NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - 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 evaluates the performance of its business on, among other things, profit and loss from operations. 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 “Interest Purchase Agreement”). Pursuant
to the Interest Purchase Agreement, we acquired all of the membership interests of LogicMark from the LogicMark Sellers for
(i) $17.5 million in cash consideration (ii) $2.5 million in a secured promissory note (the “LogicMark Note”)
issued to LogicMark Investment Partners, LLC, as representative of the LogicMark Sellers (the
“LogicMark Representative”) (iii) 78,740 shares of common stock, which were issued upon signing of the Interest
Purchase Agreement (the “LogicMark Shares”), and (iv) warrants (the “LogicMark Warrants”) to purchase
an aggregate of 157,480 shares of common stock (the “LogicMark Warrant Shares”) for no additional consideration.
Such warrants were exercised on July 27, 2016. In addition, the Company was 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 met
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 July 15, 2017. The earn-out payment related to 2016 and the remaining balance owed on
the LogicMark Note including accrued interest were both paid in July 2017. See Notes 5 and 7. Based on LogicMark’s
operating results for the year ended December 31, 2017, the 2017 earnout amount owed by the Company is $3,156,088. As a
result, the Company reduced the amount of contingent consideration due to the LogicMark Sellers by $1,843,912. The
Company’s income statement for the year ended December 31, 2017 includes a favorable adjustment
for this amount
which is reflected in other income and expense.
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.
NOTE
2 -
REVerse Stock Split
On
September 1, 2016, the Company’s board of directors and stockholders approved a resolution to amend the Company’s
Certificate of Incorporation and to authorize the Company to effect a reverse split of the Company’s outstanding common
stock at a ratio of 1-for-10 (the “Reverse Split”). On September 9, 2016, the Company effected the Reverse Split.
Upon effectiveness of the Reverse Split, every 10 shares of outstanding common stock decreased to one share of common stock. Throughout
this report, the Reverse Split was retroactively applied to all periods presented.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - LIQUIDITY AND MANAGEMENT PLANS
The
Company is an emerging growth entity and incurred a net loss of $8,264,873 during the year ended December 31, 2017. As of
December 31, 2017 the Company had working capital of $1,319,766 and stockholders’ equity of $19,130,167. Such factors
raise substantial doubt about the entity’s ability to sustain operations for at least one year from the issuance of
these financial statements. Given the Company’s cash position at December 31, 2017 and its projected cash flow
from operations, the Company believes that it will have sufficient capital to sustain operations over the next twelve
months following the date of this filing to alleviate such substantial doubt. 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.
During
the year ended December 31, 2017, the Company received net proceeds of $13,291,390 from the issuance of common stock and warrants
and $594,408 from the issuance of convertible exchange notes. However, the Company can give no assurance that any cash raised
subsequent to December 31, 2017 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 in the United States
(“U.S. 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, LogicMark and Fit Pay.
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, 2017 and 2016, the Company had no cash equivalents.
RESTRICTED
CASH
At
December 31, 2017 and 2016, the Company had restricted cash of $40,371. Restricted cash 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.
The
Company is a party to a Master Development Agreement with World Ventures Holding, a related party. WVH is considered a
related party since the Chief Technology Officer of WVH is a director of Nxt-ID, Inc. During the years ended December 31,
2017 and 2016, the Company recognized revenue of $7,065,755 and $1,357,413, respectively from WVH. At December 31, 2017
and December 31, 2016, the Company’s accounts receivable, net balance included $1,364,405 and $621,724, respectively
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’s primary source
of revenues is from product sales to its customers.
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 revenue is recorded at the net amount to be received after deductions for discounts, allowances
and product returns.
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 selling and marketing expenses and were not material for the years ended December 31, 2017 and 2016.
Accounts
Receivable
For
the years ended December 31, 2017 and 2016, the Company’s revenues primarily included shipments of the Flye smartcard to
WVH and shipments of the LogicMark products. The terms and conditions of these sales provide certain 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, 2017
and 2016, the Company had an allowance for doubtful accounts of $402,383 and $0, respectively.
