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 and operates its business in one
segment — hardware and software security systems and applications. 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” (“IoT”)
applications.
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 was required to pay the LogicMark Sellers an earn-out payment of (i) $1,500,000
for calendar year 2016 and (ii) and may be required to pay the LogicMark Sellers an earn-out payment of up to $5,000,000 for calendar
year 2017 if LogicMark meets certain gross profit targets set forth in the Interest Purchase Agreement. The secured subordinated
promissory note originally issued to LogicMark Investment Partners on July 25, 2016 and amended on November 29, 2016 (the “LogicMark
Note”) was to mature on September 23, 2016 but was extended to April 15, 2017 and then extended to July 15, 2017. The Company
and the LogicMark Sellers also agreed to extend the due date on the 2016 earn-out payment to July 15, 2017. On July 19, 2017,
the Company paid the 2016 earn-out payment in the amount of $1,500,000 to the LogicMark Sellers. In addition, in July 2017, the
remaining balance of $594,403 owed on the LogicMark Note, including accrued and unpaid interest, was purchased by certain investors
in exchange for $594,408 in principal amount of convertible notes of the Company and warrants exercisable for 297,202 shares of
Common Stock. See Note 7
On
May 23, 2017, the Company completed a merger (the “Merger”) pursuant to an executed Agreement and Plan of Merger (the
“Merger Agreement”) by and among the Company, Fit Merger Sub, Inc., a wholly-owned subsidiary of the Company (the
“Merger Sub”), Fit Pay, Inc. (“Fit Pay”), Michael Orlando (“Orlando”), Giesecke & Devrient
Mobile Security America, Inc. (“G&D”), the other stockholders of Fit Pay (the “Other Holders”) and
Michael Orlando in his capacity as stockholder representative representing the Other Holders (the “Stockholder Representative”,
and together with Orlando and G&D, the “Sellers”). Pursuant to the Merger, Fit Pay merged with and into the Merger
Sub, with the Merger Sub continuing as the surviving entity and a wholly-owned subsidiary of the Company. See Note 5.
The
Company’s wholly-owned subsidiary, 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’s wholly-owned
subsidiary, Fit Pay, has a proprietary technology platform that delivers payment, credential management, authentication and
other secure services to the IoT ecosystem. The platform uses tokenization, a payment security technology that replaces
cardholders’ account information with a unique digital identifier, to transact highly secure contactless payment and
authentication services.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements as of September 30, 2017 and for the nine and 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 September 30, 2017 and the condensed
consolidated statements of operations for the nine and three months ended September 30, 2017 and September 30, 2016 and the condensed
consolidated statements of cash flows for the nine months ended September 30, 2017 and September 30, 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 nine and three months
ended September 30, 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 (the “2016 10-K”), and Amendment No. 1 to the 2016 10-K
filed with the SEC on July 7, 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 ten (10) shares of outstanding common stock decreased to one (1) share of common
stock. Throughout this report, the Reverse Split was retroactively applied to all periods presented.
Note
3 - Liquidity and Management Plans
The
Company is an emerging growth company and recorded operating income of $49,565 and a net loss of $5,960,684 during the nine
months ended September 30, 2017. As of September 30, 2017, the Company had a working capital deficiency of $6,322,182
(including contingent consideration of $5,340,432) and stockholders’ equity of $6,835,893. Given the Company’s
cash position at September 30, 2017, proceeds from equity and note offerings subsequent to September 30, 2017 (See Note 10)
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 filing. 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 engage in certain
cost containment efforts, and/or curtail certain of its operational activities.
Note
4 - Summary Of Significant Accounting Policies
Use
of Estimates in the Financial Statements
The
preparation of 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 financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s management evaluates
these significant estimates and assumptions including those related to the fair values of acquired assets and liabilities assumed
in business combinations, stock based compensation, derivative financial instruments, income taxes and related valuation allowances,
accounts receivable and inventory, 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, LogicMark
and Fit Pay. Intercompany balances and transactions have been eliminated in consolidation.
