED PAYMENT SYSTEM AND METHOD
Application
filed February 10, 2016
Application
Number 15/040,984
SYSTEM
AND METHOD FOR LOW-POWER CLOSE-PROXIMITY COMMUNICATIONS and energy transfer USING A MINIATURE MULTI-PURPOSE ANTENNA
Application
filed April 4, 2016
Application
Number 15/089,826
SYSTEM
AND METHOD FOR LOW-POWER CLOSE-PROXIMITY COMMUNICATIONS and energy transfer USING A MINIATURE MULTI-PURPOSE ANTENNA
Application
filed November 16, 2016
Application
Number 15/353,018
MULTI-INSTANCE
SHARED AUTHENTICATION (MISA) METHOD AND SYSTEM PRIOR TO DATA ACCESS
Application
filed June 23, 2016
Application
Number 15/191,456
BIOMETRIC,
BEHAVIORAL-METRIC, KNOWLEDGE-METRIC AND ELECTRONIC-METRIC DIRECTED AUTHENTICATION AND TRANSACTION METHOD AND SYSTEM
Application
filed July 5, 2016
Application
Number 15/202,515
PERSONALIZED
TOKENIZATION SYSTEM AND METHOD
Application
filed July 14, 2016
Application
Number 15/210,728
METHODS
AND SYSTEMS RELATED TO MULTI-FACTOR, MULTI-DIMENSIONAL, MATHEMATICAL HIDDEN AND MOTION SECURITY PINS
Filed
August 1, 2016
Application
Number 15/224,998
ELECTRONIC
CRYPTO-CURRENCY MANAGEMENT METHOD AND SYSTEM
Filed
August 1, 2016
Application
Number 15/225780
SYSTEMS
AND DEVICES FOR WIRELESS CHARGING OF A POWERED TRANSACTION CARD AND EMBEDDING ELECTRONICS IN A WEARABLE ACCESSORY
Filed
September 2, 2015
Application
Number 14/843,925
COMPONENTS
FOR ENHANCING OR AUGMENTING WEARABLE ACCESSORIES BY ADDING ELECTRONICS THERETO
Filed
September 2, 2015
Application
Number 14/843930
LOW
BANDWIDTH CRYPTO-CURRENCY TRANSACTION EXECUTION AND SYNCHRONIZATION METHOD AND SYSTEM
Filed
September 7, 2016
Application
Number 15/259023
METHOD
AND SYSTEM TO ORGANIZE AND MANAGE TRANSACTIONS
Filed
December 2, 2016
Application
Number 15/368546
THE
UN-PASSWORD™: RISK AWARE END-TO-END MULTI-FACTOR AUTHENTICATION VIA DYNAMIC PAIRING
Filed
March 14, 2016
Application
Number 15/068834
SYSTEM
AND METHOD TO PERSONALIZE PRODUCTS AND SERVICES
Filed
July 15, 2016
Application
number 15/212184
SYSTEM
AND METHOD TO PERSONALIZE PRODUCTS AND SERVICES
Filed
September 6, 2016
Application
number 15/257101
ACCORDION
ANTENNA STRUCTURE
Filed
April 4, 2016
Application
Number 15/089844
SYSTEM
AND METHOD TO AUTHENTICATE ELECTRONICS USING ELECTRONIC-METRICS
Filed
July 5, 2016
Application
Number 15/202553
SYSTEM
AND METHOD TO DETERMINE USER PREFERENCES
Filed
July 15, 2016
Application
number 15/212163
PREFERENCES
DRIVEN ADVERTISING SYSTEMS AND METHODS
Filed
July 15, 2016
Application
number 15/212161
We
enter into confidentiality agreements with our consultants and key employees, and maintain control over access to and distribution
of our technology, software and other proprietary information. The steps we have taken to protect our technology may be inadequate
to prevent others from using what we regard as our technology to compete with us.
We
do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents
held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar
technologies.
We
may face claims by third parties that our products or technology infringe their patents or other intellectual property rights
in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim
is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary
rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or seek to
obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses
on commercially reasonable terms may not be successful, which would prevent us from selling our products, and in any case, could
substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations.
Corporate
Information
History
We
were incorporated in the state of Delaware on February 8, 2012. We are an emerging growth technology company that is focused on
products, solutions, and services for security. Company’s core technologies are in digital payments, biometric identification;
encryption; sensors and miniaturization. Our proprietary products and solutions serve multiple end markets, including Security,
Healthcare, Finance and Internet of Things (IoT).
Effective
June 25, 2012, the Company acquired 100% of the membership interests in 3D-ID, a limited liability company formed in Florida
in February 2011 and owned by the Company’s founders. Since this was a transaction between entities under common control,
in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations”, Nxt-ID recognized
the net assets of 3D-ID at their carrying amounts in the accounts of Nxt-ID on the date that 3D-ID was organized, February 14,
2011.
On
July 25, 2016, we completed the acquisition of LogicMark, LLC (“LogicMark”) pursuant to an Interest Purchase Agreement
by and among the Company, LogicMark and the holders of all of the membership interests of LogicMark (the “LogicMark Sellers”),
dated May 17, 2016 (the “Interest Purchase Agreement”). Pursuant to the Interest Purchase Agreement, we acquired
all of the membership interests of LogicMark from the LogicMark Sellers for (i) $17.5 million in cash consideration (ii) $2.5
million in a secured promissory note (the “LogicMark Note”) issued to LogicMark Investment Partners, LLC, as representative
of the LogicMark Sellers (the “LogicMark Representative”) (iii) 78,740 shares of common stock, which were issued
upon signing of the Interest Purchase Agreement (the “LogicMark Shares”), and (iv) warrants (the “LogicMark
Warrants,”) to purchase an aggregate of 157,480 shares of
common stock (the “LogicMark Warrant Shares”) for no additional consideration. In addition, we may be required
to pay the LogicMark Sellers earn-out payments of (i) up to $1,500,000 for calendar year 2016 and (ii) up to $5,000,000 for calendar
year 2017 if LogicMark meets certain gross profit targets set forth in the Interest Purchase Agreement. The LogicMark Note originally
was to mature on September 23, 2016 but was extended to October 31, 2016. During 2016 the Company paid down $1,726,031 of the
Seller Note with cash generated from operations as well as from the net cash proceeds received of $1,400,000 from the issuance
of the convertible exchange notes issued on November 29, 2016. The Note accrues interest at a rate of 15% per annum. The
LogicMark Warrants were all exercised on July 27, 2016.
Other
Our
principal executive offices are located at 285 North Drive, Suite D, Melbourne, FL 32904, and our telephone number is (203) 266-2103.
Our website address is
www.nxt-id.com
. The information contained therein or connected thereto shall not be deemed
to be incorporated into this Report. The information on our website is not part of this Report.
We
are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will
remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in
which our annual gross revenue exceed $1 billion, (ii) the date that we become a ’‘large accelerated filer’’
as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which
we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Pursuant to Section 102 of
the JOBS Act, we have provided reduced executive compensation disclosure and have omitted a compensation discussion and analysis
from this Report. Pursuant to Section 107 of the JOBS Act, we have elected to utilize the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
Employees
As
of December 31, 2016, we had a total of 41 full-time employees, 6 in product engineering, 3 in finance and administration, 21
in sales and customer service and 11 in product fulfillment. None of our employees are represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Our future success
depends on our continuing ability to attract and retain highly qualified engineers, graphic designers, computer scientists, sales
and marketing and senior management personnel. In addition, we have independent contractors whose services we are using on an
as-needed basis to assist with the engineering and design of our products.
Our
business, financial condition and operating results are subject to a number of risk factors, both those that are known to us and
identified below and others that may arise from time to time. These risk factors could cause our actual results to differ materially
from those suggested by forward-looking statements in this report and elsewhere, and may adversely affect our business, financial
condition or operating results. If any of these risk factors should occur, moreover, the trading price of our securities could
decline, and investors in our securities could lose all or part of their investment in our securities. These risk factors should
be carefully considered in evaluating our prospects.
Risks
Relating to our Business
We
are uncertain of our ability to generate sufficient revenue and profitability in
the future.
We
continue to develop and refine our business model, but we can provide no assurance that we will be able to generate a sufficient
amount of revenue, from our business in order to achieve profitability. It is not possible for us to predict
at this time the potential success of our business. The revenue and income potential of our proposed business and operations are
currently unknown. If we cannot continue as a viable entity, you may lose some or all of your investment in our Company.
The
Company is an emerging growth company and has incurred net losses of $12,752,928 for the year ended December 31, 2016. As of
December 31, 2016, the Company had cash and stockholders’ equity of $3,299,679 and $2,818,731, respectively. At
December 31, 2016, the Company had a working capital deficiency of $2,073,523. We cannot provide any assurance that we will
be able to raise additional cash from equity financings, secure debt financing, and/or generate revenue from the sales of our
products. If we are unable to secure additional capital, we may be required to curtail our research and development
initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain
operations and meet our obligations.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories and we cannot offer any assurance
as to our future financial results, and you should not rely on the historical financial date included in this prospectus as an
indicator of our future financial performance. You may lose your entire investment.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories upon which to base any assumption
as to the likelihood that we will be successful in implementing our business plan, and we may not be able to generate significant
revenues or achieve profitability. You should consider our business and prospects in light of the risks and difficulties we face
with our limited operating history and should not rely on our past results or the past results of any of such businesses as an
indication of our future performance. There is no assurance that the growth rate we or they have experienced to date will continue.
Even if we generate future revenues sufficient to expand operations, increased infrastructure costs and cost of goods sold and
marketing expenses could impair or prevent us from generating profitable returns. We recognize that if we are unable to generate
significant revenues from our business development, we will not be able to earn profits or potentially continue operations. If
we are unsuccessful in addressing these risks, our business will most likely fail.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
industry segments in which we are operating are evolving rapidly. They are characterized by changing technology, budding industry
standards, frequent new and enhanced product introductions, rapidly changing end-user/consumer preferences and product obsolescence.
In order to continue to compete effectively in these markets, we need to respond quickly to technological changes and to understand
their impact on our customers’ preferences. It may take significant time and resources to respond to these technological
changes. If we fail to keep pace with these changes, our business may suffer. Moreover, developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be unable to keep pace with technological developments
or other market factors. If any of our competitors implement new technologies before we are able to implement them, those competitors
may be able to provide more effective products than ours. Any delay or failure in the introduction of new or enhanced products,
could have a material adverse effect on our business, results of operations and financial condition. Furthermore, our inability
to keep pace with changing industry technology and consumer preferences may cause our inventory to become obsolete at a rate faster
than anticipated, which may result in our taking goodwill impairment charges in past or future acquisitions that negatively impact
our results of operations.
We
have made a significant acquisition in 2016, and we may encounter difficulties in managing our growth, which would adversely affect
our results of operations.
During
2016, we completed the acquisition of LogicMark, and are considering other acquisitions to improve our position in market segments
that we consider to be significant and strategic. This significant expansion of our operations could put significant strain on
our management and our operational and financial resources. To manage future growth, we will need to hire, train, and manage additional
employees, as well as properly integrate personnel from acquired businesses. Concurrent with expanding our operational and marketing
capabilities, we will also need to increase our product development activities. We may not be able to support, financially or
otherwise, future growth, or hire, train, motivate, and manage the required personnel. Our failure to manage growth effectively
could limit our ability to achieve our goals.
Our
success in managing our growth will depend in part on the ability of our executive officers to continue to implement and improve
our operational, management, information and financial control systems and to expand, train and manage our employee base, and
particularly to attract, expand, train, manage and retain a sales force to market our products on acceptable terms. Our inability
to manage growth effectively could cause our operating costs to grow at a faster pace than we currently anticipate, and could
have a material adverse effect on our business, financial condition, results of operations and prospects.
Because
we are an emerging growth company, we expect to incur significant additional operating losses.
The
Company is an emerging growth company. The amount of future losses and when, if ever, we will achieve profitability are uncertain.
Our current products have not generated significant commercial revenue for the Company and there can be no guarantee that we can
generate sufficient revenues from the commercial sale of our products in the near future to fund our ongoing capital needs.
We
have a limited operating history upon which you can gauge our ability to obtain profitability.
We
have a limited operating history and our business and prospects must be considered in light of the risks and uncertainties to
which emerging growth companies are exposed. We cannot provide assurances that our business strategy will be successful or that
we will successfully address those risks and the risks described herein. Most important, if we are unable to secure future capital,
we may be unable to continue our operations. We may incur losses on a quarterly or annual basis for a number of reasons, some
of which may be outside our control.
If
we cannot obtain additional capital required to finance our research and development efforts, our business may suffer and you
may lose the value of your investment.
We
may require additional funds to further execute our business plan and expand our business. If we are unable to obtain additional
capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. If this
occurs, you may lose part or all of your investment. We will have ongoing capital needs as we expand our business. If we
raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will
be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that
have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include
restrictive financial and operating covenants that would limit our ability to compete and expand. There can be no assurance that
we will be able to obtain the additional financing we may need to fund our business, or that such financing will be available
on terms acceptable to us.
We
will require additional capital in the future to develop the NFC Wocket®. If we do not obtain any such additional financing,
if required, our business prospects, financial condition and results of operations will be adversely affected.
We
will require additional capital in the future to develop the NFC Wocket®. We may not be able to secure adequate additional
financing when needed on acceptable terms, or at all. To execute our business strategy, we may issue additional equity securities
in public or private offerings, potentially at a price lower than the market price of our common stock at the time of such issuance.