INVENTORY
The
Company measures inventory 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.
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. During the year
ended December 31, 2017, the Company wrote off $1,082,938 in excess and obsolete inventory and also wrote down the carrying value
of its finished goods Wocket inventory by $347,632. As of December 31, 2017, inventory was comprised of $1,493,995 in raw
materials and $1,565,522 in finished goods on hand. 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 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, 2017 and 2016, $887,021 and $1,089,770, 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.
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
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company will begin
testing the Fit Pay related goodwill for impairment annually in the second quarter of each 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.
As part
of the annual evaluation of the LogicMark related goodwill, 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 year ended December 31, 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 considered the reduction in earnout liability due to the LogicMark
Sellers for 2017, and such factors did not impact the Company’s conclusion.
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 consolidated balance sheet at December 31, 2017.
At
December 31, 2017, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $3,563,885; trademarks of $1,167,122; and customer relationships of $2,792,900. 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 years ended
December 31, 2017 and 2016, the Company had amortization expense of $761,818 and $318,842, respectively, related
to the LogicMark intangible assets.
At
December 31, 2017, the other intangible assets relating to the acquisition of Fit Pay, which was completed on May 23, 2017, are
comprised of trademarks of $181,042; technology of $2,284,739; and customer relationships of $1,336,868. The Company will continue
amortizing these intangible assets using the straight line method over their estimated useful lives which for the trademarks,
technology and customer relationships are 5 years; 7 years; and 6 years, respectively. During the year ended December
31, 2017, the Company had amortization expense of $334,751, related to the Fit Pay intangible assets.
Amortization
expense estimated for each of the next five fiscal years, 2018 through 2022 will be approximately $1,400,000 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE
INSTRUMENTS
(CONTINUED)
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. The fair value of debt discounts under these arrangements
are amortized over the earlier of (i) the term of the related debt using the straight line method which approximates the interest
rate method 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. See Note 7.
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 or binomial option valuation model to value the derivative instruments at inception and on
subsequent valuation dates. The Company accounts for conversion features that are embedded within the Company’s
convertible notes payable that do not have fixed settlement provisions as a separate derivative instrument. In addition,
warrants issued by the Company that do not have fixed settlement
provisions are also treated 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.
INCOME
TAXES
The
Company uses the asset and liability method of accounting for income taxes. 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, 2016.
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.
Stock-based compensation is recorded in the same component of operating expenses as if it were paid in cash. 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 from the exercise of 5,777,650 warrants as of December
31, 2017 were excluded from the computation of diluted net loss per share because the effect of their inclusion would have been
anti-dilutive. As of December 31, 2016, 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
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
May 2017, the Financial Accounting Standards Board (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 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 consolidated
financial statements.
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
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 adoption of this standard did not have a material impact on its consolidated financial statements.
In
May 2014, 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 for emerging growth companies, the Company plans to adopt ASU 2014-09 in the
first quarter of 2019 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO 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 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. Based on LogicMark’s operating results for the year
ended December 31, 2017, the Company reduced the amount of contingent consideration due to the LogicMark Sellers by $1,843,912.
As a result, the Company’s income statement for the year ended December 31, 2017 includes a favorable adjustment
for this amount which is reflected in other income and expense.
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”). During the year ended December 31, 2017,
the Company paid down $3,000,000 of the revolving loan. 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 facility for one additional year. At December 31, 2017 the unamortized balance of deferred debt
issue costs was $200,744. The maturity date of the Revolving Loan is July 25, 2018, 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, 2017, the Company was in compliance with such covenants.
The
Company has the ability to extend the Revolver for one 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 intends to exercise the option to extend the maturity
date by one year and accordingly, the Company has classified the Revolver as a non-current liability as of December 31, 2017.
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.
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. 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. See
Note 7.