Concentrations
of Credit Risk
During
the nine and three months ended September 30, 2017, the Company recognized revenue of $7,057,032 and $767,751, respectively, from
World-Ventures Holdings, LLC (“WVH”), a related party based on its position as the Company’s largest stockholder.
At September 30, 2017, the Company’s accounts receivable balance included $1,893,662 due from WVH.
Revenue
Recognition
The
Company recognizes revenue from product sales 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 September 30, 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 September
30, 2017, inventory was comprised of $3,756,866 in raw materials and $1,121,329 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 September 30, 2017, and December 31, 2016,
the Company had prepaid inventory of $1,321,230 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.
Goodwill
The
Company’s goodwill relates to the acquisitions of LogicMark and Fit Pay. The Company began testing goodwill for
impairment in the third quarter of 2017 as it relates to the acquisition of LogicMark which occurred on July 25, 2016.
As part of the annual evaluation, the Company utilized the option to first assess qualitative factors, which include
but are not limited to, economic, market and industry conditions, as well as the financial performance of LogicMark. In
accordance with applicable guidance, an entity is not required to calculate the fair value of a reporting unit if, after
assessing these qualitative factors, the Company determines that it is more likely than not that its reporting unit’s
fair value is greater than its carrying amount. During the three and nine months ended September 30, 2017, the Company
determined that it was more likely than not that the fair value of LogicMark exceeded its respective carrying amount and
therefore, a quantitative assessment was not required. The Company has not recognized any goodwill impairment in 2017 in
connection with its annual impairment test. The Company will begin testing the Fit Pay related goodwill for impairment
annually in the second quarter of each year.
Other
Intangible Assets
The
Company’s intangible assets are all related to the acquisitions of LogicMark and Fit Pay and are included in other
intangible assets in the Company’s condensed consolidated balance sheets at September 30, 2017 and December 31,
2016.
At
September 30, 2017, the other intangible assets related to the acquisition of LogicMark are comprised of patents of $3,657,833;
trademarks of $1,182,973; and customer relationships of $2,875,123. 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 nine and three months ended September 30,
2017, the Company had amortization expense of $569,796 and $192,019, respectively related to the LogicMark intangible assets.
At
September 30, 2017, the other intangible assets related to the acquisition of Fit Pay, which was completed on May 23, 2017, are
comprised of trademarks of $392,286; technology of $3,225,675; and customer relationships of $1,360,820. The Company will continue
amortizing these intangible assets using the straight-line method over their estimated useful lives which for trademarks, technology
and customer relationships are 25 years; 7 years; and 6 years, respectively. During the nine and three months ended September
30, 2017, the Company had amortization expense of $266,619 and $187,244, respectively, related to the Fit Pay intangible assets.
As
of September 30, 2017, amortization expense estimated for the remainder of fiscal year 2017 related to both the LogicMark and
Fit Pay intangibles is approximately $380,000 and for each of the next five(5) fiscal years, 2018 through 2022, the amortization
expense is estimated to be approximately $1,505,000 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 1,151,374 realizable from the convertible exchange
notes and related accrued interest and from the exercise of 3,926,251 warrants as of September 30, 2017 were excluded from the
computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive for the nine and
three months ended September 30, 2017. As of September 30, 2016, potentially dilutive securities realizable from the convertible
Series A and Series B Preferred Stock, and from the exercise of 1,319,049 warrants 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 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.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“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 in the first quarter of 2017 and it did not 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 condensed consolidated financial position and results of operations.
In November 2016, the FASB issued ASU No.
2016-18, Statement of Cash Flows: Restricted Cash (“ASU No. 2016-18”). The amendments address diversity in practice
that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This ASU is effective retrospectively for fiscal years and interim periods within those years beginning after
December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this update
provide a screen to determine when a set is not a business. If the screen is not met, it (1) requires that to be considered a
business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability
to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. The amendments
in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted. This ASU is not expected to have a material impact on the Company’s condensed
consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”
to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,
Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in
this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. This ASU is not expected
to have a material impact on the Company’s condensed consolidated financial statements.