If we cannot secure sufficient additional funding we may be forced to forego strategic opportunities or delay, scale back and/or
eliminate future product development.
We
face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial
or other resources to maintain or improve our competitive position.
A
number of other companies engage in the business of developing applications for facial recognition for access control. The market
for biometric security products is intensely competitive, and we expect competition to increase in the future from established
competitors and new market entrants. Our current competitors include both emerging or developmental stage companies, such as ourselves,
as well as larger companies. Many of our existing competitors have, and some of our potential competitors could have, substantial
competitive advantages such as:
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Greater
name recognition and longer operating histories;
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Larger
sales and marketing budgets and resources;
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Broader
distribution and established relationships with distribution partners and end-customers;
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Greater
customer support resources;
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Greater
resources to make acquisitions;
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Larger
and more mature intellectual property portfolios; and
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Substantially
greater financial, technical, and other resources.
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In
addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on
other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing
our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Conditions
in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors
or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments
in research and development may invent similar or superior products and technologies that compete with our products and technology.
Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that
may further enhance their resources.
Our
markets are subject to technological change and our success depends on our ability to develop and introduce new products.
Each
of the governmental and commercial markets for our products is characterized by:
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Changing
technologies;
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Changing
customer needs;
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Frequent
new product introductions and enhancements;
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Increased
integration with other functions; and
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Product
obsolescence.
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Our
success will be dependent in part on the design and development of new products. To develop new products and designs for our target
markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand
our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance
that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted on
a timely basis, or at all, or that the potential products will achieve market acceptance. Our failure to develop, obtain necessary
regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on
our business, financial condition and results of operations.
Claims
by others that we infringe their intellectual property rights could increase our expenses and delay the development of our business.
As a result, our business and financial condition could be harmed.
Our
industries are characterized by the existence of a large number of patents as well as frequent claims and related litigation regarding
patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents,
patents that may be issued in the future, or other intellectual property rights of others.
We
do not have the resources to conduct exhaustive patent searches to determine whether the technology used in our products infringe
patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar
technologies.
We
may face claims by third parties that our products or technology infringe their patents or other intellectual property rights.
Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid,
and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights,
we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses
from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially
reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially
increase our costs and have a material adverse effect on our business, financial condition and results of operations.
Existing
or pending patents could adversely affect our business.
On
November 12, 2015, we received a complaint that one of our technologies infringed upon one or more claims of a patent(s) issued
to the claimant. The claimant has subsequently acknowledged that we are not currently infringing on their patent(s) as the
technology in question is not commercially available at the current time. We are in the process of negotiating a future royalty
agreement with the claimant should we decide to introduce this technology in the future.
We
may not be able to protect our intellectual property rights adequately.
Our
ability to compete for government contracts is affected, in part, by our ability to protect our intellectual property rights.
We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and
licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps
we take to protect our proprietary information will be adequate to prevent misappropriation of our technology or protect that
proprietary information. The validity and breadth of claims in technology patents involve complex legal and factual questions
and, therefore, may be highly uncertain. Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable,
or that the patents of others will not have an adverse effect on our ability to do business. In addition, the enforcement of laws
protecting intellectual property may be inadequate to protect our technology and proprietary information.
We
may not have the resources to assert or protect our rights to our patents and other intellectual property. Any litigation or proceedings
relating to our intellectual property, whether or not meritorious, will be costly and may divert the efforts and attention of
our management and technical personnel.
We
also rely on other unpatented proprietary technology, trade secrets and know-how and no assurance can be given that others will
not independently develop substantially equivalent proprietary technology, techniques or processes, that such technology or know-how
will not be disclosed or that we can meaningfully protect our rights to such unpatented proprietary technology, trade secrets,
or know-how. Although we intend to enter into non-disclosure agreements with our employees and consultants, there can be no assurance
that such non-disclosure agreements will provide adequate protection for our trade secrets or other proprietary know-how.
Our
success will depend, in part, on our ability to obtain new patents.
To
date, we have applied for (25) United States patents, one of which has been awarded and our success will depend, in
part, on our ability to obtain patent and trade secret protection for proprietary technology that we currently possess or
that we may develop in the future. No assurance can be given that any pending or future patent applications will issue as
patents, that the scope of any patent protection obtained will be sufficient to exclude competitors or provide competitive
advantages to us, that any of our patents will be held valid if subsequently challenged or that others will not claim rights
in or ownership of the patents and other proprietary rights held by us.
Furthermore,
there can be no assurance that our competitors have not or will not independently develop technology, processes or products that
are substantially similar or superior to ours, or that they will not duplicate any of our products or design around any patents
issued or that may be issued in the future to us. In addition, whether or not patents are issued to us, others may hold or receive
patents which contain claims having a scope that covers products or processes developed by us.
We
may not have the resources to adequately defend any patent infringement litigation or proceedings. Any such litigation or proceedings,
whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management
and technical personnel. In addition, we may be required to obtain licenses to patents or proprietary rights from third parties.
There can be no assurance that such licenses will be available on acceptable terms if at all. If we do not obtain required licenses,
we could encounter delays in product development or find that the development, manufacture or sale of products requiring such
licenses could be foreclosed. Accordingly, challenges to our intellectual property, whether or not ultimately successful, could
have a material adverse effect on our business and results of operations.
We
rely on a third party for licenses relating to a critical component of our technology. The failure of such licensor would materially
and adversely affect our business and product offerings.
We
currently license technology for a critical component of our current product offerings from a third party. The third party’s
independent registered public accounting firm included an explanatory paragraph in its audit report as it relates to the third
party’s ability to continue as a going concern in its recent financial statements. If our licensor were to fail, it could
impact our license arrangement and impede our ability to further commercialize our technology. In the event we were to lose our
license or our license were to be renegotiated as a result of our licensor’s failure, our ability to manage our business
would suffer and it would significantly harm our business, operating results and financial condition.
Our
future success depends on the continued service of management, engineering and sales personnel and our ability to identify, hire
and retain additional personnel.
Our
success depends, to a significant extent, upon the efforts and abilities of members of senior management. We have entered into
an employment agreement with our Chief Executive Officer, but have not entered into an employment agreement with our Chief Financial
officer or Chief Technology Officer, and we have no current plans to use employment agreements as a tool to attract and retain
new hires of key personnel that we may make in the future. The loss of the services of one or more of our senior management or
other key employees could adversely affect our business. We currently maintain a key person life insurance policy on our Chief
Executive Officer only.
There
is intense competition for qualified employees in our industry, particularly for highly skilled design, applications, engineering
and sales people. We may not be able to continue to attract and retain developers, managers, or other qualified personnel necessary
for the development of our business or to replace qualified individuals who may leave us at any time in the future. Our anticipated
growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering
staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail
to recruit engineers or other technical and management personnel, our business could be harmed.
The
requirements of being a public company may strain our resources and divert management’s attention.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank
Act and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal
and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems
and resources. The Exchange Act requires, among other things, that we file annual and current reports with respect to our business
and operating results.
As
a result of disclosure of information in this annual report and in filings required of a public company, our business and financial
condition is more visible, which we believe may result in threatened or actual litigation, including by competitors and other
third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not
result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert
resources of our management and harm our business and operating results.
Periods
of rapid growth and expansion could place a significant strain on our resources, including our employee base, which could negatively
impact our operating results.
We
may experience periods of rapid growth and expansion, which may place significant strain and demands on our management, our operational
and financial resources, customer operations, research and development, marketing and sales, administrative, and other resources.
To manage our possible future growth effectively, we will be required to continue to improve our management, operational and financial
systems. Future growth would also require us to successfully hire, train, motivate and manage our employees. In addition, our
continued growth and the evolution of our business plan will require significant additional management, technical and administrative
resources. If we are unable to manage our growth successfully we may not be able to effectively manage the growth and evolution
of our current business and our operating results could suffer.
We
depend on contract manufacturers, and our production and products could be harmed if it is unable to meet our volume and quality
requirements and alternative sources are not available.
We
rely on contract manufacturers to provide manufacturing services for our products. If these services become unavailable, we would
be required to identify and enter into an agreement with a new contract manufacturer or take the manufacturing in-house. The loss
of our contract manufacturers could significantly disrupt production as well as increase the cost of production, thereby increasing
the prices of our products. These changes could have a material adverse effect on our business and results of operations.
Our
insiders and affiliated parties beneficially own a significant portion of our stock.
As
of the date of hereof, our executive officers, directors, and affiliated parties beneficially own approximately 32.93% of our
common stock. As a result, our executive officers, directors and affiliated parties will have significant influence to:
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or defeat the election of our directors;
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Amend
or prevent amendment of our certificate of incorporation or bylaws;
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Effect
or prevent a merger, sale of assets or other corporate transaction; and
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Affect
the outcome of any other matter submitted to the stockholders for vote.
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In
addition, any sale of a significant amount of our common stock held by our directors and executive officers, or the possibility
of such sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing any gains from our common stock.
We
are presently a small company with too limited resources and personnel to establish a comprehensive system of
internal controls. If we fail to maintain an effective system of internal controls, we would not be able to accurately report
our financial results on a timely basis or prevent fraud. As a result, current and potential stockholders could lose
confidence in our financial
reporting, which would harm our business and the trading price of our stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, our brand and operating results would be harmed. We may in the future discover areas
of our internal controls that need improvement. For example, because of size and limited resources, our external auditors may
determine that we lack the personnel and infrastructure necessary to properly carry out an independent audit function. Although
we believe that we have adequate internal controls for a company with our size and resources, we are not certain that the measures
that we have in place will ensure that we implement and maintain adequate controls over our financial processes and reporting
in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation,
would harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls would also
cause investors to lose confidence in our reported financial information, which would have a negative effect on our company and,
if a public market develops for our securities, the trading price of our stock.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely
basis.
As
of December 31, 2016, we have identified certain matters that constituted a material weakness in our internal controls over financial
reporting. Specifically, we have difficulty in accounting for complex accounting transactions due to an insufficient number of
accounting personnel with experience in that area and limited segregation of duties within our accounting and financial reporting
functions.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our
ability to grow successfully requires an effective planning and management process. The expansion and growth of our business
could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully,
we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems,
procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond
effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s
business, financial condition, results of operations and future prospects.
We
are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions
from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long
as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that
are not applicable to other public companies that are not emerging growth companies, including not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be
an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion,
if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock held
by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, in which
case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find
our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under
the JOBS Act, emerging growth companies may also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
We
may not be able to access the equity or credit markets.
We
face the risk that we may not be able to access various capital sources including investors, lenders, or suppliers. Failure to
access the equity or credit markets from any of these sources could have a material adverse effect on the Company’s business,
financial condition, results of operations, and future prospects.
Persistent
global economic trends could adversely affect our business, liquidity and financial results.
Although
improving, persistent global economic conditions, particularly the scarcity of capital available to smaller businesses, could
adversely affect us, primarily through limiting our access to capital and disrupting our clients’ businesses. In addition,
continuation or worsening of general market conditions in economies important to our businesses may adversely affect our clients’
level of spending and ability to obtain financing, leading to us being unable to generate the levels of sales that we require.
Current and continued disruption of financial markets could have a material adverse effect on the Company’s business, financial
condition, results of operations and future prospects.
We
may seek or need to raise additional funds. Our ability to obtain financing for general corporate and commercial purposes or acquisitions
depends on operating and financial performance, and is also subject to prevailing economic conditions and to financial, business
and other factors beyond our control. The global credit markets and the financial services industry have been experiencing a period
of unprecedented turmoil characterized by the bankruptcy, failure or sale of various financial institutions. An unprecedented
level of intervention from the U.S. and other governments has been seen. As a result of such disruption, our ability to raise
capital may be severely restricted and the cost of raising capital through such markets or privately may increase significantly
at a time when we would like, or need, to do so. Either of these events could have an impact on our flexibility to fund our business
operations, make capital expenditures, pursue additional expansion or acquisition opportunities, or make another discretionary
use of cash and could adversely impact our financial results.
Although
recent trends point to continuing improvements, there is still lingering volatility and uncertainty. A change or disruption in
the global financial markets for any reason may cause consumers, businesses and governments to defer purchases in response to
tighter credit, decreased cash availability and declining consumer confidence. Accordingly, demand for our products could decrease
and differ materially from current expectations. Further, some of our customers may require substantial financing in order to
fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases
of our products and meet their payment obligations to us or possible insolvencies of our customers could result in decreased customer
demand, an impaired ability for us to collect on outstanding accounts receivable, significant delays in accounts receivable payments,
and significant write-offs of accounts receivable, each of which could adversely impact our financial results.
Rising
interest rates could adversely impact our business.
Changes
in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:
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rising
interest rates would increase our cost of capital; and
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rising
interest rates may negatively impact our ability to secure financing on favorable terms and may impact our ability to provide
cost-effective financing to our end-customers or end-users, where applicable.
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Rising
interest rates could generally harm our business and financial condition.
Risks
Related to Our Biometric Recognition Applications and Related Products
Our
biometric products and technologies may not be accepted by the intended commercial consumers of our products, which could harm
our future financial performance.
