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.
On December 19,
2017, and effective as of November 29, 2017, we entered into an agreement (the “Amendment Agreement”) with the holders
of the convertible notes and common stock purchase warrants issued pursuant to that certain Exchange Agreement, dated November
29, 2016, by and among the Company and such holders. Pursuant to the Amendment Agreement, the parties agreed to (i) amend the
maturity dates of the convertible notes by one (1) year, or November 29, 2018, and (ii) that the holders would forbear the exercise
of any remedies due to the passing of the original maturity date. In consideration thereof, the Company issued to the holders
an aggregate of 370,000 shares of restricted Common Stock.
On December 26,
2017, we closed a registered direct offering of an aggregate of 1,750,000 shares (the “December Shares”) of Common
Stock. We sold the December Shares at a price of $4.00 per share. We received gross proceeds from the offering, before deducting
placement agent fees and other estimated offering expenses payable by us, of approximately $7 million. Aegis Capital Corp. acted
as the lead placement agent for the offering and Maxim Group LLC acted as a co-placement agent for the offering.
INDEX TO FINANCIAL STATEMENTS
Nxt-ID, Inc. and Subsidiary
CONTENTS
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Nxt-ID, Inc.:
We have audited, before the effects of the adjustments
to retrospectively apply the changes in the presentation of deferred debt issuance costs and in share and per-share data as described
in note 2, the accompanying consolidated balance sheet of Nxt-ID, Inc. and subsidiary as of December 31, 2015, and the
related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. The
2015 consolidated financial statements before the effects of the adjustments discussed in note 2 are not presented herein.
The 2015 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2015 consolidated financial statements,
before the effects of the adjustments to retrospectively apply the changes in the presentation of deferred debt issuance costs
and in share and per-share data as described in note 2, present fairly, in all material respects, the financial position
of Nxt-ID, Inc. and subsidiary as of December 31, 2015, and the results of their operations and their cash flows for the
year then ended in conformity with U.S. generally accepted accounting principles.
We were not engaged to audit, review, or apply any
procedures to the adjustments to retrospectively apply the changes in the presentation of deferred debt issuance costs and in
share and per-share data as described in note 2 and, accordingly, we do not express an opinion or any other form of assurance
about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by a successor auditor.
The accompanying consolidated financial statements
as of December 31, 2015 and for the year then ended have been prepared assuming that the Company will continue as a going concern.
As discussed in note 3 to the consolidated financial statements, the Company has incurred recurring losses from operations that
raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters
are also described in note 3. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG
LLP
Stamford, Connecticut
April 14, 2016
Nxt-ID,
Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
3,299,679
|
|
|
$
|
418,991
|
|
Restricted cash
|
|
|
40,371
|
|
|
|
1,534,953
|
|
Accounts receivable
|
|
|
1,218,705
|
|
|
|
-
|
|
Inventory, net
|
|
|
5,341,500
|
|
|
|
1,767,942
|
|
Prepaid expenses and other current
assets
|
|
|
1,347,627
|
|
|
|
986,595
|
|
Total Current Assets
|
|
|
11,247,882
|
|
|
|
4,708,481
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
175,537
|
|
|
|
105,902
|
|
Furniture and fixtures
|
|
|
79,062
|
|
|
|
72,713
|
|
Tooling and molds
|
|
|
581,881
|
|
|
|
390,952
|
|
|
|
|
836,480
|
|
|
|
569,567
|
|
Accumulated depreciation
|
|
|
(456,752
|
)
|
|
|
(196,353
|
)
|
Property and equipment, net
|
|
|
379,728
|
|
|
|
373,214
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
15,479,662
|
|
|
|
-
|
|
Other intangible assets, net of
amortization of $318,842 and $0, respectively
|
|
|
8,285,725
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
35,392,997
|
|
|
$
|
5,081,695
|
|
Liabilities and Stockholders’ Equity
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,070,658
|
|
|
$
|
1,333,137
|
|
Accrued expenses
|
|
|
2,901,672
|
|
|
|
641,438
|
|
Customer deposits
|
|
|
6,068,894
|
|
|
|
8,729
|
|
Short-term debt
|
|
|
773,969
|
|
|
|
-
|
|
Convertible notes payable, net of discount of $1,366,667
and $1,445,342, respectively, and net of deferred debt issuance costs of $123,563 and $52,810, respectively
|
|
|
9,770
|
|
|
|
1,796,698
|
|
Derivative liability conversion feature
|
|
|
-
|
|
|
|
420,360
|
|
Other current liabilities –
contingent consideration
|
|
|
1,496,442
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
13,321,405
|
|
|
|
4,200,362
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities – contingent consideration
|
|
|
4,832,028
|
|
|
|
-
|
|
Revolving loan facility, net of
deferred debt issuance costs of $769,453
|
|
|
14,230,547
|
|
|
|
-
|
|
Deferred tax liability
|
|
|
190,286
|
|
|
|
-
|
|
Total Liabilities
|
|
|
32,574,266
|
|
|
|
4,200,362
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value: 10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A preferred stock, $0.0001 par value: 3,125,000
shares designated; 310,268 issued and outstanding (aggregate liquidation preferences of $440,594) as of December 31, 2016
|
|
|
182,851
|
|
|
|
-
|
|
Series B preferred stock, $0.0001 par value: 4,500,000
shares designated; 4,500,000 issued and outstanding (aggregate liquidation preferences of $5,625,000) as of December 31, 2016
|
|
|
4,090,000
|
|
|
|
-
|
|
Common stock, $0.0001 par value: 10,000,000 shares authorized;
7,379,924 and 4,442,528 issued and outstanding, respectively
|
|
|
738
|
|
|
|
444
|
|
Additional paid-in capital
|
|
|
33,204,943
|
|
|
|
22,787,762
|
|
Accumulated deficit
|
|
|
(34,659,801
|
)
|
|
|
(21,906,873
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’
Equity
|
|
|
2,818,731
|
|
|
|
881,333
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Stockholders’ Equity
|
|
$
|
35,392,997
|
|
|
$
|
5,081,695
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
7,736,320
|
|
|
$
|
616,854
|
|
Costs of goods sold
|
|
|
4,434,868
|
|
|
|
1,823,824
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
|
3,301,452
|
|
|
|
(1,206,970
|
)
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
6,241,685
|
|
|
|
3,565,242
|
|
Selling and marketing
|
|
|
2,881,668
|
|
|
|
3,423,567
|
|
Research and development
|
|
|
888,187
|
|
|
|
2,728,518
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
10,011,540
|
|
|
|
9,717,327
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(6,710,088
|
)
|
|
|
(10,924,297
|
)
|
|
|
|
|
|
|
|
|
|
Other Income and (Expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
23
|
|
|
|
727
|
|
Interest expense
|
|
|
(3,275,059
|
)
|
|
|
(1,249,961
|
)
|
Inducement expense
|
|
|
-
|
|
|
|
(755,000
|
)
|
Loss on extinguishment of debt
|
|
|
(272,749
|
)
|
|
|
(635,986
|
)
|
Realized gain on change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
47,242
|
|
Change in fair value of derivative liabilities
|
|
|
(2,299,020
|
)
|
|
|
444,728
|
|
Total Other Expense, Net
|
|
|
(5,846,805
|
)
|
|
|
(2,148,250
|
)
|
|
|
|
|
|
|
|
|
|
Loss before Income Taxes
|
|
|
(12,556,893
|
)
|
|
|
(13,072,547
|
)
|
Provision for Income Taxes
|
|
|
(196,035
|
)
|
|
|
(4,307
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(12,752,928
|
)
|
|
|
(13,076,854
|
)
|
Preferred stock dividend
|
|
|
(1,080,741
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(13,833,669
|
)
|
|
$
|
(13,076,854
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share - Basic and Diluted
|
|
$
|
(2.24
|
)
|
|
$
|
(4.82
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding
- Basic and Diluted
|
|
|
6,172,272
|
|
|
|
2,711,198
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance
- January 1, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,477,605
|
|
|
$
|
248
|
|
|
$
|
11,565,115
|
|
|
$
|
(8,830,019
|
)
|
|
$
|
2,735,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock purchase warrants, net of fees
|
|
|
|
|
|
|
|
|
|
|
32,500
|
|
|
|
3
|
|
|
|
649,997
|
|
|
|
-
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants for cash, net of fees
|
|
|
|
|
|
|
|
|
|
|
332,143
|
|
|
|
33
|
|
|
|
2,917,345
|
|
|
|
-
|
|
|
|
2,917,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued related to waiver of installment provisions
|
|
|
|
|
|
|
|
|
|
|
58,300
|
|
|
|
6
|
|
|
|
139,915
|
|
|
|
-
|
|
|
|
139,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
|
|
|
|
|
|
|
|
|
254,147
|
|
|
|
25
|
|
|
|
2,381,936
|
|
|
|
-
|
|
|
|
2,381,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock to employees
|
|
|
|
|
|
|
|
|
|
|
16,000
|
|
|
|
2
|
|
|
|
373,832
|
|
|
|
-
|
|
|
|
373,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release