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 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
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5 – acquisitions (CONTINUED)
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 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 $1,774,539 as part of its purchase
price allocation.
Allocation
of Purchase Price of Fit Pay
The
purchase price to acquire Fit Pay was $10,104,184 of which $100,000 was paid by the Company in cash and $10,004,184 in non-cash
consideration.
The
non-cash consideration was comprised of a $851,842 seller note, $3,289,161 of common stock issued to the sellers, Series C preferred
stock issued to sellers of $1,807,300 and $4,055,881 in an earn-out provision. At the date of acquisition, the earn-out provision
was discounted using a prime borrowing rate of 3.5%.
The
Merger Agreement was accounted for under the acquisition method of accounting. The purchase price was 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 completed 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. The following table summarizes the 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
|
|
|
92,629
|
|
Other current assets
|
|
|
53,966
|
|
Property and equipment
|
|
|
31,968
|
|
Goodwill
|
|
|
9,119,709
|
|
Intangible assets (See Note 4)
|
|
|
4,137,400
|
|
Assets acquired
|
|
|
13,446,561
|
|
|
|
|
|
|
Accounts payable
|
|
|
165,650
|
|
Accrued liabilities
|
|
|
1,139,774
|
|
Customer deposits
|
|
|
262,414
|
|
Deferred taxes
|
|
|
1,774,539
|
|
Liabilities assumed
|
|
|
3,342,377
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
10,104,184
|
|
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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5 – acquisitions (CONTINUED)
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 year ended December 31, 2017 and 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.
|
|
For the Years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
Pro forma:
|
|
|
|
|
|
|
Net Sales
|
|
$
|
23,410,933
|
|
|
$
|
16,329,155
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(10,139,972
|
)
|
|
$
|
(18,723,441
|
)
|
Net Loss Per Share - Basic and Diluted applicable to Common Stockholders
|
|
$
|
(0.79
|
)
|
|
$
|
(2.32
|
)
|
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 acquisitions of LogicMark and Fit Pay and the application of
fair value adjustments to intangible assets occurred on January 1, 2016. For the year ended December 31, 2017, the pro
forma financial information excluded the Fit Pay acquisition-related expenses of $220,943, 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 twelve months ended December 31, 2017 include the following adjustments, (a) amortization
expense related to the acquired intangible assets of $301,625; (b) interest expense of $213,510; and (c) dividends related to
the Series C Preferred Stock of $44,384.
For
the year 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 year ended December 31, 2016 include the following
adjustments, (a) amortization expense related to the acquired intangible assets of $1,155,267; (b) interest expense including
the amortization of deferred debt issue costs of $2,893,777; (c) reduction in depreciation expense of $23,562; and (d)
dividends related to the Series B and Series C Preferred Stock of $734,375.
NOTE
6 - ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Salaries and payroll taxes
|
|
$
|
92,906
|
|
|
$
|
77,037
|
|
Consulting fees
|
|
|
70,000
|
|
|
|
25,547
|
|
Merchant bank fees
|
|
|
28,075
|
|
|
|
31,124
|
|
State income taxes
|
|
|
11,049
|
|
|
|
1,135
|
|
Professional fees
|
|
|
31,781
|
|
|
|
7,568
|
|
Management incentives
|
|
|
891,667
|
|
|
|
604,125
|
|
Interest expense
|
|
|
639,030
|
|
|
|
691,684
|
|
Amount due to LogicMark Sellers
|
|
|
421,606
|
|
|
|
-
|
|
Dividends – Series A & B preferred stock
|
|
|
25,000
|
|
|
|
583,067
|
|
Liquidated damages – Series B preferred stock
|
|
|
-
|
|
|
|
360,000
|
|
Finder’s fees
|
|
|
-
|
|
|
|
256,250
|
|
Other
|
|
|
253,953
|
|
|
|
264,135
|
|
Totals
|
|
$
|
2,465,067
|
|
|
$
|
2,901,672
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
|
On
December 19, 2017, and effective as of November 29, 2017, the maturity date of the agreement the Company 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 with a fair value of $673,400. This amount was expensed and is included in interest expense for
the year ended December 31, 2017.