There
can be no assurance that our biometric systems will achieve wide acceptance by commercial consumers of such security-based products,
and/or market acceptance generally. The degree of market acceptance for products and services based on our technology will also
depend upon a number of factors, including the receipt and timing of regulatory approvals, if any, and the establishment and demonstration
of the ability of our proposed device to provide the level of security in an efficient manner and at a reasonable cost. Our failure
to develop a commercial product to compete successfully with existing security technologies could delay, limit or prevent market
acceptance. Moreover, the market for new biometric-based security systems is largely undeveloped, and we believe that the overall
demand for mobile biometric-based security systems technology will depend significantly upon public perception of the need for
such a level of security. There can be no assurance that the public will believe that our level of security is necessary or that
private-industry will actively pursue our technology as a means to solve their security issues. Long-term market acceptance of
our products and services will depend, in part, on the capabilities, operating features and price of our products and technologies
as compared to those of other available products and services. As a result, there can be no assurance that currently available
products, or products under development for commercialization, will be able to achieve market penetration, revenue growth or profitability.
Our
biometric applications may become obsolete if we do not effectively respond to rapid technological change on a timely basis.
The
biometric identification and personal identification industries are characterized by rapid technological change, frequent new
product innovations, changes in customer requirements and expectations and evolving industry standards. If we are unable to keep
pace with these changes, our business may be harmed. Products using new technologies, or emerging industry standards, could make
our technologies less attractive. In addition, we may face unforeseen problems when developing our products, which could harm
our business. Furthermore, our competitors may have access to technologies not available to us, which may enable them to produce
products of greater interest to consumers or at a more competitive cost.
Our
biometric applications are new and our business model is evolving. Because of the new and evolving nature of biometric technology,
it is difficult to predict the size of this specialized market, the rate at which the market for our biometric applications will
grow or be accepted, if at all, or whether other biometric technologies will render our applications less competitive or obsolete.
If the market for our biometric applications fails to develop or grows slower than anticipated, we would be significantly and
materially adversely affected.
If
our products and services do not achieve market acceptance, we may never have significant revenues or any profits.
If
we are unable to operate our business as contemplated by our business model or if the assumptions underlying our business model
prove to be unfounded, we could fail to achieve our revenue and earnings goals within the time we have projected, or at all, which
would have a detrimental effect on our business. As a result, the value of your investment could be significantly reduced
or completely lost.
We
may in the future experience competition from other biometric application developers.
Competition
in the development of biometric recognition is expected to become more intense. Competitors range from university-based
research and development graphics labs to development-stage companies and major domestic and international companies. Many
of these entities have financial, technical, marketing, sales, distribution and other resources significantly greater than those
of our company. There can be no assurance that we can continue to develop our biometric technologies or that present or
future competitors will not develop technologies that render our biometric applications obsolete or less marketable or that we
will be able to introduce new products and product enhancements that are competitive with other products marketed by industry
participants.
We
may fail to create new applications for our products and enter new markets, which would have an adverse effect on our operations,
financial condition and prospects.
Our
future success depends in part on our ability to develop and market our technology for applications other than those currently
intended. If we fail in these goals, our business strategy and ability to generate revenues and cash flow would be significantly
impaired. We intend to expend significant resources to develop new technology, but the successful development of new technology
cannot be predicted and we cannot guarantee we will succeed in these goals.
Our
products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers
and revenue and result in costly litigation or liability
.
Our
products may contain defects for many reasons, including defective design or manufacture, defective material or software interoperability
issues. Products as complex as those we offer, frequently develop or contain undetected defects or errors. Despite testing defects
or errors may arise in our existing or new products, which could result in loss of revenue, market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, and increased service and maintenance cost. Defects
or errors in our products and solutions might discourage customers from purchasing future products. Often, these defects are not
detected until after the products have been shipped. If any of our products contain defects or perceived defects or have reliability,
quality or compatibility problems or perceived problems, our reputation might be damaged significantly, we could lose or experience
a delay in market acceptance of the affected product or products and might be unable to retain existing customers or attract new
customers. In addition, these defects could interrupt or delay sales. In the event of an actual or perceived defect or other problem,
we may need to invest significant capital, technical, managerial and other resources to investigate and correct the potential
defect or problem and potentially divert these resources from other development efforts. If we are unable to provide a solution
to the potential defect or problem that is acceptable to our customers, we may be required to incur substantial product recall,
repair and replacement and even litigation costs. These costs could have a material adverse effect on our business and operating
results.
We
will provide warranties on certain product sales and allowances for estimated warranty costs are recorded during the period of
sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair
or to replace the products under warranty. We will establish warranty reserves based on our best estimates of warranty costs for
each product line combined with liability estimates based on the prior twelve months’ sales activities. If actual
return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional
cost of sales may be required in future periods. In addition, because our customers rely on secure authentication and identification
of cardholders to prevent unauthorized access to programs, PCs, networks, or facilities, a malfunction of or design defect in
its products (or even a perceived defect) could result in legal or warranty claims against us for damages resulting from security
breaches. If such claims are adversely decided against us, the potential liability could be substantial and have a material adverse
effect on our business and operating results. Furthermore, the possible publicity associated with any such claim, whether or not
decided against us, could adversely affect our reputation. In addition, a well-publicized security breach involving smart card-based
or other security systems could adversely affect the market’s perception of products like ours in general, or our products
in particular, regardless of whether the breach is attributable to our products. Any of the foregoing events could cause demand
for our products to decline, which would cause its business and operating results to suffer.
Risks
Related to our Securities
The
market price for our common stock is particularly volatile given our status as a relatively unknown company with a small and thinly
traded public float, and lack of profits, which could lead to wide fluctuations in our share price. You may be unable to sell
your common shares at or above your purchase price, which may result in substantial losses to you.
The
market for our common stock is characterized by significant price volatility when compared to the shares of larger, more established
companies that trade on a national securities exchange and have large public floats, and we expect that our share price will continue
to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, as noted above, our common stock is, compared to the shares of such
larger, more established companies, sporadically and thinly traded. The price for our shares could, for example, decline precipitously
in the event that a large number of our common stock is sold on the market without commensurate demand. Secondly, we are a speculative
or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of
a larger, more established company that trades on a national securities exchange and has a large public float. Many of these factors
are beyond our control and may decrease the market price of our common stock regardless of our operating performance.
If
we are not able to comply with the applicable continued listing requirements or standards of the NASDAQ Capital Market, NASDAQ
could delist our common stock.
Our
common stock is currently listed on the NASDAQ Capital Market (“NASDAQ”). In order to maintain that listing, we must
satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence
and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements.
There can be no assurances that we will be able to comply with the applicable listing standards. Although we are currently in
compliance with our listing standards, we have, in the past, fallen out of compliance and may in the future fall out of compliance.
If we are unable to maintain compliance with these NASDAQ requirements, our common stock will be delisted from NASDAQ.
In
the event that our common stock is delisted from the NASDAQ Capital Market and is not eligible for quotation on another market
or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board
established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult
to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage
by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be
difficult for us to raise additional capital if we are not listed on a major exchange.
In
the event that our common stock is delisted from NASDAQ, U.S. broker-dealers may be discouraged from effecting transactions in
shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The
SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed
to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Exchange
Act. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity
securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is
provided by the exchange or system). Our shares of common stock have in the past constituted, and may again in the future constitute,
“penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon
U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could
severely limit the market liquidity of such shares of common stock and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor”
(generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with his or her spouse) must make a special suitability determination for the purchaser and must receive the
purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise
exempt. In addition, the “penny stock” regulations require the U.S. broker-dealer to deliver, prior to any
transaction involving a “penny stock”, a disclosure schedule prepared in accordance with SEC standards relating
to the “penny stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S.
broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative
and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing
recent price information with respect to the “penny stock” held in a customer’s account and information
with respect to the limited market in “penny stocks”.
Stockholders
should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns
of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;
and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate
in the market, management will strive within the confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
If
and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly
volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired
them.
The
market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors
that are beyond our control, including, but not limited to:
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●
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Variations
in our revenues and operating expenses;
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●
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Actual
or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding
our common stock, other comparable companies or our industry generally;
|
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●
|
Market
conditions in our industry, the industries of our customers and the economy as a whole;
|
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●
|
Actual
or expected changes in our growth rates or our competitors’ growth rates;
|
|
●
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Developments
in the financial markets and worldwide or regional economies;
|
|
●
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Announcements
of innovations or new products or services by us or our competitors;
|
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Announcements
by the government relating to regulations that govern our industry;
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Sales
of our common stock or other securities by us or in the open market; and
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Changes
in the market valuations of other comparable companies.
|
In
addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading
price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading
price of our shares might also decline in reaction to events that affect other companies in our industry, even if these events
do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. In
the past, following periods of volatility in the market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention
and resources, which could materially and adversely affect our business, operating results and financial condition.
We
do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends.
The
payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors
affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if our stock price appreciates.
We
currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate
paying any cash dividends on our common stock in the foreseeable future.
You
may experience additional dilution in the future.
We
may acquire other technologies or finance strategic alliances by issuing equity, which may result in additional dilution to our
stockholders.
We
could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder
interests and impairing their voting rights; and provisions in our charter documents could discourage a takeover that stockholders
may consider favorable.
Our
certificate of incorporation authorizes the issuance of up to 10,000,000 shares of “blank check” preferred stock
with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of
directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance
of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For
example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control of our company.
Financial
Industry Regulatory Authority (“FINRA”) sales practice requirements may limit a stockholder’s ability to buy
and sell our common stock.
FINRA
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low priced securities will not be suitable for certain customers. FINRA requirements will
likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect
of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market
in our common stock, reducing a stockholder’s ability to resell shares of our common stock.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
Properties
Our
principal executive offices are located in Melbourne, Florida. On October 3, 2014, the Company entered into a lease agreement
for this office space, which includes customer service and warehouse space. The lease term which commenced on January 1, 2015
is for three years with a current monthly rent of $6,837 which includes the base rent, an escrow for taxes and insurance, common
area maintenance charges and applicable sales tax.
We
also retain an office in Oxford, Connecticut. On September 12, 2014, the Company entered into a lease agreement for this office
space. The lease term commenced on October 1, 2014 and the lease term was for two years. The Company is currently leasing this
office space on a month-to-month basis with a monthly rent of $2,450.
On
October 16, 2013, the Company entered into a lease agreement for office space in Palm Bay, Florida. The term of the lease commenced
on May 1, 2014 and is for three years with a monthly rent of $1,250 per month in the first year, increasing 3% annually thereafter.
As
a result of the LogicMark acquisition on July 25, 2016, we assumed two facility leases. One of the leases is for office space
located in Plymouth, Minnesota. This lease agreement expires in February 2018 and the current monthly rent is $1,170.
In addition, LogicMark also subleases office and warehouse space located in Louisville, Kentucky. The monthly rent for the space
is $8,850 and this sublease agreement is due to expire in July 2017.
Item
3.
|
Legal
Proceedings
|
On
November 12, 2015, we received a complaint that one of our technologies infringed upon one or more claims of a patent(s) issued
to the claimant. The claimant has subsequently acknowledged that we are not currently infringing on their patent(s) as the
technology in question is not commercially available at the current time. We are in the process of negotiating a future royalty
agreement with the claimant should we decide to introduce this technology in the future.
From
time to time we may be involved in various claims and legal actions arising in the ordinary course of our business. Other
than as described above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company
or any of our subsidiaries, threatened against or affecting our company, or any of our subsidiaries in which an adverse decision
could have a material adverse effect upon our business, operating results, or financial condition.
Item
4.
|
Mine
Safety Disclosures
|
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITY
Nxt-ID,
Inc. (“Nxt-ID” or the “Company”) was incorporated in the State of Delaware on February 8, 2012. Nxt-ID
is a security technology company providing security for finance, assets and healthcare. The Company’s innovative MobileBio
solution mitigates risks associated with mobile computing, m-commerce and smart OS-enabled devices. With extensive experience
in biometric identity verification, security, privacy, encryption and data protection, payments, miniaturization and sensor technologies,
the Company partners with industry leading companies to provide solutions for modern payment and the Internet of Things applications.
The Company’s wholly-owned subsidiary, LogicMark, LLC (“LogicMark”), manufactures and distributes non-monitored
and monitored personal emergency response systems sold through the United States Department of Veterans Affairs, healthcare durable
medical equipment dealers and distributors and monitored security dealers and distributors.
The Company operates its business in one segment,
Hardware and Software Security Systems and Applications. The Company evaluates the performance of its business on, among other
things, profit and loss from operations before interest, headquarters’ expense allocations, stock-based compensation expense,
income taxes and amortization related to certain intangible assets.
On
June 25, 2012, Nxt-ID, a company having similar ownership as 3D-ID, acquired 100% of the membership interests in 3D-ID (the “Acquisition”)
in exchange for 20,000,000 shares of Nxt-ID common stock. Since this was a transaction between entities under common control,
in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations”, Nxt-ID recognized
the net assets of 3D-ID at their carrying amounts in the accounts of Nxt-ID on the date that 3D-ID was organized.
3D-ID,
LLC (“3D-ID”) was organized and registered in the State of Florida on February 14, 2011.