of escrowed common stock to officers
|
|
|
|
|
|
|
|
|
|
|
11,833
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants in connection with the World Ventures Holding Transaction
|
|
|
|
|
|
|
|
|
|
|
1,005,000
|
|
|
|
100
|
|
|
|
1,974,422
|
|
|
|
-
|
|
|
|
1,974,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with the issuance of convertible notes on December 8, 2015
|
|
|
|
|
|
|
|
|
|
|
90,000
|
|
|
|
9
|
|
|
|
332,991
|
|
|
|
-
|
|
|
|
333,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible notes to common stock
|
|
|
|
|
|
|
|
|
|
|
140,000
|
|
|
|
14
|
|
|
|
183,779
|
|
|
|
-
|
|
|
|
183,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with the issuance of convertible notes on April 23, 2015, net of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,513,434
|
|
|
|
-
|
|
|
|
1,513,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inducement
fees
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
3
|
|
|
|
754,997
|
|
|
|
-
|
|
|
|
755,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,076,854
|
)
|
|
|
(13,076,854
|
)
|
Balance
- December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
4,442,528
|
|
|
|
444
|
|
|
|
22,787,762
|
|
|
|
(21,906,873
|
)
|
|
|
881,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
|
|
|
|
|
|
|
|
|
204,553
|
|
|
|
21
|
|
|
|
619,233
|
|
|
|
-
|
|
|
|
619,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of remaining conversion feature liability
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,702,400
|
|
|
|
-
|
|
|
|
1,702,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants in connection with the acquisition of Logicmark
|
|
|
|
|
|
|
|
|
|
|
78,740
|
|
|
|
8
|
|
|
|
899,992
|
|
|
|
-
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock purchase warrants in connection with the acquisition of Logicmark
|
|
|
|
|
|
|
|
|
|
|
157,480
|
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible notes and interest to common stock
|
|
|
|
|
|
|
|
|
|
|
1,601,905
|
|
|
|
160
|
|
|
|
3,943,261
|
|
|
|
-
|
|
|
|
3,943,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series A preferred stock, net
|
|
|
2,500,000
|
|
|
|
2,269,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,269,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A preferred stock and dividends to common stock
|
|
|
(2,189,732
|
)
|
|
|
(2,086,924
|
)
|
|
|
834,718
|
|
|
|
83
|
|
|
|
2,461,058
|
|
|
|
-
|
|
|
|
374,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with the management incentive plan for 2015
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
6
|
|
|
|
371,994
|
|
|
|
-
|
|
|
|
372,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series B preferred stock, net
|
|
|
4,500,000
|
|
|
|
4,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
discount recorded in connection with the issuance of Convertible Exchange notes on November 29, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,752,928
|
)
|
|
|
(12,752,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,080,741
|
)
|
|
|
|
|
|
|
(1,080,741
|
)
|
Balance
- December 31, 2016
|
|
|
4,810,268
|
|
|
$
|
4,272,851
|
|
|
|
7,379,924
|
|
|
$
|
738
|
|
|
$
|
33,204,943
|
|
|
$
|
(34,659,801
|
)
|
|
$
|
2,818,731
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,752,928
|
)
|
|
$
|
(13,076,854
|
)
|
Adjustment
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
260,399
|
|
|
|
183,196
|
|
Stock
based compensation
|
|
|
1,113,129
|
|
|
|
1,513,584
|
|
Amortization
of debt discount
|
|
|
648,365
|
|
|
|
1,093,371
|
|
Amortization
of intangible assets
|
|
|
318,842
|
|
|
|
-
|
|
Amortization of discount on contingent consideration
|
|
|
91,682
|
|
|
|
-
|
|
Loss
on extinguishment of debt
|
|
|
272,749
|
|
|
|
635,986
|
|
Inducement
fees
|
|
|
-
|
|
|
|
755,000
|
|
Non
- cash inventory charges
|
|
|
48,405
|
|
|
|
999,124
|
|
Amortization
of deferred debt issuance costs
|
|
|
631,994
|
|
|
|
35,683
|
|
Unrealized
(loss) gain on change in fair value of derivative liabilities
|
|
|
2,299,020
|
|
|
|
(444,728
|
)
|
Realized
gain on change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
(47,242
|
)
|
Stock
issued related to waiver of installment provisions
|
|
|
-
|
|
|
|
139,921
|
|
Deferred
taxes
|
|
|
190,286
|
|
|
|
-
|
|
Other
|
|
|
44,628
|
|
|
|
69,850
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(721,230
|
)
|
|
|
-
|
|
Inventory
|
|
|
(1,055,846
|
)
|
|
|
(2,407,522
|
)
|
Prepaid
expenses and other current assets
|
|
|
(362,399
|
)
|
|
|
400,497
|
|
Accounts
payable
|
|
|
120,008
|
|
|
|
1,352,881
|
|
Accrued
expenses
|
|
|
1,842,683
|
|
|
|
306,451
|
|
Customer
deposits
|
|
|
6,060,165
|
|
|
|
(129,870
|
)
|
Total
Adjustments
|
|
|
11,865,666
|
|
|
|
4,456,182
|
|
Net
Cash Used in Operating Activities
|
|
|
(950,048
|
)
|
|
|
(8,620,672
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from Investing Activities
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,494,582
|
|
|
|
(1,506,514
|
)
|
Acquisition,
net of cash acquired
|
|
|
(17,390,290
|
)
|
|
|
-
|
|
Purchase
of equipment
|
|
|
(39,073
|
)
|
|
|
(381,767
|
)
|
Net
Cash Used in Investing Activities
|
|
|
(15,934,781
|
)
|
|
|
(1,888,281
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
received from issuance of Series A preferred stock, net
|
|
|
1,869,775
|
|
|
|
-
|
|
Proceeds
received from issuance of Series B preferred stock, net
|
|
|
4,090,000
|
|
|
|
-
|
|
Proceeds
received from short-term promissory note
|
|
|
400,000
|
|
|
|
-
|
|
Pay
down of short-term debt
|
|
|
(1,726,031
|
)
|
|
|
-
|
|
Proceeds
received in connection with issuance of common stock and warrants, net
|
|
|
-
|
|
|
|
5,114,353
|
|
Proceeds
received from issuance of convertible exchange notes, net
|
|
|
1,400,000
|
|
|
|
-
|
|
Revolver
borrowings, net
|
|
|
13,906,250
|
|
|
|
-
|
|
Payment
of Series A preferred stock dividends
|
|
|
(123,457
|
)
|
|
|
-
|
|
Proceeds
from convertible notes payable
|
|
|
-
|
|
|
|
2,962,304
|
|
Proceeds
received in connection with exercise of warrants
|
|
|
-
|
|
|
|
650,000
|
|
Fees
paid in connection with equity offerings
|
|
|
(51,020
|
)
|
|
|
-
|
|
Net
Cash Provided by Financing Activities
|
|
|
19,765,517
|
|
|
|
8,726,657
|
|
Net
Increase (Decrease) in Cash
|
|
|
2,880,688
|
|
|
|
(1,782,296
|
)
|
Cash
- Beginning of Year
|
|
|
418,991
|
|
|
|
2,201,287
|
|
Cash
- End of Year
|
|
$
|
3,299,679
|
|
|
$
|
418,991
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the periods for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
930,219
|
|
|
$
|
-
|
|
Taxes
|
|
$
|
8,764
|
|
|
$
|
1,000
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
Equipment
purchases on payment terms
|
|
$
|
-
|
|
|
$
|
18,420
|
|
Fees
incurred in connection with equity offerings
|
|
$
|
-
|
|
|
$
|
222,453
|
|
Issuance
of common stock in connection with accelerated installments of note payable
|
|
$
|
3,294,850
|
|
|
|
350,000
|
|
Reclassification
of conversion feature liability in connection with note modification
|
|
$
|
1,702,400
|
|
|
$
|
-
|
|
Commitment
shares issued in connection with December 8, 2015 notes
|
|
$
|
-
|
|
|
$
|
333,000
|
|
Additional
convertible notes issued in connection with exchange of April 24, 2015 notes for December 8, 2015 notes
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Fees
incurred in connection with revolving credit facility
|
|
$
|
256,250
|
|
|
$
|
-
|
|
Issuance
of common stock in connection with conversion of interest on convertible notes
|
|
$
|
291,588
|
|
|
$
|
-
|
|
Issuance
of common stock in connection with conversion of Series A preferred stock
|
|
$
|
2,189,732
|
|
|
$
|
-
|
|
Accrued
Series A preferred dividends
|
|
$
|
92,442
|
|
|
$
|
-
|
|
Accrued
Series B preferred dividends
|
|
$
|
490,625
|
|
|
$
|
-
|
|
Exchange
of short-term promissory note for Series A preferred stock
|
|
$
|
400,000
|
|
|
$
|
-
|
|
Issuance
of common stock in connection with conversion of dividends on Series A preferred stock
|
|
$
|
374,217
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
LogicMark
Acquisition:
|
|
|
|
|
|
|
|
|
Assets
acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
Current
assets, including cash acquired of $109,710
|
|
$
|
3,541,323
|
|
|
$
|
-
|
|
Property
and equipment
|
|
|
227,840
|
|
|
|
-
|
|
Goodwill
and other intangible assets
|
|
|
24,084,229
|
|
|
|
-
|
|
Accounts
payable and accrued liabilities
|
|
|
(716,604
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
|
27,136,788
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
cash paid to acquire LogicMark
|
|
|
(17,500,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non
cash consideration
|
|
$
|
9,636,788
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
consideration consisted of:
|
|
|
|
|
|
|
|
|
Note
payable issued to sellers
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
Common
stock and warrants issued to sellers
|
|
|
900,000
|
|
|
|
-
|
|
Earn-out
provision
|
|
|
6,236,788
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
consideration
|
|
$
|
9,636,788
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
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.