Note
5 – Acquisitions
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 they relate 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, in order to fund part of the acquisition purchase price 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 originally incurred $1,357,356
in deferred debt issue costs related to the revolving loan. In addition, the Company incurred an additional $450,000 in deferred
debt issue costs as a result of extending the revolving loan. At September 30, 2017 the unamortized balance of those deferred
debt issue costs was $365,000. The initial maturity date of the Revolving Loan was July 25, 2017, and the Revolving Loan bears
interest at a rate of 15% per annum.
The Company has the ability to extend the
Revolving Loan for one (1) additional year at its sole discretion with no subjective acceleration by the Lender, provided the
Company is not in default on the loan. The Company exercised the option to extend the maturity date to July 25, 2018 and
accordingly, the Company has classified the Revolving Loan as a non-current liability as of September 30, 2017 and December 31,
2016.
The
Loan Agreement contains customary covenants, including an EBITDA requirement and a fixed charges ratio, as defined in the
loan agreement. As of September 30, 2017, the Company was in compliance with such covenants.
On
September 23, 2016, the Company entered into a forbearance agreement with LogicMark Investment Partners, LLC 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. As discussed below, the LogicMark Note was
extended to July 15, 2017 pursuant to an amendment.
Under
the terms of the forbearance agreement, the LogicMark Sellers agreed to extend the maturity date of the LogicMark Note and the
Company agreed to pay to the LogicMark Sellers 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 LogicMark Seller’s forbearance. During June 2017, the Company
paid down $250,000 of the LogicMark Note with cash generated from operations. The LogicMark Note originally was to mature on September
23, 2016 but was extended to July 15, 2017. In July 2017, the remaining balance of the LogicMark Note including the accrued interest
owed was settled.
Acquisition
of Fit Pay
As
discussed in Note 1, the Company completed the “Merger” on May 23, 2017. Pursuant to the terms of the Merger Agreement,
the aggregate purchase price paid for Fit Pay stock was: (i) 1,912,303 shares of common stock which was equivalent to 19.96% of
the outstanding shares of common stock of the Company (the “Common Stock”); (ii) 2,000 shares of the Series C Non-Convertible
Preferred Stock of the Company (the “Series C Preferred Stock”); (iii) the payment of certain debts by the Company;
and (iv) the payment of certain unpaid expenses of the Fit Pay Sellers of $724,116 by the Company. In addition, the Company will
be required to pay the Fit Pay Sellers an earn-out payment equal to 12.5% of the gross revenue derived from Fit Pay’s technology
for sixteen (16) fiscal quarters commencing on October 1, 2017 and ending on December 31, 2021. To date, Fit Pay has had minimal
revenue. The operating results of Fit Pay have been included in the condensed consolidated financial statements from the effective
date of the acquisition, May 23, 2017.
In
connection with the merger on May 23, 2017, the Company recorded deferred tax liabilities of $1,797,476 as part of its preliminary
purchase price allocation. As indicated below, the Company is in the process of completing its analysis of the fair value of the
net assets acquired and the consideration granted and therefore the deferred tax liabilities recorded are considered preliminary
and subject to change.
Preliminary
Allocation of Purchase Price of Fit Pay
The
Merger Agreement was accounted for under the acquisition method of accounting. The purchase price was preliminarily allocated
to the tangible and identifiable assets acquired and liabilities assumed of Fit Pay 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 is in the
process of completing its analysis of the fair value of the net assets acquired and the consideration granted through the use
of an independent valuation firm and management’s preparation of estimates. Since the following information is based on
preliminary assessments made by management, the acquisition accounting for Fit Pay is subject to final adjustment and it is possible
that the final assessment of values may differ from the preliminary assessment. The following table summarizes the preliminary
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 May 23, 2017.