On
July 25, 2016, the Company completed the acquisition of LogicMark, LLC (“LogicMark”) pursuant to an
Interest Purchase Agreement by and among the Company, LogicMark and the holders of all of the membership interests of
LogicMark (the “Logicmark Sellers”), dated May 17, 2016 (the “Interest Purchase
Agreement”). Pursuant to the Interest Purchase Agreement, the Company acquired all of the membership interests of
Logicmark from the Logicmark Sellers for (i) $17.5 million in cash consideration (ii) $2.5 million in a secured promissory
note
(the “Logicmark Note”)
issued to Logicmark Investment Partners, LLC, as representative of the Logicmark Sellers (the “Logicmark
Representative”)
(iii) 78,740 shares of common stock, which were issued upon
signing of the Interest Purchase Agreement (the “Logicmark Shares”), and (iv) warrants (the “Logicmark
Warrants,”) to purchase an aggregate of 157,480 shares of common stock (the “Logicmark Warrant
Shares”) for no additional consideration. In addition, the Company may be required to pay the Logicmark Sellers
earn-out payments of (i) up to $1,500,000 for calendar year 2016 and (ii) up to $5,000,000 for calendar year 2017 if
LogicMark meets certain gross profit targets set forth in the Interest Purchase Agreement.
The Logicmark Note
originally was to mature on September 23, 2016 but was extended to April 15, 2017. During 2016 the Company paid down
$1,726,031 of the Seller Note with cash generated from operations as well as from the net cash proceeds received of
$1,400,000 from the issuance of the convertible exchange notes issued on November 29, 2016. The Note accrues interest at a
rate of 15% per annum.
The Logicmark Warrants were all exercised on July 27,
2016.
NOTE
2 -
RECLASSIFICATION OF DEFERRED DEBT ISSUANCE COSTS AND Reverse Stock
Split
On
September 1, 2016, the Company’s board of directors and stockholders approved a resolution to amend the Company’s
Certificate of Incorporation and to authorize the Company to effect a reverse split of the Company’s outstanding common
stock at a ratio of 1-for-10 (the “Reverse Split”). On September 9, 2016, the Company effected the Reverse Split.
Upon effectiveness of the Reverse Split, every 10 shares of outstanding common stock decreased to one share of common stock. Throughout
this report, the Reverse Split was retroactively applied to all periods presented.
In
April 2015, the FASB issued Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30),
Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which provides guidance for simplifying the
presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a
direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance will
be effective for fiscal years beginning after December 15, 2015, and early adoption is permitted for financial statements
that have not been previously issued. The standard requires application on a retrospective basis and represents a change in
accounting principle. In addition, in August 2015, Accounting Standards Update 2015-15, Interest - Imputation of Interest
(“ASU 2015-15”), was released, which codified guidance pursuant to the SEC Staff Announcement at the June 18,
2015 Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance costs
associated with line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance
costs related to line-of-credit arrangements, ASU 2015-15 states the SEC staff would not object to an entity deferring and
presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term
of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement.
In accordance with the 2016 adoption of Accounting Standards Update 2015-03, the Company revised the
presentation of its previously reported December 31, 2015 Consolidated Balance Sheet to reflect a deduction of $52,810 of
deferred debt issuance costs from the amount of convertible notes payable previously presented.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - LIQUIDITY AND MANAGEMENT PLANS
The
Company is an emerging growth entity and incurred net losses of $12,752,928 during the year ended December 31, 2016. As
of December 31, 2016 the Company had a working capital deficiency of $2,073,523 and stockholders’ equity of $2,818,731.
As of December 31, 2015, the Company had substantial doubt about its ability to continue as a going concern as it had no
revenues and required additional cash to execute its business plan. The accompanying 2015 financial statements do not include
any adjustments that might be necessary should the Company be unable to continue as a going concern. As of December 31,
2016, the Company had alleviated this concern as it had raised additional capital and acquired a profitable
revenue generating subsidiary, LogicMark LLC. In addition the Company began to recognize revenues from its contract with
World Ventures Holdings Inc. In order to execute the Company’s long-term strategic plan to develop and commercialize
its core products, fulfill its product development commitments and fund its obligations as they come due, the Company may
need to raise additional funds, through public or private equity offerings, debt financings, or other means.
During
the twelve months ended December 31, 2016, the Company raised $1,869,775 in net proceeds from the issuance of the
Company’s Series A Convertible Preferred Stock, $0.0001 par value (the “Series A Preferred Stock”)
and $400,000 from the issuance of a promissory note that was converted into Series A Preferred Stock. In addition, the
Company received $4,090,000 in net proceeds from the issuance of the Company’s Series B Convertible Preferred Stock,
$0.0001 par value (the “Series B Preferred Stock”). However, the Company can give no assurance that any cash
raised subsequent to December 31, 2016 will be sufficient to execute its business plan or meet its obligations. The Company can give no assurance that additional funds will
be available on reasonable terms, or available at all, or that it will generate sufficient revenue to alleviate
these conditions.
The
Company’s ability to execute its business plan is dependent upon its ability to raise additional equity, secure debt financing,
and/or generate revenue. Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue
to fund its operations, the Company would need to curtail certain of its operational activities.
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES IN THE FINANCIAL STATEMENTS
The
preparation of consolidated financial statements in conformity with generally accepted accounting
principles (“GAAP”) 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 consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s management
evaluates these significant estimates and assumptions included those related to the fair value of acquired assets and
liabilities, stock based compensation, derivative instruments, income taxes and inventories, and other
matters that affect the consolidated financial statements and disclosures. Actual results could differ from those
estimates.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries, 3D-ID and LogicMark. Intercompany
balances and transactions have been eliminated in consolidation.
CASH
The
Company considers all highly liquid securities with an original maturity date of three months or less when purchased to be cash
equivalents. Due to their short-term nature, cash equivalents are carried at cost, which approximates fair value. At December
31, 2016 and 2015, the Company had no cash equivalents.
RESTRICTED
CASH
At
December 31, 2016 and 2015, the Company had restricted cash of $40,371 and $1,534,953, respectively. The restricted
cash balance at December 31, 2015 included $1,500,000 received on December 31, 2015 as a result of the World
Ventures Holdings transaction, described elsewhere in the notes to these consolidated financial statements. Restricted cash
also includes amounts held back by the Company’s third party credit card processor for potential customer refunds,
claims and disputes.
CONCENTRATIONS
OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The
Company maintains its cash balances in large well-established financial institutions located in the United States. At times,
the Company’s cash balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance limits.
During
the year ended December 31, 2016, the Company recognized revenue of $1,357,413 from WVH a related party. At December 31, 2016,
the Company’s accounts receivable balance included $621,724 due from WVH.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
RECOGNITION
The
Company recognizes revenue when persuasive evidence of an arrangement exists, the service has been rendered or product delivery
has occurred, the price is fixed or readily determinable and collectability of the sale is reasonably assured. The Company’s
wocket® smart wallet sales comprise multiple element arrangements including both the wocket® smart wallet device itself
as well as unspecified future upgrades. The Company offers to all of its end-consumer customers a period of fourteen days post
the actual receipt date in which to return their wocket® smart wallet. The Company was unable to reliably estimate returns
at the time shipments were made during the year’s ended December 31, 2016 and 2015 due to lack of return history. Accordingly,
the Company has recognized revenue only on those shipments whose fourteen day return period had lapsed by December 31, 2016 or
2015. Such sales during the fourteen day period ending December 31, 2016 or 2015 were not material. The Company accrues for
the estimated costs associated with the one year wocket® smart wallet warranty at the time revenue associated with the sale
is recorded, and periodically updates its estimated warranty cost based on actual experience. At December 31, 2016 and 2015, such
amounts were not material.
SHIPPING
AND HANDLING
Amounts
billed to customers for shipping and handling are included in revenues. The related freight charges incurred by the Company are
included in cost of goods and were not material for either the years ended December 31, 2016 or 2015.
Accounts
Receivable
For
the year ended December 31, 2016, the Company’s revenues included shipments of the wocket® smart wallet
to customers who placed orders in 2016. For the year ended December 31, 2015, the Company’s revenues related to
shipments of the wocket® smart wallet to customers who pre-ordered the product in 2014 as well as to those customers
who ordered the product in 2015. In addition, the revenues for the year ended December 31, 2016 and 2015 included resale
sales of the wocket® smart wallet to retail customers who resell the wocket® smart wallet through their
respective distribution channels. The aggregate amount of these resale sales was $33,540 and $167,164 for the years ended
December 31, 2016 and 2015, respectively. The terms and conditions of these sales provide the retail customers with trade
credit terms. In addition, these sales were made to the retailers with no rights of return and are subject to the normal
warranties offered to the ultimate consumer for product defects.
Accounts
receivable
is stated at net realizable value. The Company regularly reviews accounts receivable balances and
adjusts the receivable reserves as necessary whenever events or circumstances indicate the carrying value may not be
recoverable. At December 31, 2016, the Company had no allowance for doubtful accounts.
INVENTORY
Effective
October 1, 2015 for application prospectively, the Company adopted FASB Accounting Standards Update No. 2015-11,
simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory is measured at the
lower of cost or net realizable value, defined as estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal and transportation. Previously, inventory was measured at the lower of
cost or market. The Company adopted ASU 2015-11 in connection with its fourth quarter 2015 inventory valuation review, and
prompted by the impact of EMV chip point of sale and Nearfield Communication technologies on our business. As a result, the Company’s
fourth quarter 2015 inventory valuation charges were determined based upon our inventory’s net realizable
value.
The
Company performs regular reviews of inventory quantities on hand and evaluates the realizable value of its inventories. The Company
adjusts the carrying value of the inventory as necessary with estimated valuation reserves
for
excess, obsolete, and slow-moving inventory by comparing the individual inventory parts to forecasted product demand or production
requirements.
The inventory is valued at the lower of cost or net realizable value with cost determined using the first-in,
first-out method.
As of December 31, 2016 inventory
was
comprised of $3,797,499 in raw materials and $1,544,001 in finished goods on hand. As of December 31, 2015 inventory was comprised
of $1,587,653 in raw materials and $180,289 in finished goods on hand. As an emerging growth company, the Company is required
to prepay for raw materials with certain vendors until credit terms can be established. As of December 31, 2016 and 2015, $1,089,770
and $49,103, respectively of prepayments made primarily for raw materials inventory is included in prepaid expenses and other
current assets on the consolidated balance sheet.
LONG-LIVED
ASSETS
Long-lived
assets, such as property and equipment, goodwill and other intangibles are evaluated for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with ASC 360-10-35-17
through 35-35 “Measurement of an Impairment Loss.” The Company assesses the impairment of the assets based on
the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets. If
the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded.
Management estimates future cash flows using assumptions about expected future operating performance. Management’s estimates
of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions
or changes to the Company’s business operations.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY
AND EQUIPMENT
Property
and equipment consisting of furniture, fixtures and tooling is stated at cost. The costs of additions and improvements are generally
capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment
are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included
in income. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful life
of the respective asset as follows:
Equipment
|
|
|
5
years
|
|
Furniture and fixtures
|
|
|
3
to 5 years
|
|
Tooling and molds
|
|
|
2
to 3 years
|
|
Goodwill
On
July 25, 2016, the Company recorded goodwill of $15,479,662 as a result of the LogicMark acquisition. The Company will begin testing
goodwill for impairment annually in the third quarter of each year using data as of August 1 of that year.
Authoritative
accounting guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform the
more detailed two-step quantitative goodwill impairment test. The Company performs the quantitative test if its qualitative assessment
determined it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company may
elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting units or assets. The
quantitative goodwill impairment test, if necessary, is a two-step process. The first step is to identify the existence of a potential
impairment by comparing the fair value of a reporting unit (the estimated fair value of a reporting unit is calculated using a
discounted cash flow model) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying
amount, the reporting unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative
goodwill impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second
step of the quantitative goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any.
The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair
value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined using
the same approach as employed when determining the amount of goodwill that would be recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all of its assets and liabilities as if the reporting unit had been acquired
in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
Other
Intangible Assets
The
Company’s intangible assets are all related to the LogicMark acquisition and are included in other intangible assets in
the Company’s consolidated balance sheet at December 31, 2016. The Company had no intangible assets at December 31, 2015.
At
December 31, 2016, the other intangible assets are comprised of patents with a fair value of $3,936,612; trademarks with a fair
value of $1,230,002; and customer relationships with a fair value of $3,119,111. The Company will amortize these intangible assets
using the straight line method over their estimated useful lives which for the patents, trademarks and customer relationships
are 11 years; 20 years; and 10 years, respectively. During the twelve months ended December 31, 2016, the Company had amortization
expense of $318,842 related to the intangible assets.
Amortization
expense estimated for each of the next five fiscal years, 2017 through 2021 will be approximately $764,000 per year.
CONVERTIBLE
INSTRUMENTS
The
Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting
for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options
from their host instruments and account for them as free standing derivative financial instruments according to certain criteria.
The criteria include circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are
not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that
embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The
derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value
reported in the results of operations.
Conversion
options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances
of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result
in their bifurcation from the host instrument.
The
Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should
not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”.
The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in
debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the
note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized
over the term of the related debt using the straight line method which approximates the interest rate method. See Note 7.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates
all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated
statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option valuation
model to value the derivative instruments at inception and on subsequent valuation dates. The conversion feature embedded within
Company’s convertible note payable does not have fixed settlement provisions as the conversion price varies based on the
trading price of the Company’s common stock and the potential number of common shares to be issued upon conversion is indeterminable
up to a maximum of 120,000 shares of common stock. In addition, the warrants issued in connection with the Offering (as defined
in Note 8) do not have fixed settlement provisions as their exercise prices may be lowered if the Company conducts an offering
in the future at a price per share below the exercise price of the warrants. Accordingly, the conversion feature and warrants
have been recognized as derivative instruments. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date. (See Note 8.)