Fit Pay, Inc.
Financial
Statements (unaudited)
As of and for the three months period
ended March 31, 2017 and 2016
Fit
Pay, Inc.
Table of Contents
Fit
Pay, Inc.
Unaudited Condensed Statement
of Balance Sheet
|
|
March
31, 2017
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
188,162
|
|
Accounts receivable, net
|
|
|
31,500
|
|
Prepaid expenses and other current assets
|
|
|
46,671
|
|
Total current assets
|
|
|
266,333
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
Property and equipment, net
|
|
|
33,812
|
|
Deposits
|
|
|
3,240
|
|
Total non-current assets
|
|
|
37,052
|
|
|
|
|
|
|
Total assets
|
|
$
|
303,385
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
139,032
|
|
Accrued expense
|
|
|
40,742
|
|
Deferred revenue
|
|
|
188,081
|
|
Notes payable to related party
|
|
|
850,692
|
|
Total current liabilities
|
|
|
1,218,547
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
Deferred revenue
|
|
|
29,375
|
|
Total non-current liabilities
|
|
|
29,375
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,247,922
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
Common Stock, no par value: 6,154,537 shares authorized; 100,000,000 shares
issued and outstanding
|
|
|
61,545
|
|
Preferred stock, no par value: 2,235,081 shares authorized; 2,235,081 shares
issued and outstanding
|
|
|
3,261,289
|
|
Additional Paid-in Capital
|
|
|
765,134
|
|
Retained Earning
|
|
|
(5,032,505
|
)
|
Total stockholders' deficit
|
|
|
(944,537
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
303,385
|
|
See accompanying notes to financial statements.
Fit
Pay, Inc.
Unaudited Condensed Statement of Operations
Three
Months Ending March 31,
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
56,004
|
|
|
$
|
83,333
|
|
Cost of sales
|
|
|
48,585
|
|
|
|
83,333
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,419
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
214,682
|
|
|
|
128,499
|
|
Sales and marketing
|
|
|
44,372
|
|
|
|
62,013
|
|
Research and development
|
|
|
195,213
|
|
|
|
485,623
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
454,267
|
|
|
|
676,135
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(446,848
|
)
|
|
|
(676,135
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,434
|
)
|
|
|
(1,535
|
)
|
Total other expenses
|
|
|
(1,434
|
)
|
|
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(448,282
|
)
|
|
|
(677,670
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(448,282
|
)
|
|
$
|
(677,670
|
)
|
See accompanying notes to financial statements.
Fit
Pay, Inc.
Unaudited Condensed Statement
of Cash Flows
Three
Months Ending March 31,
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(448,282
|
)
|
|
$
|
(677,670
|
)
|
Adjustments to reconcile
net loss to net cash used in operating
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
3,240
|
|
|
|
1,285
|
|
Stock compensation
|
|
|
28,777
|
|
|
|
5,628
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(31,500
|
)
|
|
|
555
|
|
Prepaid expenses
and other current assets
|
|
|
105,695
|
|
|
|
-
|
|
Deposit
|
|
|
-
|
|
|
|
75,000
|
|
Accounts payable
|
|
|
52,811
|
|
|
|
374,370
|
|
Accrued expenses
and other current liabilities
|
|
|
(108,920
|
)
|
|
|
(8,551
|
)
|
Deferred revenue
|
|
|
191,843
|
|
|
|
453,121
|
|
Net cash (used in) provided by operating activities
|
|
|
(206,336
|
)
|
|
|
223,738
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of intangible property
|
|
|
-
|
|
|
|
(266,667
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(266,667
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
borrowing
|
|
|
50,782
|
|
|
|
-
|
|
Proceeds from
related party additional capital
|
|
|
100,000
|
|
|
|
-
|
|
Proceeds from
issuances of preferred stock
|
|
|
-
|
|
|
|
3,000,000
|
|
Proceeds from
issuances of common stock
|
|
|
182
|
|
|
|
446
|
|
Net cash provided by financing activities
|
|
|
150,964
|
|
|
|
3,000,446
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(55,372
|
)
|
|
|
2,957,517
|
|
|
|
|
|
|
|
|
|
|
Cash – beginning of year
|
|
|
243,534
|
|
|
|
4,090
|
|
|
|
|
|
|
|
|
|
|
Cash – end of quarter
|
|
$
|
188,162
|
|
|
$
|
2,961,607
|
|
|
|
|
|
|
|
|
|
|
Non-cash transaction – investing and financing:
|
|
|
|
|
|
|
|
|
Preferred stock deemed dividend
|
|
|
-
|
|
|
|
560,722
|
|
See accompanying notes to financial statements.
Fit
Pay, Inc.
Notes to Unaudited
Condensed Financial Statements
or the Three Months
Period Ended March 31, 2017 and 2016
Fit Pay, Inc. (the “Company”),
a Delaware Corporation incorporated on June 16, 2014, provides a proprietary technology platform that adds contactless payment
capabilities to wearable and IoT devices—with very little startup time, no investment in software development and instant
access to the leading card networks. The Company integrates its technology into a wearable and IoT devices which provides customers
to make purchases from many merchants worldwide.
The Company is located in Danville, California.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
This summary of significant accounting
policies of the Company is presented to assist in understanding the Company’s condensed unaudited financial statements.
The condensed unaudited financial statements and notes are representations of the Company’s management, which is responsible
for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation
of the financial statements.
Basis of Presentation
The accounting and reporting
policies of the Company are in accordance with accounting principles generally accepted in the United States of America, which
is based on the accrual method of accounting.
The included unaudited condensed
consolidated financial statements as of March 31, 2017 and 2016, have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should
be read in conjunction with the audited financial statements and notes thereto contained here within. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results
of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are
not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the condensed consolidated
financial statements which substantially duplicate the disclosure contained in the financial statements as reported in the year
ended December 31, 2016 financial statements included here within, have been omitted.
The Company currently operates
in one business segment. The Company is not organized by market and is managed and operated as one business. A single management
team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business.
The Company does not currently operate any separate lines of businesses or separate business entities.
Cash and cash equivalents
For purposes of the statement
of cash flows, the Company considers highly liquid investments with an original maturity at the date of purchase of three months
or less to be cash equivalents.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting
period. Significant estimates include, but are not limited to, estimated fair market value of stock based compensation, the estimated
useful lives of property and equipment, and the ultimate collection of accounts receivable. Actual results could materially differ
from those estimates.
Fit Pay,
Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March
31, 2017 and 2016
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Revenue Recognition
The Company recognizes revenue
in accordance with accounting principles generally accepted in the United States. Recognition occurs when there is persuasive
evidence of an arrangement, services are rendered, the fees are fixed and determinable, and collection is reasonably assured.