Cash
|
|
$
|
10,889
|
|
Accounts receivable
|
|
|
91,810
|
|
Other current assets
|
|
|
77,095
|
|
Property and equipment
|
|
|
31,967
|
|
Goodwill
|
|
|
7,954,260
|
|
Intangible assets (See Note 4)
|
|
|
5,245,400
|
|
Assets acquired
|
|
|
13,411,421
|
|
|
|
|
|
|
Accounts payable
|
|
|
165,650
|
|
Accrued liabilities
|
|
|
964,463
|
|
Customer deposits
|
|
|
286,948
|
|
Deferred taxes
|
|
|
1,797,476
|
|
Liabilities assumed
|
|
|
3,214,537
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
10,196,884
|
|
Goodwill
arising from the transaction consists of the expected operational synergies upon combining the entity and intangibles not qualifying
for separate recognition.
In
connection with the Fit Pay transaction, the Company entered into an employment agreement with Michael Orlando, the former Chief
Executive Officer of Fit Pay.
Mr.
Orlando is now the Chief Operating Officer of the Company and President of the wholly-owned subsidiary, Fit Pay.
The term of the employment agreement is for one (1) year and the employment agreement includes provisions for term
extensions. In addition to Mr. Orlando’s salary, the employment agreement also provides for all necessary and
reasonable out-of-pocket expenses incurred in the performance of his duties under the agreement, eligibility to participate
in bonus or incentive compensation plans of the Company and eligibility to receive equity awards as determined by the board
of directors.
Pro
Forma Financial Information
The
following table summarizes the unaudited pro forma financial information assuming that the acquisitions of LogicMark and Fit
Pay occurred on January 1, 2016, and their respective results had been included in the Company’s financial results for
the nine and three months ended September 30, 2017 and September 30, 2016. The pro forma combined amounts are based upon
available information and reflect a reasonable estimate of the effects of the acquisitions of LogicMark and Fit Pay 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 acquisitions of LogicMark and Fit Pay in fact occurred on the date
assumed, nor is it necessarily indicative of the results that may be expected in future periods.
|
|
Nine Months Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Pro forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
18,961,528
|
|
|
$
|
4,530,088
|
|
|
$
|
11,490,257
|
|
|
$
|
4,014,154
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(7,862,415
|
)
|
|
$
|
(4,101,606
|
)
|
|
$
|
(16,898,135
|
)
|
|
$
|
(4,614,264
|
)
|
Net Loss Per Share - Basic and Diluted applicable to
Common Stockholders
|
|
$
|
(0.71
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
(0.53
|
)
|
The
unaudited pro forma net loss attributable to the Company has been calculated using actual historical information
and is adjusted for certain pro forma adjustments based on the assumption that the acquisitions of LogicMark and Fit Pay and
the application of fair value adjustments to intangible assets occurred on January 1, 2016. For the three and nine months
ended September 30, 2017, the pro forma financial information excluded the Fit Pay acquisition-related expenses of $26,626
and $149,443, respectively, which are included in the actual reported results, as general and administrative expenses,
but excluded from the pro forma amounts above due to their nonrecurring nature. In addition, the pro forma adjustments for
the three and nine months ended September 30, 2017 include the following adjustments; (a) amortization expense related to
the acquired intangible assets of $nil and $289,066, respectively; (b) interest expense of $nil and $211,406, respectively;
and (c) dividends related to the Series C Preferred Stock of $nil and $38,904, respectively.
For
the three and nine months ended September 30, 2016, the pro forma financial information reflects the following adjustments; (a)
the exclusion of the acquisition-related expenses of $275,948 and $609,466; (b) amortization of the inventory fair value adjustment
of $nil and $945,212, respectively; (c) reduction in depreciation expense of $15,719 and $28,935, respectively; (d) amortization
expense related to the acquired intangible assets of $378,881 and $1,124,291, respectively; (e) interest expense including the
amortization of deferred debt issue costs of $1,443,667 and $4,325,190, respectively; and (f) dividends related to the Series
B Preferred Stock and Series C Preferred Stock of $306,456 and $918,545, respectively.
