NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization and Basis of Presentation
Organization
and Principal Business Activities
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 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
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 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. The Company is currently in the process of negotiating with the
LogicMark Sellers to extend the due date on both the earn-out payment related to 2016 and the installment payment and accrued
interest related to the LogicMark Note. Such amounts aggregate $1,500,000 and $813,635, respectively, and have been included as a
component of current liabilities on the condensed consolidated balance sheet as of March 31, 2017.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements as of March 31, 2017, and for the three months then ended
have been prepared in accordance with the accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of
Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares
its annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of March 31, 2017
and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 2017 and March 31, 2016 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods
presented. The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for
the year ending December 31, 2017, or for any future interim period. The condensed consolidated balance sheet at December 31,
2016 has been derived from audited consolidated financial statements. However, it does not include all of the information and
notes required by GAAP for complete consolidated financial statements. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016, and
notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April
14, 2017.
Note
2 – 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3 – Liquidity And Management Plans
The
Company is an emerging growth entity and recorded an operating profit of $1,066,902 and a net loss of $730,215 during
the three months ended March 31, 2017. As of March 31, 2017 the Company had a working capital deficiency of $1,391,950
and stockholders’ equity of $2,896,650. Given the Company’s cash position at March 31, 2017 and its projected
cash flow from operations over the next twelve months, the Company believes that it will have sufficient capital to sustain
operations over the next twelve months following the date of this report. 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. 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 condensed consolidated financial statements in conformity with 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,
accounts receivable and inventories, and other matters that affect the condensed consolidated financial statements and
disclosures. Actual results could differ from those estimates.
Principles
of consolidation
The
condensed 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.
Concentrations
of Credit Risk
During
the three months ended March 31, 2017, the Company recognized revenue of $2,708,036 from World Ventures Holdings, LLC
(“WVH”), a related party and the Company’s largest stockholder. At March 31, 2017, the Company’s
accounts receivable balance included $1,593,500 due from WVH.
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.
Accounts
Receivable
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. The Company had no
allowance for doubtful accounts at March 31, 2017, and December 31, 2016.
Inventory
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. As of March 31,
2017 inventory was comprised of $3,909,176 in raw materials and $1,311,605 in finished goods on hand. Inventory at December 31,
2016 was comprised of $3,797,499 in raw materials and $1,544,001 in finished goods on hand. The
Company is required to prepay for raw materials with certain vendors until credit terms can be established. As of March 31, 2017,
and December 31, 2016, the Company had prepaid inventory of $1,801,816 and $1,089,770, respectively. These prepayments were made
primarily for raw materials inventory and prepaid inventory is included in prepaid expenses and other current assets on the condensed
consolidated balance sheet.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
4 – Summary Of Significant Accounting Policies (Continued)
Goodwill
The Company’s goodwill relates to
the acquisition of LogicMark. 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 acquisition of LogicMark and are included in other intangible assets
in the Company’s condensed consolidated balance sheets at March 31, 2017, and December 31, 2016.
At
March 31, 2017, the other intangible assets are comprised of patents of $3,844,707; trademarks
of $1,214,498; and customer relationships of $3,038,675. At December 31, 2016, the other intangible assets are
comprised of patents of $3,936,612; trademarks of $1,230,002; and customer relationships of $3,119,111. The Company will continue amortizing 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 three months ended March 31, 2017, the Company had amortization expense of $187,845 related to the intangible assets.
As of March 31, 2017, amortization
expense estimated for the remainder of fiscal 2017 is approximately $574,000 and for each of the next five fiscal years, 2018
through 2022 the amortization expense is estimated to be approximately $762,000 per year.
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 1,749,805 realizable from the Series
A Preferred Stock and Series B Preferred Stock (as defined in Note 7), 575,000 from the convertible exchange notes and from
the exercise of 1,829,049 warrants as of March 31, 2017 were excluded from the computation of diluted net loss per share
because the effect of their inclusion would have been anti-dilutive. As of March 31, 2016, potentially dilutive securities
from the conversion of convertible notes of $838,171 and related accrued interest and from the exercise of warrants into
756,549 shares of Common Stock were excluded from the computation of diluted net loss per share because the effect of their
inclusion would have been anti-dilutive.
Recent
Accounting Pronouncements
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
adopted this standard during the three
months ended March 31, 2017 and it did not have a material impact on its condensed consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the gross profit targets as it relates to the contingent considerations would be achieved and any fair
value adjustment of the earn-out was due to time value of the payout.
On
July 25, 2016, and in order to fund part of the proceeds of the acquisition of LogicMark, 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 March 31, 2017 the
unamortized balance of those deferred debt issue costs was $428,316. 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 March 31, 2017, the Company was in compliance with such covenants.
The
Company has the ability to extend the Revolving Loan 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 Revolving Loan as a non-current liability as of March 31,
2017 and December 31, 2016.