Deferred Revenue
The Company’s deferred
revenues consist of prepayments made by certain of the Company’s customers and undelivered implementation or services. The
Company decreases the deferred revenues by the amount of the services it renders to such clients when provided, which the Company
expects to be within the next twelve months.
Advertising Expense
Advertising costs are expensed
as incurred and is recorded under sales and marketing in the accompanying statement of operations. Advertising expenses amounted
to $44,372 and $62,013 for the three months period ended March 31, 2017 and 2016, respectively.
Property and Equipment
Property and equipment are recorded
at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided using both the
straight-line method over the following estimated useful lives:
|
Office Equipment
|
3 years
|
|
Furniture and fixtures
|
7 years
|
Deferred Rent
Rent expenses are recognized
using the straight-line method over the terms of the lease. The difference between rent expense incurred and the rental amount
paid is reported as deferred rent obligation in the accompanying balance sheet. Contingent rental payments, including rents that
depend on future events such as sales volume, inflation, and future property taxes, are exempt from straight-line procedures and
are not included in the scheduled minimum lease payments. Deferred rent was immaterial at March 31, 2017.
Research and Development Costs
Research and development costs
are charged to expense as incurred in the accompanying statement of operations. Research and development expenses consists primarily
of salaries and related expenses, contractor and consultant expenses, and allocated overhead.
Long-lived Assets
In accordance with ASC 360, “Property,
Plant, and Equipment,” the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying
value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s
ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title
to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative
industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the
use of the asset are less than its carrying amount. As of March 31, 2017, the Company was not aware of any events or changes in
circumstances that would indicate that the long-lived assets are impaired.
Fit
Pay, Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March 31, 2017 and 2016
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
|
Fair Value of Financial Instruments
The Company records its financial
assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques
to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes
a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable,
that may be used to measure fair value which are the following:
Level 1 – Quoted prices in active markets
for identical assets or liabilities.
Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 – Inputs include
management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The
inputs are unobservable in the market and significant to the instrument's valuation.
As of March 31, 2017, the Company
believes that the carrying value of cash, accounts payable, accrued expenses, and other current assets and liabilities approximate
fair value due to the short maturity of theses financial instruments.
The condensed financial statements
do not include any financial instruments at fair value on a recurring or nonrecurring basis.
Share-Based Payment
The Company accounts for stock-based
compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions
of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as an expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company has elected to use
the Black-Scholes option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions
including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards.
Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated
forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
Income Taxes
Income taxes are provided for
the tax effects of transactions reported in the financial statements and consisted of taxes currently due and deferred taxes.
Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial statement and income
tax purposes.
Fit
Pay, Inc.
Notes to Unaudited
Condensed Financial Statements
For the Three Months Period Ended March 31, 2017 and 2016
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
The Company follows ASC 740,
Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The Company adopted ASC 740-10-25,
which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. The Company did not recognize additional liabilities for uncertain tax positions as a result of the
implementation of ASC 740-10-25 for the period ended March 31, 2017.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk are cash and trade receivable arising from its normal business activities.
The Company deposits its cash in high credit quality institutions. The Company performs ongoing credit evaluations to its customers
and establishes allowances when appropriate.
The Company maintains cash in
various accounts located in California. The Company has cash in financial institutions which are insured by the Federal Deposit
Insurance Company (FDIC) up to $250,000 at each institution. At various times throughout the year, the Company may have cash balances
in financial institutions that exceed the FDIC insurance limit. Management reviews the financial condition of these financial
institutions on a periodic basis and does not believe this concentration of cash results in a high level of risk for the Company.
At March 31, 2017, the Company’s bank deposits on hand did not exceed the FDIC insurance limit.
|
3.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted
of the following:
|
March 31,
|
|
2017
|
|
|
Office equipment
|
|
$
|
29,233
|
|
|
Furniture and fixtures
|
|
|
22,457
|
|
|
Total property and equipment
|
|
|
51,690
|
|
|
Less – accumulated depreciation and amortization
|
|
|
(17,878
|
)
|
|
Total property and equipment, net
|
|
$
|
33,812
|
|
Depreciation and amortization
expense on property and equipment amounted to approximately $3,240 and $1,285 for the three months period ended March 31, 2017
and 2016, respectively.
Fit
Pay, Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March 31, 2017 and 2016
|
4.
|
NOTES PAYABLE TO RELATED PARTY
|
The Company entered into various
notes payable between September 2014 and March 2017 with the Company’s shareholder. The notes bear interest of 0.41% per
annum and are due upon demand. The Company had $800,662 outstanding as of March 31, 2017.
Total interest expense under
notes payable was $751 and $1,334 for the three months period ended March 31, 2017 and 2016, respectively.
On March 9, 2017, the Company
borrowed approximately $50,000 from its shareholder and founder with interest rate at 1% per annum. The note is payable and unpaid
interest is due upon demand. Total interest expense for the three months period ended March 31, 2017 was $30. At March 31, 2017,
the outstanding balance on the note payable was approximately $50,000.
|
5.
|
CONVERTIBLE NOTES PAYABLE TO RELATED PARTY
|
The Company issued convertible notes as follows:
|
Holder
|
|
Date
Issued
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Amount
|
|
|
Balance
at
March 31,
2017
|
|
|
Holder
1
|
|
December 1, 2014
|
|
June
1, 2016
|
|
|
4.0
|
%
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
Holder 2
|
|
April 1, 2015
|
|
October 1, 2016
|
|
|
4.0
|
%
|
|
|
30,000
|
|
|
|
-
|
|
|
Holder
3
|
|
April
1, 2015
|
|
October
1, 2016
|
|
|
4.0
|
%
|
|
|
125,000
|
|
|
|
-
|
|
|
Total amount
|
|
|
|
|
|
|
|
|
|
$
|
180,000
|
|
|
$
|
-
|
|
The convertible notes are convertible
into the Company’s common stock, $0.01 per share (“Common Stock”), or convertible preferred stock (see Note
6), at a price per share equal to the valuation cap divided by the fully diluted capitalization as defined in the agreement in
the event that neither a qualified financing nor a change of control as defined in the agreement has been consummated on or before
the maturity date.
The convertible notes contain
automatic conversion features. The conversion amount will be converted on or before the maturity date into equity securities issued
and sold at the close of the Company’s next equity financing in a single transaction or a series of related transactions
yielding gross proceeds to the Company of at least $1,000,000 (including conversion of the notes).
The Company considered the guidance
in ASC 815,
Derivatives and Hedging,
and determined the embedded conversion feature should not bifurcated and accounted
for separately as a derivative liability because the embedded conversion feature is contingent. The Company then considered the
guidance in ASC 470-20-25-20,
Debt with Conversions and Other Options,
and determined that any beneficial conversion feature
shall not be recognized until and unless the triggering event occurs. As a result, no beneficial conversion feature was recognized
on the date of issuance. In January 2016, the Company completed a qualified financing (see Note 6), as defined, resulting in the
convertible debt being automatically converted into shares of preferred stock. Therefore, the Company converted the convertible
debt with a net book value of approximately $186,000, including accrued interest, into 436,835 shares of preferred stock (see
Note 6) with an estimated fair market value of $747,000, resulting in a deemed dividend on extinguishment of debt of approximately
$561,000 which is recorded against accumulated deficit.
Interest expense incurred related
to the convertible notes payable was approximately $0 and $560 for the three months period ended March 31, 2017 and
2016, respectively.
Fit Pay,
Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March
31, 2017 and 2016
Common Stock
During the three months period
ended March 31, 2017 and 2016, the Company issued 18,229 and 44,653, respectively, shares of its Common Stock to its employees
for proceeds of $182 and $446, respectively.
Convertible preferred stock
The Company is authorized to
issue 2,235,081 shares of convertible preferred stock with a par value of $0.01 per share. All preferred shares of the company
have been designated “Series Seed Preferred Stock”. The Company has issued 2,235,081 of Series Seed Preferred Stock.
The preferred stock is convertible at the original issue price for such preferred stock divided by the conversion price, which
is defined as the original issue price, subject to adjustments, both standard and anti-dilutive. The Company is required to reserve
common shares to cover any conversion of the preferred stock. The Company has determined that as a result of the preferred stock
being equity classification, derivative accounting is not required for the embedded conversion feature within the convertible
preferred stock. The Company determined it had in reserve shares of common stock to cover the conversion of preferred stock at
March 31, 2017.