Note
6 – Strategic Agreements with world ventures holdings
The
Company is a party to a Master Product Development Agreement with WVH, a related party. During the nine and three months ended
September 30, 2017, the Company recorded revenue of $7,057,032 and $767,751, respectively related to WVH. At September 30, 2017,
the Company’s accounts receivable balance included $1,893,662 due from WVH.
Note
7 – Convertible Notes Payable
July
2017 Exchange
In
order to consummate a registered direct offering and concurrent private placement on July 13, 2017 (See Note 8), the Company
was required to obtain consent from the holders (the “November Holders”) of the Company’s (i) Amended and
Restated Secured Subordinated Promissory Notes, originally issued on July 25, 2016 (
i.e.
, the LogicMark Note), and
amended on November 29, 2016 (the “November Notes”), and (ii) certain common stock purchase warrants (the
“November Warrants”) that were initially exercisable on November 29, 2016. In consideration of the November
Holders providing such consent to the registered direct offering and concurrent private placement, the Company and the
November Holders agreed, as of July 11, 2017, to the following amendments to their respective November Notes, November
Warrants, and that certain Exchange Agreement, dated November 29, 2016 (the “Exchange Agreement”):
|
1.
|
The
conversion price of the November Notes was lowered from $3.00 to $2.00.
|
|
2.
|
The
exercise price of the November Warrants was lowered from $3.00 to $2.00.
|
|
3.
|
The
Company’s prohibition under the Exchange Agreement providing that for so long as the November Holders are holders of
the November Notes, the November Warrants, or the shares of Common Stock issuable thereunder, the Company may not issue shares
of our Common Stock at a price per share less than $3.00 per share, was lowered to $2.00 per share.
|
In
connection with the reduction in conversion price of the November Notes from $3.00 to $2.00, the Company incurred a non-cash charge
for modification of convertible exchange note terms of $191,630 for the three and nine months ended September 30, 2017. In addition,
the Company expensed the remaining unamortized note discount and deferred debt issue costs related to the November Notes of $491,667
and $35,949, respectively. As a result of lowering the conversion price of the November Warrants from $3.00 to $2.00, the Company
also incurred a non-cash charge for modification of terms related to the November Warrants of $37,000 for the three and nine months
ended September 30, 2017.
On
July 19, 2017, the November Holders purchased from LogicMark Investment Partners, LLC (“LogicMark Investment Partners”),
the representative of LogicMark, LLC, the outstanding balance of $594,403, including accrued and unpaid interest on the LogicMark
Note. In connection therewith, the Company, LogicMark Investment Partners and the November Holders entered into an Assignment
and Assumption Agreement, dated July 19, 2017, pursuant to which LogicMark Investment Partners assigned the LogicMark Note to
the November Holders. In addition, on July 19, 2017, the Company and the November Holders entered into a Securities Exchange Agreement
pursuant to which the Company exchanged the LogicMark Note held by the November Holders for (i) an aggregate principal amount
of $594,408 of secured subordinated convertible promissory notes of the Company (the “July 2017 Notes”) due in July
2018, and (ii) warrants exercisable into 297,202 shares of Common Stock (the “July 2017 Warrants”). The July 2017
Notes are convertible into shares of Common Stock at a conversion price of $2.00 per share and the July 2017 Warrants are exercisable
into shares of Common Stock with a five year term and an exercise price of $2.00 per share. The exercise and the amount of shares
of common stock issuable upon exercise of the July 2017 Warrants are subject to adjustment upon certain events, such as stock
splits, combinations, dividends, distributions. reclassifications, mergers or other corporate changes and dilutive issuances.
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 above) and beneficial conversion feature, the total debt discount recognized was $432,917. The
debt discount is being amortized over the term of the debt and the Company amortized $81,839 of the debt discount for the
three and nine months ended September 30, 2017.