DEBT
DISCOUNT AND AMORTIZATION OF DEBT DISCOUNT
Debt
discount represents the fair value of embedded conversion options of various convertible debt instruments and attached convertible
equity instruments issued in connection with debt instruments. The debt discount is amortized over the earlier of (i) the term
of the debt or (ii) conversion of the debt. The amortization of debt discount is included as a component of interest expense included
in other income and expenses in the accompanying statements of operations.
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 year 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 will classify as income tax expense
any interest and penalties. The Company has no material uncertain tax positions for any of the reporting periods presented. Generally,
the tax authorities may examine the partnership/corporate tax returns for three years from the date of filing. The Company has
filed all of its tax returns for all prior periods through December 31, 2015.
STOCK-BASED
COMPENSATION
The
Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the
award. The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date.
The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests
or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period or as earned.
The Company generally issues new shares of common stock to satisfy conversion and warrant exercises.
NET
LOSS PER SHARE
Basic
loss per share was computed using the weighted average number of common shares outstanding. Diluted loss per share includes
the effect of diluted common stock equivalents. Potentially dilutive securities of 2,581,104 realizable from the convertible
Series A and Series B Preferred Stock (defined below), 575,000 from the convertible exchange notes and from the exercise
of 1,829,049 warrants as of December 31, 2016 were excluded from the computation of diluted net loss per share because
the effect of their inclusion would have been anti-dilutive. As of December 31, 2015, potentially dilutive securities
realizable from the conversion of convertible notes and related accrued interest and from the exercise of 761,549 warrants
were excluded from the computation of diluted net loss per share because the effect of their inclusion would have been
anti-dilutive.
RESEARCH
AND DEVELOPMENT
Research
and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the discovery
of new knowledge, which will be useful in developing new products or processes. The Company expenses all research and development
costs as incurred.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT
ACCOUNTING PRONOUNCEMENTS
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”). ASU 2016-15 is intended to address how certain cash receipts and cash payments
are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective
of reducing the existing diversity in practice. The amendments are effective for public business entities for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the ASU 2016-15 and
does not believe this ASU will have a material impact on its condensed consolidated financial statements.
In
May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), “Revenue from Contracts with Customers (Topic 606):
Narrow- Scope Improvements and Practical Expedients.” ASU 2016-12 will affect all entities that enter into contracts with
customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration.
The amendments in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this update affect
narrow aspects of Topic 606 including among others: assessing collectability criterion, noncash consideration, and presentation
of sales taxes and other similar taxes collected from customers. The effective date and transition requirements for the amendments
in this update are the same as the effective date and transition requirements for ASU 2014-09. The Company is currently evaluating
the effect that ASU 2016-12 will have on the Company’s financial position and results of operations.
In
March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”), “Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 will affect all entities that issue share-based payment
awards to their employees and is effective for annual periods beginning after December 15, 2016 for public entities. The areas
for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The Company is currently evaluating the effect that ASU 2016-09 will have on the Company’s financial position and
results of operations.
In
February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02
establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the
balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is currently
assessing the potential impact of ASU 2016-02 on the audited financial statements and related disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern
(“ASU 2014-15”), amending FASB Accounting Standards Subtopic 205-40 to provide
guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern and to provide related footnote disclosures. Specifically, the amendments (1) provide a definition
of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering
the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result
of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is
not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued. ASU
2014-15 is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter.
The
adoption of this standard did not have a material impact on its consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT
ACCOUNTING PRONOUNCEMENTS, CONTINUED
In
May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09,
Revenue
from Contracts with Customers
("ASU 2014-09"), which stipulates that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for such goods or services. To achieve this core principle, an entity should apply the following steps:
(1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction
price(s); (4) allocate the transaction price(s) to the performance obligations in the contract(s); and (5) recognize revenue when
(or as) the entity satisfies a performance obligation. The guidance also requires advanced disclosures regarding the nature, amount,
timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. In August 2015, the FASB issued
Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
("ASU 2015-14"), which defers the effective date of FASB's revenue standard under ASU 2014-09 by one year for all
entities and permits early adoption on a limited basis. As a result of ASU 2015-14, the guidance under ASU 2014-09 shall apply
for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period. Early
adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within
those annual periods. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
which clarified the implementation
guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
which clarified the implementation
guidance regarding performance obligations and licensing arrangements. As permitted under the standard, the Company plans to adopt
ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach and recognize the cumulative effect to existing
contracts in opening retained earnings on the effective date. The Company is currently reviewing and evaluating this guidance
and its impact on its consolidated financial statements.
Note
5 – acquisition of logicmark llc
On
July 25, 2016, the Company completed the acquisition of LogicMark. The Company determined that as of July 25, 2016, it was
more likely than not that these gross profit targets as it relates to the contingent considerations would be achieved and any fair value
adjustment of the earnout was due to time value of the payout.
On
July 25, 2016, and in order to fund part of the proceeds of the LogicMark acquisition, the Company and a group of
lenders, including ExWorks Capital Fund I, L.P. as agent for the lenders (collectively, the “Lenders”), entered
into a Loan and Security Agreement (the “Loan Agreement”), whereby the Lenders extended a revolving loan (the
“Revolving Loan”) to the Company in the principal amount of $15,000,000 (the “Debt Financing”). The
Company incurred $1,357,356 in deferred debt issue costs related to the revolving loan. At December 31, 2016 the unamortized
balance of those deferred debt issue costs was $769,453. The maturity date of the Revolving Loan is July 25, 2017, and
the Revolving Loan bears interest at a rate of 15% per annum.
The
Loan Agreement contains customary covenants, including an EBITDA requirement and a fixed change ratio, as
defined in the agreement. As of December 31, 2016, the Company was in compliance with such covenants.
The
Company has the ability to extend the Revolver for two additional years at its sole discretion with no
subjective acceleration by the lender, provided the Company is not in default on the loan. The Company intends to exercise
the option to extend the maturity date and accordingly, the Company has classified the Revolver as a non-current liability as
of December 31, 2016.
On
September 23, 2016, the Company entered into a forbearance agreement with LogicMark Investment Partners, LLC (the “Lender”)
in connection with a Secured Subordinated Promissory Note originally issued on July 22, 2016 in the amount of $2,500,000 which
expired on September 22, 2016 (the “Note”). The Company formally requested that the Lender extend the Note on September
20, 2016, and finalized the amendment on September 23, 2016.
Under
the terms of the forbearance agreement, the Lender agreed to extend the Note and the Company agreed to pay to the Lender in immediately
available funds: (i) $250,000 on September 23, 2016; (ii) $100,000 on October 24, 2016; and (iii) $1,150,000, plus all accrued
and unpaid interest due under the Note on October 31, 2016. The Company also agreed to reduce the Escrow Amount (as defined in
the Purchase Agreement) by a total of $500,000, and to make certain other changes to the definition of “Escrow Amount”
in the Purchase Agreement. The Company also agreed to make certain representations and warranties in respect of the Lender’s
forbearance. The Logic Note originally was to mature on September 23, 2016 but was extended to April 15, 2017.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 –
acquisition of logicmark llc (CONTINUED)
Allocation
of Purchase Price
The purchase price to acquire Logicmark
was $27,136,788 of which $17,500,000 was paid by the Company in cash and $9,636,788 in non-cash consideration.
The non-cash consideration was
comprised of a $2,500,000 seller note, $900,000 of common stock and warrants issued to the sellers and $6,236,788 in earn-out
provisions. At the date of acquisition, the earn-out provisions were discounted using a prime borrowing rate of 3.5%.
The
purchase price was allocated to the tangible and identifiable assets acquired and liabilities assumed of LogicMark based
upon their estimated fair values. The excess purchase price over the fair value of the underlying net assets acquired was
allocated to goodwill. The Company completed its analysis of the fair value of the net assets acquired through the use of an
independent valuation firm and management’s estimates. The following table summarizes the final assessment of the
estimated fair values of the identifiable assets acquired and liabilities assumed net of cash acquired, as of the date of
acquisition of July 25, 2016.
Cash
|
|
$
|
109,710
|
|
Accounts receivable
|
|
|
494,591
|
|
Inventories
|
|
|
2,566,117
|
|
Other current assets
|
|
|
370,905
|
|
Property and equipment
|
|
|
227,840
|
|
Goodwill
|
|
|
15,479,662
|
|
Intangible assets
|
|
|
8,604,567
|
|
Assets acquired
|
|
|
27,853,392
|
|
|
|
|
|
|
Accounts payable
|
|
|
507,857
|
|
Accrued liabilities
|
|
|
208,747
|
|
Liabilities assumed
|
|
|
716,604
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
27,136,788
|
|
Pro
Forma Financial Information
The
following table summarizes the unaudited pro forma financial information assuming that the LogicMark acquisition occurred on January
1, 2015, and its results had been included in the Company’s financial results for the twelve months ended December 31, 2016
and 2015. The pro forma combined amounts are based upon available information and reflect a reasonable estimate of the effects
of the LogicMark acquisition for the periods presented on the basis set forth herein. The following unaudited pro forma combined
financial information is presented for informational purposes only and does not purport to represent what the financial position
or results of operations would have been had the LogicMark acquisition in fact occurred on the date assumed, nor is it necessarily
indicative of the results that may be expected in future periods.
|
|
Twelve months ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
Pro forma:
|
|
|
|
|
|
|
Net Sales
|
|
$
|
15,673,801
|
|
|
$
|
11,702,194
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(13,671,124
|
)
|
|
$
|
(16,394,632
|
)
|
Net Loss Per Share - Basic and Diluted applicable to Common Stockholders
|
|
$
|
(2.22
|
)
|
|
$
|
(6.05
|
)
|
The
unaudited pro forma net loss attributable to Nxt-ID, Inc. has been calculated using actual historical information and is adjusted
for certain pro forma adjustments based on the assumption that the LogicMark acquisition and the application of fair value adjustments
to intangible assets occurred on January 1, 2015. For the twelve months ended December 31, 2016, the pro forma financial information
excluded the acquisition-related expenses of $605,228, which are included in the actual reported results, but excluded from the
pro forma amounts above due to their nonrecurring nature. In addition, the pro forma adjustments for the twelve months ended December
31, 2016 include the following adjustments, (a) amortization expense related to the acquired intangible assets of $731,242; (b)
interest expense including the amortization of deferred debt issue costs of $2,851,185; (c) reduction in depreciation expense
of $35,543; and (d) amortization of the inventory fair value adjustment of $945,212.
For
the twelve months ended December 31, 2015, the pro forma financial information reflects the following adjustments; (a) amortization
expense related to the acquired intangible assets of $731,242; (b) interest expense including the amortization of deferred debt
issue costs of $4,735,767; (c) reduction in depreciation expense of $29,948; and (d) amortization of the inventory fair value
adjustment of $945,212.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Salaries and payroll taxes
|
|
$
|
77,037
|
|
|
$
|
18,380
|
|
Reimbursable expenses
|
|
|
5,000
|
|
|
|
5,000
|
|
Consulting fees
|
|
|
25,547
|
|
|
|
32,173
|
|
Audit fees
|
|
|
-
|
|
|
|
35,000
|
|
Merchant bank fees
|
|
|
31,124
|
|
|
|
-
|
|
Rent
|
|
|
1,147
|
|
|
|
3,077
|
|
State income taxes
|
|
|
1,135
|
|
|
|
4,150
|
|
Legal fees
|
|
|
7,568
|
|
|
|
81,281
|
|
Management incentives
|
|
|
604,125
|
|
|
|
372,000
|
|
Interest expense
|
|
|
691,684
|
|
|
|
45,100
|
|
Dividends – Series A & B preferred stock
|
|
|
583,067
|
|
|
|
-
|
|
Liquidated damages – Series B preferred stock
|
|
|
360,000
|
|
|
|
-
|
|
Finder’s fees
|
|
|
256,250
|
|
|
|
-
|
|
Other
|
|
|
257,988
|
|
|
|
45,277
|
|
Totals
|
|
$
|
2,901,672
|
|
|
$
|
641,438
|
|
NOTE
7 - CONVERTIBLE NOTES PAYABLE
November 2016 Exchange
On November
29, 2016, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with certain holders
of a portion of the Original LogicMark Notes (the “Holders”) pursuant to which the Company exchanged with the Holders
of $1,500,000 of Original Notes held by the Holders in exchange for: (i) an aggregate principal amount of $1,500,000 of new secured
subordinated promissory notes (the “Exchange Notes”) and (ii) warrants (the “Warrants”, and together with
the Exchange Notes, the “Exchange Securities”) convertible into 500,000 shares of common stock of the Company, par
value $0.0001 (the “Common Stock”). The Holders purchased the $1,500,000 of Original Notes from LogicMark Investment
prior to this transaction. The Exchange Notes will mature on November 29, 2017 and accrue interest at a rate of 15.0% per annum.
The Exchange Notes are convertible at any time, in whole or in part, at the option of the Investors into shares of Common Stock
at a conversion price of $3.00 per share (the “Conversion Price”). The Conversion Price is subject to adjustment for
stock dividends, stock splits, combinations or similar events.
The conversion option embedded in the convertible
exchange notes was determined to contain beneficial conversion features, resulting in the bifurcation of those features as an
equity instrument (resulting in a debt discount) At issuance. After allocation of the gross proceeds to the warrants (discussed
below) and beneficial conversion feature, the total debt discount recognized was equal to the face of the convertible exchange
notes, The debt discount is being amortized over the term of the debt and the Company Amortized $133,333 of the debt discount
for the year ended December 31, 2016.