During the three months period
ended March 31, 2016, the Company issued a total of 43,860 of Series Seed Preferred Stock to one investor at a price of $1.71
per share for total proceeds of $75,000. A total of 417,715 shares of preferred stock were issued to two investors as a result
of the conversion of convertible notes at a conversion price of $0.38 per share (see Note 5). 19,120 shares were issued to a single
investor as a result of the conversion of convertible notes at a conversion price of $1.37 (see Note 5).
The holders of Series Seed Preferred Stock have the
rights, preferences, privileges and restrictions as set forth below:
Dividends:
The Company
will declare all dividends pro rata on the Common Stock and the Preferred Stock on a pari passu basis according to the number
of shares of Common Stock held by such holders. For this purpose, each holder of Preferred Stock will be treated as holding the
greatest whole number of shares of Common Stock then issuable upon conversion of all shares of Preferred Stock held by such holder.
As of December 31, 2016, no dividends have been declared.
Liquidation Preferences: In
the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or any Deemed Liquidation Event
(as defined), before any payment can be made to holders of Common Stock, the holders of Preferred Stock must be paid out of the
funds and assets available for distribution to its stockholders, an amount per share equal to the greater of (a) the Original
Issue Price for such share of Preferred Stock, plus any dividends declared but unpaid, or (b) such amount per share as would have
been payable had all shares of Preferred Stock been converted into Common Stock immediately prior to such liquidation, dissolution,
or winding up or Deemed Liquidation Event. If the funds and assets available for distribution are insufficient to pay the holders
of shares of Preferred Stock the full amount to which they are entitled, the holders of shares of Preferred Stock will share ratably
in any distribution of the funds and assets available for distribution in proportion to the respective amounts that would otherwise
be payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable on or with respect
to such shares were paid in full. After full payment has been made to the holders of preferred stock, the remaining proceeds,
if any, will be distributed among the holders of common stock ratably based on the number of shares of common stock held by each
holder.
Conversion: Each share of preferred
stock is convertible, at the option of the holder, into shares of common stock according to the conversion price applicable to
the series of preferred stock, as adjusted at any time after the date of issuance. Each share automatically converts into that
number of shares of common stock determined in accordance with the applicable conversion price upon either (i) the sale of the
Company’s common stock in an initial public offering, or (ii) the date and time, or the occurrence of an event, specified
by vote or written consent of the holders of at least the majority of the outstanding shares of Preferred Stock voting as a single
class on an as-converted basis.
Fit Pay,
Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March 31, 2017 and 2016
6.
|
STOCKHOLDERS’ DEFICIT (continued)
|
Voting: The holders of preferred
stock are entitled to voting rights equal to the number of whole shares of common stock into which each share of preferred stock
could be converted as of the record date for determining stockholders entitled to vote.
Protective provisions: As long
as at least 25% of the initially issued shares of preferred stock remain outstanding, the Company will not be able to do any of
the following without the written consent or affirmative vote of the holders of at least the majority of the outstanding shares
of Preferred Stock: adverse changes to rights, powers, or privileges of preferred stock; increase or decrease in the authorized
number of shares of common stock or preferred stock; creation of any new class or series of shares having rights, powers, or privileges
senior to or on parity with preferred stock; redemption or repurchase of any shares of common stock or preferred stock; declaration
or payment of any dividend or distribution on any shares of common stock or preferred stock; any change in the authorized number
of the members of the Board of Directors; taking any action that would result in a liquidity event; agree or commit to exclusively
license all or substantially all of the Company’s intellectual property in a single transaction or series of related transactions;
issue shares of any class or series of capital stock or issue any securities convertible into capital stock other than shares
of Common Stock granted to employees, officers, directors, contractors, consultants, or advisors pursuant to incentive agreements
or other arrangements that are approved by the Board of Directors, which approval must include the affirmative approval of the
Series Seed Director; and creation or authorization of any debt security that would cause aggregate indebtedness to exceed $350,000,
unless such debt security has received prior approval of the Board of Directors, including the approval of the Series Seed Director.
Redeemed or Otherwise Acquired
Shares: Any shares of Preferred Stock that are redeemed or otherwise acquired by the Company or any of its subsidiaries will be
automatically and immediately cancelled and retired and will not reissued, sold, or transferred. Neither the Company nor any of
its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following any such redemption.
In 2014, the Company adopted
the 2014 Non-statutory Stock Option Agreement (the “NSO Plan”). Under the NSO Plan, non-statutory stock options may
be granted for the purchases of 165,000 shares of common stock to employees, directors, and consultants. NSO stock options are
exercisable over periods not to exceed 10 years from the date of grant. Generally, options vest over a four-year period.
During the year three months
period ended March 31, 2017 and 2016, the Company granted stock options to employees to purchase 65,000 and 0, respectively, shares
of common stock. The stock options have an exercise price of $ 0.49, vest over four years and mature on January 15, 2019. During
the three months period ended March 31, 2017 and 2016, the Company recorded $28,777 and $5,628, respectively, of stock-based compensation
related to common stock options granted to employees. No income tax benefits have been recognized for stock-based compensation
arrangements and no stock-based compensation has been capitalized as of March 31, 2017.
Fit
Pay, Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March 31, 2017 and 2016
|
7.
|
STOCK COMPENSATION (continued)
|
The fair value of each option
awards to employees during the three months period ended March 31, 2017 and 2016 is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions: estimated fair market value of common stock was $0.50, expected
life of approximately 6.25 years, risk-free interest rate of approximately 1.25%, expected volatility of 50% and no dividends
during the expected life,resulting in an estimated fair market value of the stock options of approximately $0.435 per option.
The expected life of the options represents the period of time options are expected to be outstanding and is estimated considering
vesting terms and employees’ historical exercise and post-vesting employment termination behavior. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical
volatilities of public companies operating in the Company’s industry.
|
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2016
|
|
|
737,847
|
|
|
$
|
0.17
|
|
|
|
2.99
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(18,229
|
)
|
|
|
0.01
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(136,250
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March
31, 2017
|
|
|
583,395
|
|
|
$
|
0.14
|
|
|
|
2.61
|
|
|
Vested and expected
to vest at March 31, 2017
|
|
|
583,395
|
|
|
$
|
0.16
|
|
|
|
|
|
|
Exercisable at
March 31, 2017
|
|
|
67,813
|
|
|
$
|
0.01
|
|
|
|
|
|
Future stock-based compensation
for unvested employee options granted and outstanding as of March 31, 2017 is $170,000, which will be recognized over a weighted-average
remaining requisite service period of approximately 2.25 years.
The Company did not have material
income tax provision because of net loss and valuation allowances against deferred income tax provision for the three months periods
ended March 31, 2017 and 2016.
The components of the deferred
tax assets and liabilities are as follows:
|
March
31,
|
|
2017
|
|
|
|
|
|
|
|
Net
operating loss carryovers
|
|
$
|
2,165,000
|
|
|
Valuation allowances
|
|
|
(2,165,000
|
)
|
|
|
|
|
|
|
|
Net deferred tax
assets
|
|
$
|
-
|
|
At March
31, 2017, the Company had available net operating loss carryovers of approximately $2,165,000 million that may be applied against
future taxable income and expires at various dates between 2024 and 2036, subject to certain limitations. The Company has a deferred
tax asset arising substantially from the benefits of such net operating loss deduction and has recorded a valuation allowance
for the full amount of this deferred tax asset since it is more likely than not that some or all of the deferred tax asset may
not be realized.
The Company files income tax
returns in the U.S. federal jurisdiction and California and is subject to income tax examinations by federal tax authorities for
tax years ended 2013 and later and by California authorities for tax years ended 2012 and later. The Company currently is not
under examination by any tax authority. The Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of March 31, 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
Fit
Pay, Inc.
Notes to Unaudited Condensed Financial
Statements
For the Three Months Period Ended March 31, 2017 and 2016
|
9.
|
RELATED PARTY TRANSACTIONS
|
The Company had a note payable
to Michael Orlando with a principal amount of $845,000 and accrued interest of $5,692 as of March 31, 2017. See Note 4.
On March 31, 2017, the Company
received $100,000 from Nxt-ID, Inc (“NXT”) as an advance payment as part of a merger agreement between the two companies
(see Note 11 Subsequent Events). This payment is considered a part of the overall purchase price.
|
10.
|
COMMITMENTS AND CONTINGENCIES
Operating
Lease
|
The Company entered into an
operating facility lease agreement for its office located in California in June 2016 for 4 years’ term expiring in May 2020.
The lease contain rent increase each year with starting base rent of $3,240 per month.