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 year ended December 31, 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 year ended
December 31, 2017. In December 2017, the November Notes and the related accrued interest balance were converted into 868,970 shares
of the Company’s common stock.
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 a debt discount at issuance. After allocating the gross proceeds to the warrants (discussed above) and
beneficial conversion feature, the total debt discount recognized was $432,917. The entire debt discount was fully amortized
during the year ended December 31, 2017 as a result of all the July 2017 Notes and the related accrued interest balance being
fully converted into 328,897 shares of the Company’s common stock in December 2017. As of December 31, 2017, there was
no remaining outstanding principal balance on the July 2017 Notes.
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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
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 was amortized over the term of the debt and the Company amortized
$1,366,667 and $133,333 of the debt discount for the years ended December 31, 2017 and 2016, respectively. As of December
31, 2017, there was no remaining outstanding principal balance on the November 2016 Exchange Notes.
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. 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.
The
debt discount was 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 which was recorded as an interest expense in the
consolidated statement of operations.
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 year 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
the year 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 year 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,
|
|
|
2016
|
|
Embedded Conversion Feature Liability:
|
|
|
Risk-free interest rate
|
|
0.46%-0.59
|
%
|
Expected volatility
|
|
100.00
|
%
|
Expected life (in years)
|
|
0.91-0.70
|
|
Expected dividend yield
|
|
-
|
|
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, 2017 and December
31, 2016.
The
carrying amounts of cash and accounts payable 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
the years ended December 31, 2017 and 2016, 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
|
|
|
|
|
|
Beginning liability balance
|
|
$
|
420,360
|
|
Change in fair value of derivative liabilities
|
|
|
2,299,020
|
|
Recognition of conversion feature liability
|
|
|
-
|
|
Gain on derivative liabilities resulting from accelerated amortizations
|
|
|
(1,016,980
|
)
|
Net realized gain on conversion feature liabilities
|
|
|
-
|
|
Net unrealized gain on conversion feature liabilities
|
|
|
-
|
|
Adjustment to additional paid-in capital upon conversion and modification
|
|
|
(1,702,400
|
)
|
Ending balance
|
|
$
|
-
|
|
Other
Fair Value Measurements
During
the years ended December 31, 2017 and 2016, the Company recorded $171,530 and $91,682, respectively 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 - STOCKHOLDERS’ EQUITY
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 2,189,732 shares Series A
Preferred Stock converted $2,662,794 of Preferred Stock and dividends into 834,718 shares of common stock. For the year ended
December 31, 2017, the Company recorded Series A Preferred Stock dividends of $34,884. During the year ended December 31,
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 December 31, 2017, there was no remaining outstanding principal balance on the Series A
Preferred 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, 2016,
the Company recorded Series B Preferred Stock dividends of $490,625. For the year ended December 31, 2017, the Company recorded
Series B Preferred Stock dividends of $634,375. During the year ended December 31, 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 December 31, 2017, there was no remaining outstanding principal balance on the Series B Preferred Stock.
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 net proceeds from the offering, after deducting placement
agent fees and other offering related expenses payable by the Company, of approximately $3,017,932. The pre-funded warrants 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.
November
2017 Offerings
On
November 13, 2017, the Company closed a registered direct offering of an aggregate of 2,941,177 shares (the “November Shares”)
of Common Stock. The Company sold the November Shares at a price of $1.36 per share. The Company received net proceeds from the
offering, after deducting placement agent fees and other offering related expenses of approximately $3,620,115.
On
November 13, 2017, the Company also closed a previously announced concurrent private placement for no additional consideration,
of the November Investor 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 with a fair value of $673,400. This amount was expensed and is included in interest expense for
the year ended December 31, 2017.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
December
2017 Offering
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 net proceeds from the offering, after
deducting placement agent fees and other offering related expenses of $6,392,341.