The Company
may prepay, in whole but not in part, without premium or penalty, the outstanding principal, together with accrued but unpaid
interest on the outstanding principal, if any. The Warrants will be exercisable beginning on November 29, 2016, and will be exercisable
for a period of five years. The exercise price with respect to the Warrants is $3.00 per share (the “Exercise Price”).
The Exercise Price and the amount of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment upon
certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate changes.
December
2015 Private Placement
On
December 8, 2015, the Company entered into a securities purchase agreement (the “December Purchase Agreement”) with
certain accredited investors (the “December Purchasers”) pursuant to which the Company sold an aggregate of $1,500,000
in principal amount of Senior Secured Convertible Notes (the “December Notes”) for an aggregate purchase price of
$1,500,000 (the “December Offering”). The Notes matured on December 8, 2016 (the “December Maturity Date”),
less any amounts converted or redeemed prior to the December Maturity Date. The December Notes bear interest at a rate of 8% per
annum. The December Notes were convertible at any time, in whole or in part, at the option of the holders into shares of common
stock at a conversion price of $2.35 per share, as modified. In case of an Event of Default (as defined in the December Notes),
the notes are convertible at 85% of the average of the five (5) lowest daily Weighted Average Prices (as defined in the December
Notes) in the prior fifteen (15) trading days, until such Event of Default has been cured. The conversion price is subject to
adjustment for stock dividends, stock splits, combinations or similar events. The Notes are repayable from the earlier of June
7, 2016 or the effective date of the initial registration statement that was filed with this offering, (The Installment Trigger
Date). The installment payments are to be made on the l
st
and 15
th
calendar day of each month. The amount
of each installment is the quotient of the original principal amount divided by the number of installment payments after the Installment
Trigger Date and the scheduled Maturity Date on December 7, 2016. The holder of the notes may opt to accelerate two installment
amounts in an amount up to twice the regular installment amount. The installment payments may be made in cash or in common stock
at 85% of the average of the five (5) lowest daily Weighted Average Prices (as defined in the December Notes) in the prior fifteen
(15) trading days at the option of the Company.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
In
connection with the sale of the December Notes, the Company also issued to the December Purchasers an aggregate of 90,000 shares
of the Company’s common stock in consideration of each Investor’s execution and delivery of the December Purchase
Agreement (the “Commitment Shares”). The Commitment Shares were offered by the Company pursuant to an effective shelf
registration statement on Form S-3, which was initially filed with the SEC on April 24, 2015 and declared effective on May 14,
2015 (File No. 333-203637).
As
described above, the April Purchasers exchanged the April Convertible Notes plus accrued but unpaid interest into the convertible
notes that were issued on December 8, 2015. (The December Notes). As a result, the Company incurred a loss on extinguishment of
the April Convertible Notes of $635,986 which resulted primarily from the write off of the remaining unamortized note discount
and deferred debt issue costs on extinguishment. In order to obtain their consent to issue the December Notes on December 8, 2015,
and to effect the exchange, the Company issued to each of the April Purchasers additional December Notes with a face value of
$500,000. On December 8, 2015, the total outstanding principal amount of these convertible notes was $2,134,850. On December 28,
2015, the note holders accelerated installment repayments in an aggregate amount of $350,000 which the Company satisfied by an
issuance of common stock as a result of a waiver by the holders which allowed the Company to issue common stock below $2.50. As
a result of this repayment, the outstanding amount of the convertible notes held by the April Purchasers was $1,784,850 on December
31, 2015.
The
total face amount of the Notes outstanding on December 8, 2015 were $3,644,850.
On
December 8, 2015 the Company recorded a debt discount of $1,719,700 and a derivative liability of $912,330.
During
December 2015, the holders of the Notes accelerated $350,000 in installments in exchange for common stock as a result of a waiver
by the holders which allowed the Company to issue common stock below $2.50. At December 31, 2015, the balance on the Notes outstanding
was $3,294,850.
The
debt discount is attributable to the value of the separately accounted for conversion feature and common stock issued in connection
with the sale of the December Notes. The embedded conversion feature derivatives relate to the conversion option, the installment
payments and the accelerated installment option of the December Notes. The embedded derivatives were evaluated under FASB ASC
Topic 815-15
, were bifurcated from the debt host, and were classified as liabilities in the consolidated balance sheet.
The debt discount was amortized using the effective interest method over the term of the December Notes. During the year ended
December 31, 2016, the Company recorded $515,032 of debt discount amortization all of which related to the December Notes. For
the year ended December 31, 2015, the Company recorded a total of $1,093,371 of debt discount amortization, which was recorded
as an interest expense in the consolidated statement of operations. Of this amount, $109,535 related to the December Notes.
On
February 12, 2016, in exchange for the consents given to the Company by the December Purchasers and the April Purchasers to allow
for the issuance of shares in connection with the WVH Transaction (described below), the December Notes were amended to a fixed
conversion price of $2.35. As a result of the modification, the Company fair valued the conversion option up to the date of modification
and re-classified the remaining conversion feature liability of $1,702,400 as of the date of modification to additional paid-in-capital.
During
the year ended December 31, 2016, the holders of the December Notes accelerated $2,456,679 in installments and $253,028 of
interest in exchange for 1,228,828 shares of common stock. During the twelve months ended December 31, 2016, the holders of
the December Notes also converted $838,171 of the convertible notes and $38,560 of interest in exchange for 373,077 shares
of common stock. At December 31, 2016, the outstanding balance on the December Notes was $0. As it relates to the
accelerated installments, the Company incurred a loss on extinguishment of debt of $272,749. The loss on extinguishment of
debt was equivalent to the excess fair value of the common stock issued to the holders of the December Notes as compared to
the net carrying value of the convertible debt. The fair value of the common stock issued in payment of interest exceeded the
amount of interest owed by $34,628. This amount is included as part of interest expense on the consolidated statement of
operations.
November
2015, Term Note
On
November 25, 2015, the Company issued the Term Note with a principal amount of $200,000 to an accredited purchaser (the
“November Purchaser”). The Term Note was scheduled to mature on December 15, 2015. The interest rate was 12% per
annum with a minimum guaranteed interest of $10,000. The November Purchaser converted the entire principal amount into the
December Offering described above.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
July
2015 Convertible Note
On
July 27, 2015, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
sold an aggregate of $222,222 in principal amount of the 8% Convertible Notes for an aggregate purchase price of $200,000. The
Company received net proceeds of $200,000 from the sale of the 8% Convertible Notes. The 8% Convertible Notes matured on September
11, 2015 (the “Maturity Date”), less any amounts converted or redeemed prior to the Maturity Date. The 8% Convertible
Notes bear interest at a rate of 8% per annum, subject to increase to the lesser of 24% per annum or the maximum rate permitted
under applicable law upon the occurrence of certain events of default. The 8% Convertible Notes were convertible at any time,
in whole or in part, at the option of the holders into shares of common stock at a conversion price of $35.00 per share, which
was subject to adjustment for stock dividends, stock splits, combinations or similar events. The Company was able to prepay in
cash any portion of the principal amount of the 8% Convertible Notes and any accrued and unpaid interest.
If
such prepayment was made within sixty (60) days after the issuance date of the 8% Convertible Notes, the Company would pay an
amount in cash equal to 109% of the sum of the then outstanding principal amount of the note and interest; thereafter, if such
prepayment was made, the Company would pay an amount in cash equal to 114% of the sum of the then outstanding principal amount
of the note and interest. In the event the Company effects a registered offering either utilizing Form S-1 or Form S-3 (a “Registered
Offering”), the Holder would have the right to convert the entire amount of the purchase price into such Registered Offering.
On August 4, 2015, the Company closed a Registered Offering and the holder of the 8% Convertible Notes elected to convert the
entire purchase price amount into common shares. The conversion price used to convert the entire purchase price into common stock
was equivalent to the equity offering price of $17.50 on August 4, 2015 and not the conversion price of $35.00 stipulated in the
securities purchase agreement. As a result of the change in the conversion price, the Company recorded additional inducement expense
of $100,000 in three months ended September 30, 2015.
April
2015 Private Placement
On
April 24, 2015, the Company entered into a securities purchase agreement (the “April Purchase Agreement”) with a group
of accredited investors (the “April Purchasers”) pursuant to which the Company sold to such purchasers an aggregate
of $1,575,000 principal amount of secured convertible notes (the “Convertible Notes”), a Class A Common Stock Purchase
Warrant (the “Class A Warrant”) to purchase up to 46,875 shares of the Company’s common stock and a Class B
Common Stock Purchase Warrant (the “Class B Warrant,” and together with the Class A Warrant, the “April Warrants”)
to purchase up to 46,875 shares of the Company’s common stock. The Convertible Notes bear interest at 6% per annum and
are convertible at any time, in whole or in part, at the option of the holders into shares of common stock at a conversion price
of $25.20 per share. The April Warrants are exercisable beginning six (6) months after issuance through the fifth (5
th
)
anniversary of such initial exercisability date. The Class A Warrant has an initial exercise price equal to $30.20 per share and
the Class B Warrant has an initial exercise price equal to $50.00 per share. The Company received cash proceeds of $1,481,500 from
the issuance of the Convertible Notes after deducting debt issuance costs of $93,500.
The
Company recorded a debt discount of $1,575,000 related to the sale of the Convertible Notes and the April Warrants. The debt discount
reflects the underlying fair value of the April Warrants of approximately $860,000 on the date of the transaction and a beneficial
conversion charge of approximately $715,000. During the period April 23, 2015 through December 8, 2015, the Company amortized
$983,836 of the debt discount as a component of interest expense in the accompanying statements of operations.
In
connection with the sale of the Convertible Notes and April Warrants, the Company entered into a registration rights agreement,
dated April 24, 2015 (the “April Registration Rights Agreement”), with the April Purchasers, pursuant to which the
Company agreed to register the shares of common stock underlying the Convertible Notes and Warrants on a Form S-3 registration
statement to be filed with the Securities and Exchange Commission within ten (10) business days after the date of the issuance
of the Convertible Notes and April Warrants (the “April Filing Date”) and to cause the April Registration Statement
to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”) within ninety (90) days
following the April Filing Date. If certain of its obligations under the April Registration Rights Agreement are not met, the
Company is required to pay partial liquidated damages to each April Purchaser. On May 8, 2015, the Company filed a registration
statement on Form S-3 with the SEC to register the shares issuable upon the conversion of the Convertible Notes, the related accrued
interest and the exercise of the April Warrants. Such registration statement was declared effective with the SEC on May 14, 2015.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
In connection with the sale
of the Convertible Notes and the April Warrants, the Company entered into a security agreement, dated April 24, 2015 (the “April
Security Agreement”), between the Company, 3D-ID and the collateral agent thereto. Pursuant to the Security Agreement, the
April Purchasers were granted a security interest in certain personal property of the Company and 3D-ID to secure the payment
and performance of all obligations of the Company and 3D-ID under the Convertible Notes, April Warrants, April Purchase Agreement,
April Registration Rights Agreement and April Security Agreement. In addition, in connection with the Security Agreement, 3D-ID
executed a subsidiary guaranty, pursuant to which it agreed to guarantee and act as surety for payment of the Convertible Notes
and other obligations of the Company under the April Warrants, April Purchase Agreement, April Registration Rights Agreement and
April Security Agreement.
As
described above, the April Purchasers exchanged the April Convertible Notes into the convertible notes that were issued on December
8, 2015. (The December Notes). As a result, the Company incurred a loss on extinguishment of the April Convertible Notes of $635,986
which resulted primarily from the write off of the remaining unamortized note discount and deferred debt issue costs on extinguishment.
In order to obtain their consent to issue the December Notes on December 8, 2015, and to effect the exchange, the Company issued
to each of the April Purchasers additional December Notes with a face value of $500,000. On December 8, 2015, the total outstanding
principal amount of these convertible notes was $2,134,850. On December 28, 2015, the note holders accelerated installment repayments
in an aggregate amount of $350,000 which the Company satisfied by an issuance of common stock as a result of a waiver by the holders
which allowed the Company to issue common stock below $2.50. As a result of this repayment, the outstanding amount of the convertible
notes held by the April Purchasers was $1,784,850 on December 31, 2015.
In
exchange for the consents given to the Company by the December Purchasers and the April Purchasers in connection with the consent
to the WVH transaction (described below), the December Notes as defined on page F-12 under December 15 Private Placement, the
Exchange Notes, and the Additional December Notes were amended. One of the significant amendments was as follows: the notes are
convertible at any time, in whole or in part, at the option of the holders into shares of common stock at a conversion price the
lesser of (a) $5.50 per share and (b) from and after an Event of Default (as defined in the December Notes), 85% of the average
of the five (5) lowest daily Weighted Average Prices (as defined in the December Notes) in the prior thirty (30) trading days,
until such Event of Default has been cured.
NOTE
8 - DERIVATIVE LIABILITIES
Fair
value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of
judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability.
Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely,
financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured
at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation
and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the
asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level
hierarchy.
The
conversion features embedded within the Company’s convertible notes payable issued in connection with December 8, 2015
private placement (as defined in Note 7) did not have fixed settlement provisions on the date they were initially issued
because the conversion price could be lowered if certain provisions included in the note agreement occurred before
conversion.
This liability was included in the Company’s level 3 liabilities.