Future minimum
lease expense under the facility lease agreement at March 31, 2017 is as follows:
|
Years
ending December 31,
|
|
Amount
|
|
|
2017
|
|
$
|
29,968
|
|
|
2018
|
|
|
41,076
|
|
|
2019
|
|
|
42,465
|
|
|
2020
|
|
|
17,935
|
|
|
Total
|
|
$
|
131,444
|
|
Total lease expense for the three
months period ended March 31, 2017 and 2016 was $9,719 and $0, respectively.
The Company evaluated all events
or transactions that occurred after March 31, 2017 up through the date the financial statements were available to be issued. During
these periods, the Company did not have any material recognizable subsequent events required to be disclosed as of and for the
three months period ended March 31, 2017 other than the following:
|
●
|
On
May 23, 2017, the Company completed a merger with Nxt-ID, Inc. (“NXT”), a
publicly traded company, whereby NXT acquired all of the equity of the Company (the “Transaction”).
Following the merger, the Company became a wholly owned subsidiary of NXT. The purchase
price of the Transaction consisted of: (i) the issuance of 19.99% of the outstanding
shares of the capital stock of NXT to the shareholders of the Company; (ii) the issuance
by the Company of $2,000,000 worth of voting, non-convertible shares of junior preferred
stock to certain shareholders of preferred shares of the Company; and (iii) an earn-out
payment to the shareholders of the Company of 12.5% of the gross revenue derived from
the then Company’s technology by NXT, for the sixteen quarter period beginning
October 1, 2017.
|
Fit
Pay, Inc.
Financial
Statements
As
of and for the year ended December 31, 2016
with
Independent Auditors’ Report
Fit Pay,
Inc.
Table of Contents
Fit
Pay, Inc.
Independent
Auditors’ Report
To
the Board of Directors
Fit
Pay, Inc.
Danville,
California
Report
on the Financial Statements
We
have audited the accompanying financial statements of Fit Pay, Inc. (the “Company”), which comprise the balance sheet
as of December 31, 2016, and the related statements of operations, changes in shareholder’s deficit, and cash flows for
the year then ended, and the related notes to the financial statements.
Management’s
Responsibility for the Financial Statements
Management
is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due
to fraud or error.
Auditor’s
Responsibility
Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States of America
.
Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fit
Pay, Inc. as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in accordance
with accounting principles generally accepted in the United States of America.
/s/
Benjamin & Young, LLP
Anaheim,
California
November 6, 2017
Fit
Pay, Inc.
Balance Sheet
December 31
|
|
2016
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
243,534
|
|
Prepaid expenses and other current assets
|
|
|
152,366
|
|
Total current assets
|
|
|
395,900
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
Property and equipment, net
|
|
|
37,051
|
|
Deposits
|
|
|
3,240
|
|
Total non-current assets
|
|
|
40,291
|
|
|
|
|
|
|
Total assets
|
|
$
|
436,191
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
86,221
|
|
Accrued expense
|
|
|
149,662
|
|
Deferred revenue
|
|
|
21,238
|
|
Notes payable to related party
|
|
|
799,910
|
|
Total current liabilities
|
|
|
1,057,031
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
Deferred revenue
|
|
|
4,375
|
|
Total non-current liabilities
|
|
|
4,375
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,061,406
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
Common Stock,
no
par value:
10,000,000
shares authorized;
6,136,308
shares issued and outstanding
|
|
|
61,363
|
|
Preferred stock,
no
par value: 2,235,081 shares authorized; 2,235,081 shares issued
and outstanding
|
|
|
3,261,289
|
|
Additional Paid-in Capital
|
|
|
636,356
|
|
Retained Earning
|
|
|
(4,584,223
|
)
|
Total stockholders’ deficit
|
|
|
(625,215
|
)
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
436,191
|
|
See
accompanying notes to financial statements.
Fit
Pay, Inc.
Statement of Operations
Year Ended December 31,
|
|
2016
|
|
Net sales
|
|
$
|
655,354
|
|
Cost of sales
|
|
|
527,825
|
|
|
|
|
|
|
Gross profit
|
|
|
127,529
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
General and administrative
|
|
|
764,731
|
|
Sales and marketing
|
|
|
333,031
|
|
Research and development
|
|
|
1,905,051
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,002,813
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,875,284
|
)
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
Interest expense
|
|
|
(3,897
|
)
|
Total other expenses
|
|
|
(3,897
|
)
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(2,879,181
|
)
|
|
|
|
|
|
Income tax provision
|
|
|
898
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,880,079
|
)
|
See
accompanying notes to financial statements.
Fit
Pay, Inc.
Statement of Shareholders’ Deficit
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance - December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
6,016,655
|
|
|
$
|
-
|
|
|
$
|
13,845
|
|
|
$
|
(1,143,422
|
)
|
|
$
|
(1,129,577
|
)
|
Issuances of preferred stock
|
|
|
1,798,246
|
|
|
|
3,075,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,075,000
|
|
Conversion
of notes payable to preferred stock
|
|
|
436,835
|
|
|
|
186,289
|
|
|
|
-
|
|
|
|
-
|
|
|
|
560,722
|
|
|
|
-
|
|
|
|
747,011
|
|
Deemed
preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(560,722
|
)
|
|
|
(560,722
|
)
|
Issuances
of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
119,653
|
|
|
|
61,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,363
|
|
Stock
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,789
|
|
|
|
-
|
|
|
|
61,789
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,880,079
|
)
|
|
|
(2,880,079
|
)
|
Balance
- December 31, 2016
|
|
|
2,235,081
|
|
|
$
|
3,261,289
|
|
|
|
6,136,308
|
|
|
$
|
61,363
|
|
|
$
|
636,356
|
|
|
$
|
(4,584,223
|
)
|
|
$
|
(625,215
|
)
|
See
accompanying notes to financial statements.
Fit
Pay, Inc.
Statement of Cash Flows
Year Ended December 31,
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(2,880,079
|
)
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
Depreciation expense
|
|
|
8,973
|
|
Stock compensation
|
|
|
61,789
|
|
Changes in assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
|
555
|
|
Prepaid expenses
|
|
|
(152,366
|
)
|
Deposit
|
|
|
(3,240
|
)
|
Accounts payable
|
|
|
8,963
|
|
Accrued expenses and other current liabilities
|
|
|
125,613
|
|
Deferred revenue
|
|
|
29,309
|
|
Net cash used in operating activities
|
|
|
(2,800,483
|
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of property and equipment
|
|
|
(36,269
|
)
|
Net cash used in investing activities
|
|
|
(36,269
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuances of preferred stock
|
|
|
3,075,000
|
|
Proceeds from issuances of common
stock
|
|
|
1,196
|
|
Net cash provided by financing activities
|
|
|
3,076,196
|
|
|
|
|
|
|
Net increase in cash
|
|
|
239,444
|
|
|
|
|
|
|
Cash—beginning of year
|
|
|
4,090
|
|
|
|
|
|
|
Cash—end of year
|
|
$
|
243,534
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
|
$
|
-
|
|
Income taxes
|
|
$
|
800
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
Conversion of notes payable to related
parties to preferred stock
|
|
$
|
747,011
|
|
Preferred stock deemed dividend
|
|
|
560,722
|
|
See
accompanying notes to financial statements.
Fit Pay, Inc.
Notes to Financial Statements
Fit
Pay, Inc. (the “Company”), a Delaware Corporation incorporated on June 16, 2014, provides a proprietary technology
platform that adds contactless payment capabilities to wearable and IoT devices—with very little start-up time, no investment
in software development and instant access to the leading card networks. The Company integrates its technology into a wearable
and IoT devices which provides customers to make purchases from many merchants worldwide.
The
Company is located in Danville, California.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United
States of America, which is based on the accrual method of accounting.
Cash
and cash equivalents
For
purposes of the statement of cash flows, the Company considers highly liquid investments with an original maturity at the date
of purchase of three months or less to be cash equivalents.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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 revenue and expenses
during the reporting period. Significant estimates include, but are not limited to, estimated fair market value of stock based
compensation, the estimated useful lives of property and equipment, and the ultimate collection of accounts receivable. Actual
results could materially differ from those estimates.
Revenue
Recognition
The
Company recognizes revenue in accordance with accounting principles generally accepted in the United States. Recognition occurs
when there is persuasive evidence of an arrangement, services are rendered, the fees are fixed and determinable, and collection
is reasonably assured.
Deferred
Revenue
The
Company’s deferred revenues consist of prepayments made by certain of the Company’s customers and undelivered implementation
or services. The Company decreases the deferred revenues by the amount of the services it renders to such clients when
provided, which the Company expects to be within the next twelve months.
Advertising
Expense
Advertising
costs are expensed as incurred and is recorded under sales and marketing in the accompanying statement of operations. Advertising
expenses amounted to $48,840 for the year ended December 31, 2016.