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 year ended December 31, 2017, the Company recorded Series C Preferred Stock dividends of
$60,556.
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 December
31, 2017. Therefore, the Company classified the Series C Preferred Stock as temporary equity in the consolidated balance sheet
at December 31, 2017.
Warrants
The
following table summarizes the Company’s warrants outstanding and exercisable at December 31, 2016 and 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at January 1, 2016
|
|
|
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
|
|
|
$
|
-
|
|
Issued
|
|
|
4,827,202
|
|
|
|
2.00
|
|
|
|
4.76
|
|
|
|
-
|
|
Exercised (1)
|
|
|
(878,601
|
)
|
|
|
2.00
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2017
|
|
|
5,777,650
|
|
|
$
|
5.08
|
|
|
|
4.26
|
|
|
$
|
6,672,902
|
|
(1)
|
During
the year ended December 31, 2017, 648,601 warrants were exercised on a cashless basis
and were converted into 429,656 shares of common stock.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - STOCKHOLDERS’ EQUITY (CONTINUED)
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 December 31, 2016.
2017
Stock Incentive Plan
On
August 24, 2017, a majority of the Company’s stockholders approved at the 2017 Annual Shareholders’ Meeting the 2017
Stock Incentive Plan (“2017 SIP”). The aggregate maximum number of shares of Common Stock (including shares underlying
options) that may be issued under the 2017 SIP pursuant to awards of restricted shares or options will be limited to 10% of the
outstanding shares of Common Stock, which calculation shall be made on the first (1
st
) business day of each new fiscal
year; provided that for fiscal year 2017, 1,500,000 shares of Common Stock may be delivered to participants under the 2017 SIP.
Thereafter, the 10% evergreen provision shall govern the 2017 SIP. The number of shares of Common Stock that are the subject of
awards under the 2017 SIP which are forfeited or terminated, are settled in cash in lieu of shares of Common Stock or in a manner
such that all or some of the shares covered by an award are not issued to a participant or are exchanged for awards that do not
involve shares will again immediately become available to be issued pursuant to awards granted under the 2017 SIP. If shares of
Common Stock are withheld from payment of an award to satisfy tax obligations with respect to the award, those shares of Common
Stock will be treated as shares that have been issued under the 2017 SIP and will not again be available for issuance under the
2017 SIP.
During
the year ended December 31, 2017, the Company issued 159,933 shares of common stock under both the LTIP and the 2017 SIP 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 $360,000. Also during the year ended December 31, 2017, the Company issued 232,559 shares of common
stock with an aggregate fair value of $400,000 to executive and certain non-executive employees related to the
Company’s 2016 management incentive plan. The Company also granted 1,095,895 restricted shares of common stock with an
aggregate value of $1,864,253 to certain executive and non-executive employees. The vesting period for these restricted
shares of common stock is twelve months and the Company expensed $1,629,049 related to these restricted stock awards. 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, which was
previously accrued.
During
the year ended December 31, 2017, the Company accrued $925,000 of discretionary management and employee bonus
expense.
During
the year ended December 31, 2017, the Company issued 448,258 fully-vested shares of common stock with a fair value of
$816,955 to non-employees for services rendered.
NOTE 10 - INCOME TAXES
On
December 22, 2017, the President signed into law new legislation, known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”),
that resulted in significant changes to the Internal Revenue Code of 1986, as amended. These changes include a federal statutory
rate reduction from 34% to 21%, limitation of the deduction for net operating losses to 80% of taxable income while providing
that the net operating loss carryovers for years after 2017 will not expire, limitation on the amount of research and development
expenses deductible per year beginning in years after 2021, increased limitations on certain executive compensation, elimination
of the Corporate Alternative Minimum Tax, and modifying or repealing other business deductions and credits.
The Company has incorporated the impact of
the Tax Act in the results from operations for the tax effects of the Tax Act than can be reasonably estimated, but not completed,
for the year ended December 31, 2017.