During
2015, the derivative liabilities were valued using the Monte Carlo simulation model and the following weighted
average assumptions on December 8, 2015 and December 31, 2015. During the twelve months ended December 31, 2016, the Company
had five separate valuations performed using the Monte Carlo simulation model. The valuations coincided with the number of
accelerated installments occurring during the twelve months ended December 31, 2016. All of the 2016 valuations occurred
during the first quarter of 2016. The table for 2016 reflects the range of weighted average assumptions used for the 2016
valuations.
|
|
January 12, -
March 29,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Embedded Conversion Feature Liability:
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.46%-0.59
%
|
|
|
|
0.62
|
%
|
Expected volatility
|
|
|
100.00%
|
|
|
|
100.00
|
%
|
Expected life (in years)
|
|
|
0.91-0.70
|
|
|
|
0.92
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Face Value of convertible notes
|
|
|
$
3,209,850 - $1,208,850
|
|
|
|
3,294,850
|
|
Fair value
|
|
|
$ -
|
|
|
$
|
420,360
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - DERIVATIVE LIABILITIES (CONTINUED)
Fair
Value Measurement
Valuation
Hierarchy
ASC
820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs
are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs
based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company did not have any liabilities
carried at fair value measured as a recurring basis as of December 31, 2016.
The
following table provides the liabilities carried at fair value measured on a recurring basis as of December 31,
2015:
|
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
Total
Carrying
Value at
December 31, 2015
|
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Derivative liabilities
|
|
$
|
420,360
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
420,360
|
|
The
carrying amounts of cash, inventory, prepaid expenses, accounts payable and accrued liabilities approximate their fair value due
to their short maturities. The Company’s other financial instruments include its convertible notes payable obligations.
The carrying value of these instruments approximate fair value, as they bear terms and conditions comparable to market, for obligations
with similar terms and maturities. The Company measures the fair value of financial assets and liabilities based on 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. The Company maximizes
the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy,
the Company’s accounting department, who reports to the Principal Financial Officer, determines its valuation policies and
procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations
are the responsibility of the Company’s accounting department and are approved by the Principal Financial Officer.
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the conversion feature liability and common stock purchase warrants for which there are no
current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes
in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in
estimates or assumptions and recorded as appropriate. A significant decrease in the volatility or a significant decrease in the
Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
During
December 31, 2016 and 2015, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.
The
following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at
fair value on a recurring basis:
|
|
For the year ended December 31, 2016
|
|
|
For the year ended
December 31, 2015
|
|
|
|
|
|
|
|
|
Beginning liability balance
|
|
$
|
420,360
|
|
|
$
|
-
|
|
Loss on change in fair value of derivative liabilities
|
|
|
2,299,020
|
|
|
|
-
|
|
Recognition of conversion feature liability
|
|
|
-
|
|
|
|
912,330
|
|
Gain on derivative liabilities resulting from accelerated amortizations
|
|
|
(1,016,980
|
)
|
|
|
-
|
|
Net realized gain on conversion feature liabilities
|
|
|
-
|
|
|
|
(47,242
|
)
|
Net unrealized gain on conversion feature liabilities
|
|
|
-
|
|
|
|
(444,728
|
)
|
Adjustment to additional paid-in capital upon conversion and modification
|
|
|
(1,702,400
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
420,360
|
|
Other Fair Value Measurements
During the year ended December
31, 2016, the Company recorded $91,682 of interest expense related to the amortization of the discount of the contingent consideration.
The fair value measurements were based on significant inputs not observed in the market and thus represented a level 3 measurement.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STRATEGIC AGREEMENTS WITH WORLD VENTURES HOLDINGS
On
December 31, 2015, we entered into a Master Product Development Agreement (the “Development Agreement”) with World
Ventures Holdings, LLC (“WVH”). The Development Agreement commenced on December 31, 2015, and has an initial term
of two (2) years (the “Initial Term”). Thereafter, the Development Agreement will automatically renew for additional
successive one (1) year terms (each a “Renewal Term”) unless and until WVH provides written notice of non-renewal
at least thirty (30) days prior to the end of the Initial Term or then-current Renewal Term. Each Renewal Term will commence immediately
on expiration of the Initial Term or preceding Renewal Term. The Development Agreement may also be terminated earlier pursuant
to certain conditions.
In
connection with the Development Agreement, on December 31, 2015, the Company entered into a securities purchase agreement
(the “WVH Purchase Agreement”) with WVH providing for the issuance and sale by the Company of 1,005,000
shares (the “WVH Shares”) of Common Stock and a common stock purchase warrant (the “WVH Warrant”) to
purchase 251,250 shares (the “WVH Warrant Shares”) of Common Stock, for an aggregate purchase price of
$2,000,000. The WVH Warrant is initially exercisable on the five (5) month anniversary of the issuance date at an exercise
price equal to $7.50 per share and has a term of exercise equal to two (2) years and seven (7) months from the date on which
first exercisable. On April 28, 2016, the exercise price of the WVH Warrant was modified to $4.00.
Pursuant
to the Development Agreement, WVH retained the Company to design, develop and manufacture a series of Proprietary Products
(as defined in the Development Agreement) for distribution through WVH’s network of sales representatives, members,
consumers, employees, contractors or affiliates. In conjunction with the Development Agreement, the Company and WVH
contractually agreed to dedicate $1,500,000 of the $2,000,000 in total proceeds received by the Company to the development
and manufacture of the product for WVH. In addition, any expenditure of the $1,500,000 in proceeds is restricted in that the
Company will need prior approval from WVH on a monthly basis in order to fund the estimated expenditures needed for the
development of the product for WVH from the $1,500,000. Accordingly, the $1,500,000 is included in the restricted cash
balance on the accompanying Balance Sheet at December 31, 2015. During the twelve months ended December 31, 2016, the Company
used the entire $1,500,000 in restricted cash received from WVH on December 31, 2015 for the design and development of
products specifically for WVH. The expenses related to the design and development of products for WVH during the twelve
months ended December 31, 2016 are included in research and development expenses. During the twelve months ended December 31,
2016, the Company received deposits totaling $6,068,894 from WVH against initial purchase orders received from WVH. The
deposits received from WVH are included in the consolidated balance sheet line item labeled customer deposits as of December
31, 2016. During the year ended December 31, 2016, the Company recorded revenue of $1,357,413 related to WVH. At
December 31, 2016, the Company’s accounts receivable balance included $621,724 due from WVH.
Nxt-ID, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - STOCKHOLDERS’ EQUITY
April
2015 Private Placement
On
April 24, 2015, the Company entered into a securities purchase agreement (the “April Purchase Agreement”) with a group
of accredited investors (the “April Purchasers”) pursuant to which the Company sold to such purchasers an aggregate
of $1,575,000 principal amount of secured convertible notes (the “April Convertible Notes”), a Class A Common Stock
Purchase Warrant (the “Class A Warrant”) to purchase up to 46,875 shares of the Company’s common stock and a
Class B Common Stock Purchase Warrant (the “Class B Warrant,” and together with the Class A Warrant, the “April
Warrants”) to purchase up to 46,875 shares of the Company’s common stock. The April Convertible Notes bear interest
at 6% per annum and are convertible at any time, in whole or in part, at the option of the holders into shares of common stock
at a conversion price of $25.20 per share. The April Warrants are exercisable beginning six (6) months after issuance through
the fifth (5
th
) anniversary of such initial exercisability date. The Class A Warrant has an initial exercise price
equal to $30.20 per share and the Class B Warrant has an initial exercise price equal to $50.00 per share. The Company received
cash proceeds of $1,481,500 from the issuance of the Convertible Notes after deducting debt issuance costs of $93,500.
The
Company recorded a debt discount of $1,575,000 related to the sale of the April Convertible Notes and the April Warrants. The
debt discount reflects the underlying fair value of the April Warrants of approximately $860,000 on the date of the transaction
and a beneficial conversion charge of approximately $715,000. The debt discount will be amortized to interest expense over the
earlier of (i) term of the April Convertible Notes or (ii) conversion of the debt.
In
connection with the sale of the April Convertible Notes and April Warrants, the Company entered into a registration rights agreement,
dated April 24, 2015 (the “April Registration Rights Agreement”), with the April Purchasers, pursuant to which the
Company agreed to register the shares of common stock underlying the April Convertible Notes and April Warrants on a Form S-3
registration statement to be filed with the Securities and Exchange Commission (the “SEC”) within ten (10) business
days after the date of the issuance of the April Convertible Notes and April Warrants (the “April Filing Date”) and
to cause the April Registration Statement to be declared effective under the Securities Act within ninety (90) days following
the April Filing Date. If certain of its obligations under the April Registration Rights Agreement are not met, the Company is
required to pay partial liquidated damages to each April Purchaser. On May 8, 2015, the Company filed a registration statement
on Form S-3 with the SEC to register the shares issuable upon the conversion of the April Convertible Notes, the related accrued
interest and the exercise of the April Warrants. Such registration statement was declared effective with the SEC on May 14, 2015.
In
connection with the sale of the April Convertible Notes and the April Warrants, the Company entered into a security agreement,
dated April 24, 2015 (the “April Security Agreement”), between the Company, 3D-ID and the collateral agent thereto.
Pursuant to the Security Agreement, the April Purchasers were granted a security interest in certain personal property of the
Company and 3D-ID to secure the payment and performance of all obligations of the Company and 3D-ID under the April Convertible
Notes, April Warrants, April Purchase Agreement, April Registration Rights Agreement and April Security Agreement. In addition,
in connection with the April Security Agreement, 3D-ID executed a subsidiary guaranty, pursuant to which it agreed to guarantee
and act as surety for payment of the April Convertible Notes and other obligations of the Company under the April Warrants, April
Purchase Agreement, April Registration Rights Agreement and April Security Agreement.
As
described below, the April purchaser exchanged the April Convertible Notes into convertible notes that were identical to the convertible
notes that were issued on December 8, 2015.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - STOCKHOLDERS’ EQUITY (CONTINUED)
July
2015 Private Placement
On
July 27, 2015, the Company entered into a securities purchase agreement with an accredited investors (the “July Purchaser”)
pursuant to which the Company sold an aggregate of $222,222 in principal amount of the 8% Original Issue Discount Convertible
Notes (the “8% Convertible Notes”) for an aggregate purchase price of $200,000. The Company received net proceeds
of $200,000 from the sale of the 8% Convertible Notes.
The
8% Convertible Notes will mature on September 11, 2015 (the “Maturity Date”), less any amounts converted or redeemed
prior to the Maturity Date. The 8% Convertible Notes bear interest at a rate of 8% per annum, subject to increase to the lesser
of 24% per annum or the maximum rate permitted under applicable law upon the occurrence of certain events of default.
The
8% Convertible Notes are convertible at any time, in whole or in part, at the option of the holders into shares of common stock
at a conversion price of $35.00 per share, which is subject to adjustment for stock dividends, stock splits, combinations or similar
events.
The
Company agreed that if it effected a registered offering either utilizing Form S-1 or Form S-3 (a “Registered Offering”),
the Holder shall have the right to convert the entire amount of the subscription amount into such Registered Offering. The
July Purchaser converted the entire amount of the subscription amount into the August Offering described below.
The
conversion price used to convert the entire purchase price into common stock was equivalent to the equity offering price of $17.50
on August 4, 2015 and not the conversion price of $35.00 stipulated in the securities purchase agreement. As a result of the change
in the conversion price, the Company recorded additional inducement expense of $100,000 at the time of conversion.
August
2015 Offerings
On
August 4, 2015, the Company closed with certain purchasers (the “August 2015 Purchasers”) a public offering (the “August
Offering”) providing for the issuance and sale by the Company of 172,143 shares of the Company’s common stock
at a price to the public of $17.50 per share (the “Registered Shares”) for an aggregate purchase price of $3,012,500.
In
connection with the sale of the Registered Shares, the Company also entered into a Warrant Purchase Agreement (the “Warrant
Purchase Agreement”) with the August 2015 Purchasers providing for the issuance and sale by the Company of warrants to purchase
86,072 shares of the Company’s common stock at a purchase price of $0.0000001 per warrant (the “August 2015 Warrants”). Each
August 2015 Warrant shall be initially exercisable on the six (6) month anniversary of the issuance date an exercise price equal
to $23.50 per share and have a term of exercise equal to five (5) years from the date on which first exercisable.
The
Registered Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially
filed with the Securities and Exchange Commission (the “SEC”) on April 24, 2015 and declared effective on May 14,
2015 (File No. 333-203637) (the “Registration Statement”).
Pursuant
to a Registration Rights Agreement, dated July 30, 2015, by and between the Company and the August 2015 Purchasers, the Company
agreed to file one or more registration statements with the SEC covering the resale of the shares of common stock issuable upon
exercise of the August 2015 Warrants.
The
placement agent in connection with the Registered Shares was Northland Securities, Inc.
October
2015 Public Offering
On
October 21, 2015, the Company closed on an underwritten public offering of its common stock. The Company offered 150,000 shares
of common stock at a price to the public of $7.00 per share. The Company received gross proceeds from the offering, before deducting
underwriting discounts and commission and other estimated offering expenses payable by the Company, of approximately $1,050,000.
The underwriter was Aegis Capital Corp.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - STOCKHOLDERS’ EQUITY (CONTINUED)
December
2015 Private Placement
In
connection with the sale of the December Notes, the Company also issued to the December Purchasers an aggregate of 90,000 shares
of the Company’s common stock in consideration of each Investor’s execution and delivery of the December Purchase
Agreement (the “Commitment Shares”). The Commitment Shares were offered by the Company pursuant to an effective shelf
registration statement on Form S-3, which was initially filed with the SEC on April 24, 2015 and declared effective on May 14,
2015 (File No. 333-203637).