Fit Pay,
Inc.
Notes to Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Property
and Equipment
Property
and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization
are provided using both the straight-line method over the following estimated useful lives:
|
Office Equipment
|
3 years
|
|
Furniture and fixtures
|
7 years
|
Deferred
Rent
Rent
expenses are recognized using the straight-line method over the terms of the lease. The difference between rent expense incurred
and the rental amount paid is reported as deferred rent obligation in the accompanying balance sheet. Contingent rental payments,
including rents that depend on future events such as sales volume, inflation, and future property taxes, are exempt from straight-line
procedures and are not included in the scheduled minimum lease payments. Deferred rent was immaterial at December 31, 2016.
Research
and Development Costs
Research
and development costs are charged to expense as incurred in the accompanying statement of operations. Research and development
expenses consists primarily of salaries and related expenses, contractor and consultant expenses, and allocated overhead.
Long-lived
Assets
In
accordance with ASC 360, “Property, Plant, and Equipment,” the Company reviews for impairment of long-lived assets
and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The
Company considers the carrying value of assets may not be recoverable based upon our review of the following events or changes
in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset are less than its carrying amount. As of December 31, 2016, the Company
was not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
Fair
Value of Financial Instruments
The
Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards
as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date.
The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the
use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
As
of December 31, 2016, the Company believes that the carrying value of cash, accounts payable, accrued expenses, and other current
assets and liabilities approximate fair value due to the short maturity of theses financial instruments.
The
financial statements do not include any financial instruments at fair value on a recurring or non-recurring basis.
Fit
Pay, Inc.
Notes
to Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Share-Based
Payment
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under
the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the
vesting period.
The
Company has elected to use the Black-Scholes option-pricing model to estimate the fair value of its options, which incorporates
various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the
fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately
expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial statements and consisted of taxes currently due
and deferred taxes. Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial
statement and income tax purposes.
The
Company follows ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The
Company adopted ASC 740-10-25, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain
tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize additional liabilities for
uncertain tax positions as a result of the implementation of ASC 740-10-25 for the year ended December 31, 2016.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk are cash and trade receivable arising from its
normal business activities. The Company deposits its cash in high credit quality institutions. The Company performs ongoing credit
evaluations to its customers and establishes allowances when appropriate.
The
Company maintains cash in various accounts located in California. The Company has cash in financial institutions which are insured
by the Federal Deposit Insurance Company (FDIC) up to $250,000 at each institution. At various times throughout the year, the
Company may have cash balances in financial institutions that exceed the FDIC insurance limit. Management reviews the financial
condition of these financial institutions on a periodic basis and does not believe this concentration of cash results in a high
level of risk for the Company. At December 31, 2016, the Company’s bank deposits on hand did not exceed the FDIC insurance
limit.
Fit Pay,
Inc.
Notes
to Financial Statements
|
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following:
|
December 31,
|
|
2016
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
29,233
|
|
|
Furniture and fixtures
|
|
|
22,457
|
|
|
Total property and equipment
|
|
|
51,690
|
|
|
Less – accumulated depreciation and amortization
|
|
|
(14,639
|
)
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
37,051
|
|
Depreciation
and amortization expense on property and equipment amounted to approximately $8,973 for the year ended December 31, 2016.
|
4.
|
NOTES
PAYABLE TO RELATED PARTY
|
The
Company entered into various notes payable between September 2014 and November 2015 with the Company’s shareholder. The
notes bear interest of 0.41% per annum and are due upon demand. The Company had $799,910 outstanding as of December 31, 2016.
Total
interest expense under notes payable was $3,897 for the year ended December 31, 2016.
|
5.
|
CONVERTIBLE
NOTES PAYABLE TO RELATED PARTY
|
The
Company issued convertible notes as follows:
|
Holder
|
|
Date Issued
|
|
Maturity Date
|
|
Interest
Rate
|
|
|
Original
Amount
|
|
|
Balance
at December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holder 1
|
|
December 1, 2014
|
|
June 1, 2016
|
|
|
4.0
|
%
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
Holder 2
|
|
April 1, 2015
|
|
October 1, 2016
|
|
|
4.0
|
%
|
|
|
30,000
|
|
|
|
-
|
|
|
Holder 3
|
|
April 1, 2015
|
|
October 1, 2016
|
|
|
4.0
|
%
|
|
|
125,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount
|
|
|
|
|
|
|
|
|
|
$
|
180,000
|
|
|
$
|
-
|
|
The
convertible notes are convertible into the Company’s common stock, $0.01 per share (“Common Stock”), or convertible
preferred stock (see Note 6), at a price per share equal to the valuation cap divided by the fully diluted capitalization as defined
in the agreement in the event that neither a qualified financing nor a change of control as defined in the agreement has been
consummated on or before the maturity date.
The
convertible notes contain automatic conversion features. The conversion amount will be converted on or before the maturity date
into equity securities issued and sold at the close of the Company’s next equity financing in a single transaction or a
series of related transactions yielding gross proceeds to the Company of at least $1,000,000 (including conversion of the notes).
Fit
Pay, Inc.
Notes
to Financial Statements
|
5.
|
CONVERTIBLE
NOTES PAYABLE TO RELATED PARTY (continued)
|
The
Company considered the guidance in ASC 815,
Derivatives and Hedging,
and determined the embedded conversion feature should
not bifurcated and accounted for separately as a derivative liability because the embedded conversion feature is contingent. The
Company then considered the guidance in ASC 470-20-25-20,
Debt with Conversions and Other Options,
and determined that
any beneficial conversion feature shall not be recognized until and unless the triggering event occurs. As a result, no beneficial
conversion feature was recognized on the date of issuance. In January 2016, the Company completed a qualified financing (see Note
6), as defined, resulting in the convertible debt being automatically converted into shares of preferred stock. Therefore, the
Company converted the convertible debt with a net book value of approximately $186,000, including accrued interest, into 436,835
shares of preferred stock (see Note 6) with an estimated fair market value of $747,000, resulting in a deemed preferred stock
dividend on extinguishment of debt of approximately $561,000 which is recorded in the accompanying statement of
shareholders’
deficit under preferred stock deemed dividend.
Interest
expense incurred related to the convertible notes payable was approximately $560 for the year ended December 31, 2016.
Common
Stock
During
2016, the Company issued 119,653 shares of its Common Stock to its employees for proceeds of $1,197.
Convertible
preferred stock
The
Company is authorized to issue 2,235,081 shares of convertible preferred stock with a par value of $0.01 per share. All preferred
shares of the company have been designated “Series Seed Preferred Stock”. The Company has issued 2,235,081 of Series
Seed Preferred Stock. The preferred stock is convertible at the original issue price for such preferred stock divided by the conversion
price, which is defined as the original issue price, subject to adjustments, both standard and anti-dilutive. The Company is required
to reserve common shares to cover any conversion of the preferred stock. The Company has determined that as a result of the preferred
stock being equity classification, derivative accounting is not required for the embedded conversion feature within the convertible
preferred stock. The Company determined it had in reserve shares of common stock to cover the conversion of preferred stock at
December 31, 2016.
The
Company issued a total of 1,798,246 of Series Seed Preferred Stock to two investors at a price of $1.71 per share for total proceeds
of $3,075,000. A total of 417,715 shares of preferred stock were issued to two investors as a result of the conversion of convertible
notes at a conversion price of $0.38 per share (see Note 5). 19,120 shares were issued to a single investor as a result of the
conversion of convertible notes at a conversion price of $1.37 (see Note 5).
The
holders of Series Seed Preferred Stock have the rights, preferences, privileges and restrictions as set forth below:
Dividends:
The company will declare all dividends pro rata on the Common Stock and the Preferred Stock on a pari passu basis according
to the number of shares of Common Stock held by such holders. For this purpose, each holder of Preferred Stock will be treated
as holding the greatest whole number of shares of Common Stock then issuable upon conversion of all shares of Preferred Stock
held by such holder. As of December 31, 2016, no dividends have been declared.
Fit
Pay, Inc.