As a result of
the Tax Act being signed into law, the Company recognized a provisional charge of $4,295,052, equal to (43.48%) of Operating Income
Before Income Tax, in the fourth quarter of 2017 related to the re-measurement of its U.S. deferred tax assets at the lower enacted
corporate tax rate. Due to the history of net operating losses, the Company is in a full valuation allowance position. As a result,
the additional tax expense due to the Tax Act was offset by an equal reduction to the valuation allowance, resulting in no net
tax impact from the Tax Act to the overall financial condition and results of operations of the Company.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - INCOME TAXES (CONTINUED)
As
of December 31, 2017, the Company had US federal and state net operating loss (“NOLs”) carryovers of $35,030,083 and
$29,699,580, respectively, available to offset future taxable income, which expire beginning in 2033. In addition, the Company
had tax credit carryforwards of $315,492 at December 31, 2017 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 not determined whether a change of control has occurred as of December 31, 2017 with respect to the Nxt-ID NOLs
and therefore no limitation under Section 382 has been computed related to the Nxt-ID NOLs. Management will review for such limitations
before any of the Nxt-ID NOLs against future taxable income. Management has determined the acquisition of Fit Pay during the 2017
year is a change of control event under Section 382 of the Internal Revenue Code with respect to the Fit Pay pre-acquisition NOLs.
Management determined that the sum of Section 382 annual limitations on the Fit Pay pre-acquisition NOLs during the corresponding
carryforward period is in excess of the total amount of Fit Pay NOL carryforward available at the time of change of control. Consequently,
no adjustment has been made to the amount of Fit Pay NOL available following the change in control.
Section 384 of the Internal Revenue
Code Section further limits Nxt-ID’s ability to off-set pre-acquisition NOLs of Nxt-ID against future taxable income
which may be created by the realization of Fit Pay built in gains during the five-year recognition period following the Fit
Pay acquisition. However, tax losses of the consolidated group generated from operations occurring after the Fit Pay
acquisition are eligible to offset any taxable income resulting from realization of Fit Pay built in gain following the
transaction.
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, 2016 and intends to timely the income tax returns for the period ending December 31, 2017. 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, 2017 the
Company’s tax years post 2012 are subject to examination by the tax authorities. With few exceptions, as of December 31,
2017 the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before December 31, 2013.
The Company has not been examined or received notice of pending examination by the federal or any state and local tax authority.
To the extent a tax authority examines an open tax year and makes an assessment, the results from operations could be affected
through additional tax liabilities or adjustments to the amount of NOL carryforward or tax basis of other components of deferred
tax.
The
income tax (benefit) provision consists of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
16,089
|
|
|
|
5,749
|
|
|
|
|
16,089
|
|
|
|
5,749
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,321,607
|
|
|
|
(2,843,866
|
)
|
State
|
|
|
(483,260
|
)
|
|
|
(281,625
|
)
|
|
|
|
838,347
|
|
|
|
(3,125,491
|
)
|
Change in valuation allowance
|
|
|
(2,467,771
|
)
|
|
|
3,315,776
|
|
Total income tax (benefit) provision
|
|
$
|
(1,613,335
|
)
|
|
$
|
196,035
|
|
A
reconciliation of the effective income tax rate and the statutory federal income tax rate is as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State income tax rate, net of federal benefit
|
|
|
3.12
|
|
|
|
1.45
|
|
Other permanent differences
|
|
|
(2.29
|
)
|
|
|
(10.60
|
)
|
Effect of rate change under Tax Act
|
|
|
(43.48
|
)
|
|
|
-
|
|
Less: valuation allowance
|
|
|
24.98
|
|
|
|
(26.41
|
)
|
Provision for income taxes
|
|
|
16.33
|
%
|
|
|
(1.56
|
)%
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - INCOME TAXES (CONTINUED)
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 valuation allowance. Nxt-ID considered the deferred tax liabilities related to
indefinite lived intangibles not allowable as a source of future taxable income in determining the amount of valuation
allowance at December 31, 2017 and 2016, resulting in net deferred tax liabilities in each period after applying valuation
allowance. For the year ended December 31, 2017, the net change in valuation allowance of $841,402 was comprised of an
increase of $1,626,369 related to the Fit Pay
purchase accounting offset by a reduction of $2,467,771 related to a
change in valuation allowance included in the income tax provision. For the year ended December 31, 2016,
the increase in valuation allowance of $3,315,776 related to the change in valuation allowance included in the income tax
provision.