April 2016 Offering
On April 11, 2016, the
Company closed a registered offering (the “April 2016 Offering”) of shares of its Series A Convertible Preferred
Stock, par value $0.0001 per share (the “Series A Preferred Stock”). The Company sold 2,500,000 shares of Series
A Pref
erred Stock at a price of $1.00 per share
, and received gross proceeds
from the offering, before deducting placement agent fees and other estimated offering expenses payable by the Company,
of $2,500,000. The Company incurred approximately $230,225 of costs associated with the issuance of the Series A
Preferred Stock. Holders of the Series A Preferred stock shall be entitled to receive from the first date of issuance of the
Series A Preferred Stock cumulative dividends at a rate of 25% Per annum on a compounded basis, which dividend amount shall
be guaranteed. Accrued and unpaid dividends shall be at the Company’s option, in cash, shares of common stock,
or additional share of Series A Preferred Stock. For the year ended December 31, 2016, the Company recorded Series A
Preferred Stock dividends of $590,116. During the year ended December 31, 2016 holders of the Series A Preferred Stock
converted $2,662,794 of Preferred Stock and dividends into 834,718 shares of common stock.
July 2016 Offering
On July 25, 2016, the Company closed
a private placement (the “July 2016 Offering”) of shares of its Series B Convertible Preferred Stock, par value $0.0001
per share (the “Series B Preferred Stock”) and warrants (the “July 2016 Warrants”) to purchase 562,500
shares of the Company’s common stock. The Company sold 4,500,000 shares of Series B Pref
erred
Stock at a price of $1.00 per share
, and received gross proceeds from the offering, before deducting placement agent fees
and other estimated offering expenses payable by the Company, of $4,500,000. The Company incurred approximately $410,000 of costs
associated with the issuance of the Series B Preferred Stock. The conversion price of the Series B Preferred Stock is $4.00. The
July 2016 Warrants will be exercisable beginning on January 25, 2017, and will be exercisable for a period of five (5) years.
The exercise price with respect to the July 2016 Warrants is $7.50 per share. Holders of the Series B Preferred stock shall be
entitled to receive from the first date of issuance of the Series B Preferred Stock cumulative dividends at a rate of 25% Per
annum on a compounded basis, which dividend amount shall be guaranteed. Accrued and unpaid dividends shall be at the Company’s
option, in cash, shares of common stock, or additional share of Series B Preferred Stock. For the year ended December 31, the
Company recorded Series B Preferred Stock dividends of $490,625.
Warrants
The
following table summarizes the Company’s warrants outstanding and exercisable at December 31, 2015 and 2016:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at January 1, 2015
|
|
|
362,978
|
|
|
$
|
28.00
|
|
|
|
4.51
|
|
|
$
|
283,828
|
|
Issued
|
|
|
431,071
|
|
|
|
17.80
|
|
|
|
4.04
|
|
|
|
-
|
|
Exercised
|
|
|
(32,500
|
)
|
|
|
20.00
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2015
|
|
|
761,549
|
|
|
$
|
22.60
|
|
|
|
3.83
|
|
|
$
|
-
|
|
Issued
|
|
|
1,224,980
|
|
|
|
4.69
|
|
|
|
4.13
|
|
|
|
-
|
|
Exercised
|
|
|
(157,480
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2016
|
|
|
1,829,049
|
|
|
$
|
12.00
|
|
|
|
3.92
|
|
|
$
|
-
|
|
Long-Term
Stock Incentive Plan
On
January 4, 2013, a majority of the Company’s stockholders approved by written consent the Company’s 2013 Long-Term
Stock Incentive Plan (“LTIP”). The maximum aggregate number of shares of common stock that may be issued under the
LTIP, including stock awards, stock issued to directors for serving on the Company’s board, and stock appreciation rights,
is limited to 10% of the shares of common stock outstanding on the first business or trading day of any fiscal year, which is
554,054 at December 31, 2016. During the year ended December 31, 2016, the Company issued 51,705 shares under the plan to three
non-executive directors for serving on the Company’s board. The aggregate fair value of the shares issued to the directors
was $180,000. Also during the year ended December 31, 2016, the Company issued 60,000 shares with an aggregate fair value of $372,000
to executive and certain non-executive employees related to the Company’s 2015 management incentive plan. The aggregate
fair value of $372,000 was expensed entirely in 2015. During the year ended December 31, 2015, the Company issued 26,961 shares
under the plan to three non-executive directors for serving on the Company’s board. The aggregate fair value of the shares
issued to the directors was $180,000. Also during the year ended December 31, 2015, the Company issued 5,000 shares with an aggregate
fair value of $147,500 to one non-executive employee. These shares were issued with no Company imposed restrictions and as a result,
the aggregate fair value of $147,500 was expensed entirely in 2015.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 - INCOME TAXES
As
of December 31, 2016, the Company had US federal and state net operating loss (“NOLs”) carryovers of $24,152,902
and $12,469,752, respectively, available to offset future taxable income, which expire beginning in 2033. In addition, the
Company had tax credit carryforwards of $187,856 at December 31, 2016 that will be available to reduce future tax
liabilities. The tax credit carryforwards will begin to expire beginning in 2033.
In
accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual
limitation in the event of a change of control. The Company has determined that a change of control has not occurred as of December
31, 2016 and therefore none of the NOLs are limited under Section 382. The Company has no material uncertain tax positions for
any of the reporting periods presented. The Company has filed all of its tax returns for all prior periods through December 31,
2015. As a result, the Company’s net operating loss carryovers will now be available to offset any future taxable income.
The Company is
subject to taxation in the United States and various states. As of December 31, 2016 the Company’s tax years post 2012
are subject to examination by the tax authorities. With few exceptions, as of December 31, 2016 the Company is no longer
subject to U.S. federal or state examinations by tax authorities for years before December 31, 2013.
The
income tax provision consists of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
5,749
|
|
|
|
4,307
|
|
|
|
|
5,749
|
|
|
|
4,307
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,843,866
|
)
|
|
|
(3,543,673
|
)
|
State
|
|
|
(281,625
|
)
|
|
|
(362,722
|
)
|
|
|
|
(3,125,491
|
)
|
|
|
(3,906,395
|
)
|
Change in valuation allowance
|
|
|
3,315,776
|
|
|
|
3,906,395
|
|
Total income tax provision
|
|
$
|
196,035
|
|
|
$
|
4,307
|
|
A
reconciliation of the effective income tax rate and the statutory federal income tax rate is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State income tax rate, net of federal benefit
|
|
|
1.45
|
|
|
|
1.81
|
|
Inducement expenses
|
|
|
-
|
|
|
|
(2.33
|
)
|
Other permanent differences
|
|
|
(10.60
|
)
|
|
|
(3.63
|
)
|
Less: valuation allowance
|
|
|
(26.41
|
)
|
|
|
(29.88
|
)
|
Provision for income taxes
|
|
|
(1.56
|
)%
|
|
|
(.03
|
)%
|
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 not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences representing net future deductible amounts became deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. After consideration of all of the information available, Management believes that significant uncertainties
exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance.
For the year ended December 31, 2016 and 2015, the change in valuation allowance was $3,315,776 and $3,906,395.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 - INCOME TAXES (CONTINUED)
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
8,887,756
|
|
|
$
|
6,109,750
|
|
Tax credits
|
|
|
187,856
|
|
|
|
177,909
|
|
Accruals and reserves
|
|
|
546,286
|
|
|
|
315,580
|
|
Restricted stock
|
|
|
42,140
|
|
|
|
4,238
|
|
Tangible and intangible assets
|
|
|
62,352
|
|
|
|
-
|
|
Charitable donations
|
|
|
3,738
|
|
|
|
3,759
|
|
Total deferred tax assets before valuation allowance:
|
|
$
|
9,730,128
|
|
|
$
|
6,611,236
|
|
Valuation allowance
|
|
|
(9,920,414
|
)
|
|
|
(6,604,638
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
(190,286
|
)
|
|
|
6,598
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
-
|
|
|
$
|
(6,598
|
)
|
Convertible debt
|
|
|
-
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
(6,598
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(190,286
|
)
|
|
$
|
-
|
|
NOTE
12 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
On
November 12, 2015, the Company received a complaint that one of its technologies infringed upon one or more claims of
a patent(s) issued to the claimant. The claimant has subsequently acknowledged that the Company is not currently
infringing on their patent(s) as the technology in question is not commercially available at the current time. The
Company is in the process of negotiating a future royalty agreement with the claimant should it decide to introduce this
technology in the future.
From
time to time the Company may be involved in various claims and legal actions arising in the ordinary course of
its business. Other than as described above, there is no action, suit, proceeding, inquiry or investigation before or by
any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the
executive officers of the company or any of its subsidiaries, threatened against or affecting the company, or any of
its subsidiaries in which an adverse decision could have a material adverse effect upon its business, operating
results, or financial condition.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS
On
September 12, 2014, the Company entered into a lease agreement for office space in Oxford, Connecticut. The term of the lease
was for two (2) years with a monthly rent of $2,300 in the first year, increasing to $2,450 per month in the second year. On
October 10, 2016, the Company extended the lease term for the office space in Oxford, Connecticut for six additional months
with a monthly rent of $2,450. On October 3, 2014, the Company entered into a lease agreement for customer service and
warehouse space in Melbourne, Florida. The lease term commenced on January 1, 2015. The term of the lease is for three (3)
years with a current monthly rent amount of $6,837 which includes the base rent, an escrow for taxes and insurance, common
area maintenance charges and applicable sale tax. As a result of the LogicMark acquisition on July 25, 2016, we assumed two
facility leases. One of the leases is for office space located in Plymouth, Minnesota. This lease agreement expires in
February 2018 and the current monthly rent is $1,170. In addition, LogicMark also subleases office and warehouse space
located in Louisville, Kentucky. The monthly rent for the space is $8,850 and this sublease agreement is due to expire in
July 2017. The Company incurred rent expense of $154,194 and $124,698 for the years ended December 31, 2016 and December 31,
2015, respectively. Minimum lease payments for non-cancelable operating leases are as follows:
Future Lease Obligations
|
|
|
|
|
|
|
|
2017
|
|
$
|
172,586
|
|
2018
|
|
|
2,340
|
|
Total future lease obligations
|
|
$
|
174,926
|
|
Effective
October 1, 2015, we extended the employment agreement with Gino M. Pereira, our Chief Executive Officer. The term of the employment
agreement is for 3 years and the term began on October 1, 2015. Effective January 1, 2017, Mr. Pereira’s base salary increased
to $381,150 from $346,500. The employment agreement also provides for:
|
●
|
Payment
of all necessary and reasonable out-of-pocket expenses incurred by the executive in the performance of his duties under the
agreement.
|
|
●
|
Eligibility
to participate in bonus or incentive compensation plans that may be established by the board of directors from time to time
applicable to the executive’s services.
|
|
●
|
Eligibility
to receive equity awards as determined by the board of directors, or a committee of the board of directors, composed in compliance
with the corporate governance standards of any applicable listing exchange.
|
NOTE
13 - SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
January 3, 2017, the Company issued 6,000 shares of its common stock for the payment of services with a grant
date fair market value of $16,680.
On
various dates during the first quarter of 2017, purchasers of the Series A Preferred Stock converted in aggregate
$306,109 of Series A Preferred Stock and dividends into 130,259 shares of common stock.
On
various dates during the first quarter of 2017, purchasers of the Series B Preferred Stock converted in aggregate $1,682,031
of Series B Preferred Stock, dividends and liquidated damages into 762,097 shares of common stock.
On
March 28, 2017, the Company issued 27,500 shares of its common stock for the payment of services with a grant
date fair market value of $52,250.
On
March 28, 2017, the Company issued 237,559 shares of its common stock to certain employees under the 2016 bonus plan.
On March 26, 2017, the Company
signed a binding Letter of Intent (“LOI”) with Fit Pay, Inc., a Delaware corporation (“Fit Pay”),
regarding the acquisition by the Company of all of the equity of Fit Pay (the “Transaction”). Following the
Transaction, Fit Pay will become a wholly owned subsidiary of the Company. The purchase price of the Transaction will consist
of: (i) the issuance of 19.99% of the outstanding shares of the capital stock of the Company to the shareholders of Fit Pay;
(ii) the issuance by the Company of $2,000,000 worth of non-voting, non-convertible, shares of junior preferred stock to
(the “Junior Preferred Stock”) to certain holders of preferred shares of Fit Pay, which Junior Preferred Stock
shall earn a cumulative dividend of 5% per annum, which will increase to a dividend of 10% per annum after the
Company’s market capitalization is $75,000,000 for greater than thirty (30) consecutive days; and (iii) an earn-out
payment to the then former shareholders of Fit Pay of 12.5% of the gross revenue derived from the Seller’s technology
by the Company, for the sixteen (16) quarter period beginning on October 1, 2017. The parties intend to negotiate and execute
a definitive agreement for the Transaction in accordance with the terms of the LOI.
The definitive agreements will include customary closing
conditions including necessary approvals. The Company and Fit Pay have agreed not to initiate or enter into any discussion with
any other prospective purchaser of the assets and/or liabilities, or of the stock or business of Fit Pay prior to May 26, 2017.