Notes
to Financial Statements
|
6.
|
STOCKHOLDERS’
DEFICIT
(continued)
|
Liquidation
Preferences: In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or any Deemed
Liquidation Event (as defined), before any payment can be made to holders of Common Stock, the holders of Preferred Stock must
be paid out of the funds and assets available for distribution to its stockholders, an amount per share equal to the greater of
(a) the Original Issue Price for such share of Preferred Stock, plus any dividends declared but unpaid, or (b) such amount per
share as would have been payable had all shares of Preferred Stock been converted into Common Stock immediately prior to such
liquidation, dissolution, or winding up or Deemed Liquidation Event. If the funds and assets available for distribution are insufficient
to pay the holders of shares of Preferred Stock the full amount to which they are entitled, the holders of shares of Preferred
Stock will share ratably in any distribution of the funds and assets available for distribution in proportion to the respective
amounts that would otherwise be payable in respect of the shares of Preferred Stock held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full. After full payment has been made to the holders of preferred
stock, the remaining proceeds, if any, will be distributed among the holders of common stock ratably based on the number of shares
of common stock held by each holder.
Conversion:
Each share of preferred stock is convertible, at the option of the holder, into shares of common stock according to the conversion
price applicable to the series of preferred stock, as adjusted at any time after the date of issuance. Each share automatically
converts into that number of shares of common stock determined in accordance with the applicable conversion price upon either
(i) the sale of the Company’s common stock in an initial public offering, or (ii) the date and time, or the occurrence of
an event, specified by vote or written consent of the holders of at least the majority of the outstanding shares of Preferred
Stock voting as a single class on an as-converted basis.
Voting:
The holders of preferred stock are entitled to voting rights equal to the number of whole shares of common stock into which each
share of preferred stock could be converted as of the record date for determining stockholders entitled to vote.
Protective
provisions: As long as at least 25% of the initially issued shares of preferred stock remain outstanding, the Company will not
be able to do any of the following without the written consent or affirmative vote of the holders of at least the majority of
the outstanding shares of Preferred Stock: adverse changes to rights, powers, or privileges of preferred stock; increase or decrease
in the authorized number of shares of common stock or preferred stock; creation of any new class or series of shares having rights,
powers, or privileges senior to or on parity with preferred stock; redemption or repurchase of any shares of common stock or preferred
stock; declaration or payment of any dividend or distribution on any shares of common stock or preferred stock; any change in
the authorized number of the members of the Board of Directors; taking any action that would result in a liquidity event; agree
or commit to exclusively license all or substantially all of the Company’s intellectual property in a single transaction
or series of related transactions; issue shares of any class or series of capital stock or issue any securities convertible into
capital stock other than shares of Common Stock granted to employees, officers, directors, contractors, consultants, or advisors
pursuant to incentive agreements or other arrangements that are approved by the Board of Directors, which approval must include
the affirmative approval of the Series Seed Director; and creation or authorization of any debt security that would cause aggregate
indebtedness to exceed $350,000, unless such debt security has received prior approval of the Board of Directors, including the
approval of the Series Seed Director.
Redeemed
or Otherwise Acquired Shares: Any shares of Preferred Stock that are redeemed or otherwise acquired by the Company or any of its
subsidiaries will be automatically and immediately cancelled and retired and will not reissued, sold, or transferred. Neither
the Company nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following
any such redemption.
Fit
Pay, Inc.
Notes
to Financial Statements
In
2014, the Company adopted the 2014 Non-statutory Stock Option Agreement (the “NSO Plan”). Under the NSO Plan, non-statutory
stock options may be granted for the purchases of 165,000 shares of common stock to employees, directors, and consultants. NSO
stock options are exercisable over periods not to exceed 10 years from the date of grant. Generally, options vest over a four-year
period.
During
the year ended December 31, 2016, the Company granted stock options to employees to purchase 692,500 shares of common stock. The
stock options have an exercise price of $0.21, vest over 4 years and mature on various dates over 5 years. During the year ended
December 31, 2016, the Company recorded $61,789 of stock-based compensation related to common stock options granted to employees.
No income tax benefits have been recognized for stock-based compensation arrangements and no stock-based compensation has been
capitalized as of December 31, 2016.
The
fair value of each option awards to employees in 2016 is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: estimated fair market value of common stock was $0.50, expected life of
approximately 6.25 years, risk-free interest rate of approximately 1.25%, expected volatility of 50% and no dividends during the
expected life, resulting in an estimated fair market value of the stock options of approximately $0.435 per option. The expected
life of the options represents the period of time options are expected to be outstanding and is estimated considering vesting
terms and employees’ historical exercise and post-vesting employment termination behavior. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatilities
of public companies operating in the Company’s industry.
|
|
|
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
165,000
|
|
|
$
|
0.01
|
|
|
|
3.99
|
|
|
Granted
|
|
|
692,500
|
|
|
|
0.21
|
|
|
|
|
|
|
Exercised
|
|
|
(119,653
|
)
|
|
|
0.01
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
737,847
|
|
|
$
|
0.17
|
|
|
|
2.99
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
737,847
|
|
|
$
|
0.14
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
57,500
|
|
|
$
|
0.01
|
|
|
|
|
|
Future
stock-based compensation for unvested employee options granted and outstanding as of December 31, 2016 is $240,221, which will
be recognized over a weighted-average remaining requisite service period of approximately 2.5 years.
Fit
Pay, Inc.
Notes to Financial Statements
The
Company did not have material income tax provision because of net loss and valuation allowances against deferred income tax provision
for the year ended December 31, 2016.
The
provision for income taxes consisted of the following:
|
December 31,
|
|
2016
|
|
|
Current:
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
State
|
|
|
898
|
|
|
Total
|
|
|
898
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
Total
|
|
|
-
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
898
|
|
The
components of the deferred tax assets and liabilities are as follows:
|
December 31,
|
|
2016
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
1,985,000
|
|
|
Valuation allowances
|
|
|
(1,985,000
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
At
December 31, 2016, the Company had available net operating loss carryovers of approximately $2.0 million that may be applied against
future taxable income and expires at various dates between 2024 and 2036, subject to certain limitations. The Company has a deferred
tax asset arising substantially from the benefits of such net operating loss deduction and has recorded a valuation allowance
for the full amount of this deferred tax asset since it is more likely than not that some or all of the deferred tax asset may
not be realized.
The
Company files income tax returns in the U.S. federal jurisdiction and California and is subject to income tax examinations by
federal tax authorities for tax years ended 2013 and later and by California authorities for tax years ended 2012 and later. The
Company currently is not under examination by any tax authority. The Company’s policy is to record interest and penalties
on uncertain tax positions as income tax expense. As of December 31, 2016, the Company has no accrued interest or penalties related
to uncertain tax positions.
|
9.
|
RELATED
PARTY TRANSACTIONS
|
The
Company had a note payable to Michael Orlando with a principal amount of $795,000 and accrued interest of $4,910 as of 12/31/16.
See Note 4.
Fit
Pay, Inc.
Notes
to Financial Statements
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Lease
The
Company entered into an operating facility lease agreement for its office located in California in June 2016 for 4 years’
term expiring in May 2020. The lease contain rent increase each year with starting base rent of $3,240 per month.
Future
minimum lease expense under the facility lease agreement at December 31, 2016 is as follows:
|
Years ending December 31,
|
|
Amount
|
|
|
|
|
|
|
|
2017
|
|
$
|
39,688
|
|
|
2018
|
|
|
41,076
|
|
|
2019
|
|
|
42,465
|
|
|
2020
|
|
|
17,935
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141,164
|
|
Total
lease expense for the year ended on December 31, 2016 was $32,312.
In
May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be
issued. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events,
is effective for interim or annual periods ending after June 15, 2009.
The
Company evaluated all events or transactions that occurred after December 31, 2016 up through the date the financial statements
were available to be issued. During these periods, the Company did not have any material recognizable subsequent events required
to be disclosed as of and for the year ended December 31, 2016 other than the following:
|
●
|
On
May 23, 2017, the Company completed a merger with Nxt-ID, Inc. (“NXT”), a
publicly traded company, whereby NXT acquired all of the equity of the Company (the “Transaction”).
Following the merger, the Company became a wholly owned subsidiary of NXT. The purchase
price of the Transaction consisted of: (i) the issuance of 19.99% of the outstanding
shares of the capital stock of NXT to the shareholders of the Company; (ii) the issuance
by the Company of $2,000,000 worth of voting, non-convertible shares of junior preferred
stock to certain shareholders of preferred shares of the Company; and (iii) an earn-out
payment to the shareholders of the Company of 12.5% of the gross revenue derived from
the then Company’s technology by NXT, for the sixteen quarter period beginning
October 1, 2017.
|
|
|
|
|
●
|
On
March 9, 2017, the Company borrowed $50,000 from its shareholder and founder with interest
rate at 1% per annum. The note is payable and unpaid interest is due upon demand.
|
3,373,601
Shares of Common Stock
NXT-ID,
INC.
PROSPECTUS
The
date of this prospectus is February 8, 2018.