Note
8 - Stockholders’ Equity
July
2017 Offerings
On
July 13, 2017, the Company closed a registered direct offering of an aggregate of 2,170,000 shares of the
Company’s common stock, and pre-funded warrants to purchase 230,000 shares of common stock. The Company sold the shares
at a price of $1.43 per share and received $1.42 per pre-funded warrant. The Company received gross proceeds from the
offering, before deducting placement agent fees and other estimated offering expenses payable by the Company, of
approximately $3,429,700. The pre-funded w
arrants were converted into shares of common stock on September 23, 2017 and
as a result were included in the common stock outstanding balance for purposes of computing earnings per share.
On
July 13, 2017, the Company also closed on a concurrent private placement with the same investors for no additional consideration,
of warrants to purchase 1,800,000 shares of common stock. The warrants will be exercisable beginning on the six (6) month anniversary
of the date of issuance, at an exercise price of $2.00 per share and will expire on the fifth anniversary of the initial exercise
date.
Series
A Preferred Stock
For
the nine and three months ended September 30, 2017, the Company recorded Series A Preferred Stock dividends of $34,884 and $0,
respectively. During the nine months ended September 30, 2017 holders, of 211,424 shares of Series A Preferred Stock converted
$338,749 of Series A Preferred Stock and dividends into 159,219 shares of common stock. As of September 30, 2017, there was no
remaining outstanding principal balance on the Series A Preferred Stock.
Series
B Preferred Stock
For
the nine and three months ended September 30, 2017, the Company recorded Series B Preferred Stock dividends of $634,375 and $71,875,
respectively. During the nine months ended September 30, 2017, holders of 4,500,000 shares of Series B Preferred Stock converted
$6,075,000 of Series B Preferred Stock, dividends and liquidated damages into 3,106,802 shares of common stock. As of September
30, 2017, there was no remaining outstanding principal balance on the Series B Preferred Stock.
Series
C Preferred Stock
In
May 2017, the Company authorized a new Series C Preferred Stock. The terms of the Series C Preferred Stock are as follows:
Dividends
on Series C Preferred Stock
Holders
of Series C Preferred Stock are entitled to receive from and after the first date of issuance of the Series C Preferred
Stock, cumulative dividends at a rate of 5% per annum on a compounded basis, which dividend amount shall be guaranteed. Accrued
and unpaid dividends are payable in cash. For the nine and three months ended September 30, 2017, the Company recorded Series
C Preferred Stock dividends of $35,890 and $25,205, respectively.
Redemption
of Series C Preferred Stock
The
Series C Preferred Stock may be redeemed by the Company solely at the Company’s option in cash at any time, in whole or
in part, upon payment of the stated value of the Series C Preferred Stock, and all related accrued but unpaid dividends.
Fundamental
Change
If
a “fundamental change” occurs at any time while the Series C Preferred Stock is outstanding, the holders of shares
of Series C Preferred Stock then outstanding shall be immediately paid, out of the assets of the Company or the proceeds of such
fundamental change, as applicable, and legally available for distribution to its stockholders, an amount in cash equal to the
stated value of the Series C Preferred Stock, and all related accrued but unpaid dividends.
If
the legally available assets of the Company and the proceeds of such “fundamental change” are insufficient to pay
the all of the Holders of the Series C Preferred Stock, then the Holders of the Series C Preferred Stock shall share ratably in
any such distribution in proportion to the amount that they would have been entitled to. A fundamental change includes but is
not limited to any change in the ownership of at least fifty percent (50%) of the voting stock; liquidation or dissolution; or
the Common Stock ceases to be listed on the market upon which it currently trades.
Voting
Rights
The
holders of the Series C Preferred Stock are entitled to vote on any matter submitted to the stockholders of the Company for a
vote. One (1) share of Series C Preferred Stock shall carry the same voting rights as one (1) share of Common Stock.
Classification
The
Series C Preferred Stock was accounted for under Section 480-10-S99 - Distinguishing Liabilities from Equity (FASB Accounting
Standards Codification 480) as amended by ASU 2009-04 - for Redeemable Equity Instruments (“ASU 2009-04”). Under ASU
2009-04, a redeemable equity security is to be classified as temporary equity if it is conditionally redeemable upon the occurrence
of an event that is not solely within the control of the issuer. The Company’s financing is redeemable at the option of
the holder under the specified terms and conditions of such preferred stock however, the instrument was not redeemable as of September
30, 2017. Therefore, the Company classified the Series C Preferred Stock as temporary equity in the condensed consolidated balance
sheet at September 30, 2017.