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
8,829,607
|
|
|
$
|
8,887,756
|
|
Tax credits
|
|
|
315,492
|
|
|
|
187,856
|
|
Accruals and reserves
|
|
|
856,675
|
|
|
|
546,286
|
|
Restricted stock
|
|
|
-
|
|
|
|
42,140
|
|
Tangible and intangible assets
|
|
|
225,711
|
|
|
|
252,638
|
|
Charitable donations
|
|
|
2,903
|
|
|
|
3,738
|
|
Total deferred tax assets before valuation allowance:
|
|
|
10,230,388
|
|
|
|
9,920,414
|
|
Valuation allowance
|
|
|
(9,079,012
|
)
|
|
|
(9,920,414
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
1,151,376
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
(1,486,777
|
)
|
|
$
|
(190,286
|
)
|
Total deferred tax liabilities
|
|
$
|
(1,486,777
|
)
|
|
$
|
(190,286
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(335,401
|
)
|
|
$
|
(190,286
|
)
|
NOTE
11 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
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
11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS
The
Company is party to certain leases for office space and warehouse facilities, with monthly payments ranging from $1,170 to $6,911,
expiring on various dates through August 2020. The Company incurred rent expense of $206,481 and $154,194 for the years ended
December 31, 2017 and December 31, 2016, respectively. Minimum lease payments for non-cancelable operating leases are as follows:
Future Lease Obligations
|
|
|
|
|
|
|
|
2018
|
|
$
|
168,947
|
|
2019
|
|
|
128,195
|
|
2020
|
|
|
76,022
|
|
Total future lease obligations
|
|
$
|
373,164
|
|
The
maturity of the Company’s debt is as follows:
2018
|
|
$
|
266,201
|
|
2019
|
|
|
212,961
|
|
2020
|
|
|
212,961
|
|
2021
|
|
|
159,719
|
|
Total debt
|
|
$
|
851,842
|
|
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 three 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:
|
●
|
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.
|
Effective
May 23, 2017, we entered into an employment agreement with Michael Orlando, our Chief Operating Officer. The term of the
employment agreement is 1 year beginning on May 23, 2017. Mr. Orlando’s base salary is $150,000, plus an initial stock grant
of 250,000 shares of Common Stock from the Company’s 2013 LTIP. Effective January 1, 2018, Ms. Orlando’s base salary
increased to $350,000 from $150,000. The employment agreement also provides for:
|
●
|
Eligibility
to participate in bonus or incentive compensation plans that may be established by the Board from time to time applicable
to Mr. Orlando’s services.
|
|
●
|
Eligibility
to receive equity awards as determined by the Board, or a committee of the Board, composed in compliance with the corporate
governance standards of any applicable listing exchange.
|
NOTE
12 - SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
January 3, 2018, the Company issued 5,103 shares of its common stock for the payment of services with a grant date fair value of $17,861.
On
January 11, 2018, the Company issued 437,018 shares of common stock in connection with the cashless exercise of 1,075,000 warrants.
On
February 20, 2018, the Company issued 163,435 shares of its common stock to certain employees under the 2017 management
incentive plan.
On
February 26, 2018, the Company received proceeds of $200,000 in connection with the exercise of 100,000 warrants to purchase
common stock at an exercise price of $2.00.
On
March 23, 2018, the Company issued 58,333 shares of its common stock for the payment of services with a grant
date fair value of $130,666.