On
September 23, 2016, the Company entered into a forbearance agreement with LogicMark Investment Partners, LLC (the “Lender”)
in connection with the LogicMark Note originally issued on July 22, 2016 in the amount of $2,500,000 which
expired on September 22, 2016. The Company formally requested that the Lender extend the LogicMark Note on September
20, 2016. On September 23, 2016, the LogicMark Note was extended pursuant to an amendment.
Under
the terms of the forbearance agreement, the Lender agreed to extend the LogicMark 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 LogicMark Note on October 31, 2016. The Company also agreed
to reduce the Escrow Amount (as defined in the Interest 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 LogicMark Note originally was to
mature on September 23, 2016 but was extended to April 15, 2017. The Company is
currently in the process of securing
funds to settle the remaining balance owed on the LogicMark Note.
Pro
Forma Financial Information
The
following table summarizes the unaudited pro forma financial information assuming that the acquisition of LogicMark occurred
on January 1, 2016, and its results had been included in the Company’s financial results for the three months ended
March 31, 2016. 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.
|
|
Three months ended
|
|
|
|
March 31, 2016
|
|
|
|
(unaudited)
|
|
Pro forma:
|
|
|
|
Net Sales
|
|
$
|
3,317,476
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(6,752,784
|
)
|
Net Loss Per Share - Basic and Diluted applicable to Common Stockholders
|
|
$
|
(1.27
|
)
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Acquisition
Of Logicmark LLC (Continued)
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 acquisition of LogicMark and the
application of fair value adjustments to intangible assets occurred on January 1, 2016.
The
pro forma adjustments for the three months ended March 31, 2016 include the following adjustments, (a) amortization expense related
to the acquired intangible assets of $200,158; (b) interest expense including the amortization of deferred debt issue costs of
$1,251,627; (c) reduction in depreciation expense of $6,608; and (d) amortization of the inventory fair value adjustment of $945,212.
Note
6 – Strategic Agreements with world ventures holdings
On
December 31, 2015, the Company entered into a Master Product Development Agreement (the “Development Agreement”)
with World Ventures Holdings, LLC (“WVH”), a related party and the Company’s largest stockholder. 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.
During the three months ended March 31, 2017,
the Company recorded revenue of $2,708,036 related to WVH. At March 31, 2017, the Company’s accounts receivable balance
included $1,593,500 due from WVH.
Note
7 – Stockholders’ Equity
Series A Preferred Stock
For the three months ended March 31,
2017, the Company recorded Series A Preferred Stock dividends of $31,395. During the three months ended March 31, 2017
holders of 100,899 shares of Series A Preferred Stock converted $197,105 of Series A Preferred Stock and dividends
into 83,876 shares of common stock. As of March 31, 2017 the outstanding principal balance on the Series A Preferred Stock
was $110,525.
Series B Preferred Stock
For the three months ended March
31, 2017, the Company recorded Series B Preferred Stock dividends of $281,250. During the three months ended March 31,
2017 holders of 1,326,692 shares of Series B Preferred Stock converted $1,791,035 of Series B Preferred Stock, dividends
and liquidated damages into 808,480 shares of common stock. As of March 31, 2017 the outstanding principal balance on the
Series B Preferred Stock was $3,173,308.
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 737,992 at January 1, 2017. During the three months ended March
31, 2017, the Company issued 32,433 shares of common stock 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 $60,000. Also during the three months
ended March 31, 2017, the Company issued 237,559 shares of Common Stock with an aggregate fair value of $400,000 to executive
and certain non-executive employees related to the Company’s 2016 management incentive plan. The vesting
period for these restricted shares of common stock is thirty-six months. During the three months ended March 31, 2017 and 2016,
the Company expensed $26,250 related to these restricted stock awards. At March 31, 2017, a total of 453,939 shares of common
stock have been issued from the Plan and 284,062 are available to be issued.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 – Stockholders’ Equity (Continued)
During
the three months ended March 31, 2017, the Company accrued $150,000 of discretionary management and employee bonus expense.
During
the three months ended March 31, 2017, the Company issued 38,906 shares of common stock with a fair value of $73,980 to non-employees
for services rendered.
Note
8 – 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 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.
Commitments
The Company is a party to certain
leases for office space and warehouse facilities, with monthly payments ranging from $1,750 to $8,850, expiring on
various dates through February 2018.
The Company
incurred rent expense of $44,165 and $31,903 for the three months ended March 31, 2017 and March 31, 2016, respectively.
Minimum lease payments for non-cancelable operating leases are as follows:
Future Lease Obligations
|
|
|
|
|
|
|
|
2017
|
|
$
|
107,993
|
|
2018
|
|
|
2,340
|
|
Total future lease obligations
|
|
$
|
110,333
|
|
Note
9 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
From April 4, 2017 through May 10, 2017,
purchasers of the Series B Preferred Stock converted an aggregate $1,867,788 of Series B Preferred Stock, dividends and
liquidated damages into 993,507 shares of common stock.