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 nine months ended September 30, 2017, the Company issued 131,363 shares of common stock under the LTIP to five (5) non-executive
directors for serving on the Company’s board. The aggregate fair value of the shares issued to the directors was $260,000.
Also during the nine months ended September 30, 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.
In September 2017, the Company granted 622,507 restricted shares of common stock with an aggregate value of $1,067,231 to certain
executive and non-executive employees. The vesting period for these restricted shares of common stock is twelve months. During
the nine months ended September 30, 2017, the Company expensed $614,655 related to these restricted stock awards. At September
30, 2017, a total of 737,992 shares of common stock have been issued from the LTIP and there are no further shares available to
be issued under the LTIP for the remainder of 2017.
2017 Stock Incentive Plan
On August 24, 2017, a majority of the Company’s
stockholders approved at the Company’s annual meeting the Company’s 2017 Stock Incentive Plan (“2017 SIP”).
The purpose of the 2017 SIP is to enable the Company to provide a means to issue shares of Common Stock or stock options which
may be exercised for shares of Common Stock to certain eligible consultants, employees and service providers of the Company as
a substitute for, or as an additional incentive to, paying cash compensation to consultants and non-payroll employees or as a portion
of severance packages in certain scenarios. The 2017 SIP works in tandem with the 2013 LTIP to provide additional means to compensate
our employees. The maximum aggregate number of shares of common stock that may be issued under the 2017 SIP, 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 at January 1, 2018; provided that
for fiscal year 2017, 1,500,000 shares of Common Stock may be delivered to participants under the 2017 SIP.
During the nine months ended September 30,
2017, the Company issued 437,384 shares of common stock under the 2017 SIP.
Warrants
As of September 30, 2017, the Company
had 3,926,251 warrants outstanding with a weighted average exercise price and remaining life in years of $6.54 and 4.043,
respectively. At September 30, 2017, the warrants had no intrinsic value.
During
the nine months ended September 30, 2017, the Company accrued $700,000 of discretionary management and employee bonus expense.
During
the nine months ended September 30, 2017, the Company issued 119,800 fully-vested shares of common stock with a fair value of
$240,535 to non-employees for services rendered.
Note
9 - Commitments and Contingencies
Legal
Matters
From
time to time we may be involved in various claims and legal actions arising in the ordinary course of our business. 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 $6,911,
expiring on various dates through August 2020. The Company incurred rent expense of $150,730 and $103,232 for the nine months
ended September 30, 2017 and September 30, 2016, respectively. Minimum future lease payments for non-cancelable operating leases
are as follows:
2017
|
|
$
|
50,775
|
|
2018
|
|
|
110,867
|
|
2019
|
|
|
112,015
|
|
2020
|
|
|
65,235
|
|
Total future lease obligations
|
|
$
|
338,891
|
|
The
maturity of the Company’s debt is as follows:
2017
|
|
$
|
-
|
|
2018
|
|
|
266,200
|
|
2019
|
|
|
212,961
|
|
2020
|
|
|
212,961
|
|
2021
|
|
|
159,719
|
|
Total debt
|
|
$
|
851,841
|
|
Note
10 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
October 2, 2017, the Company issued 6,000 shares of its common stock for the payment of services with a grant date fair value
of $13,200.
On
November 13, 2017, the Company closed a registered direct offering of an aggregate of 2,941,177 shares of
the Company’s common stock. The Company sold the shares at a price of $1.36 per share. The Company received gross
proceeds from the offering, before deducting placement agent fees and other estimated offering expenses payable by the
Company, of approximately $4,000,000.
On
November 13, 2017, the Company also closed on a concurrent private placement with the same investors for no additional
consideration, of warrants to purchase 2,500,000 shares of common stock.