Note
2 – Liquidity And Management Plans
The
Company is an emerging growth entity and recorded an operating loss of $740,748 and a net loss of $1,612,813 during the three
months ended March 31, 2018. As of March 31, 2018 the Company had working capital of $738,830 and stockholders’ equity of
$18,225,489. 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 March 31, 2018 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.
The
Company can give no assurance that any cash raised subsequent to March 31, 2018 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.
Note
3 – Summary Of Significant Accounting Policies
Use
of estimates in the financial statements
The
preparation of condensed consolidated financial statements in conformity with 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, accounts receivable and inventories,
and other matters that affect the condensed consolidated financial statements and disclosures. Actual results could differ from
those estimates.
Principles
of consolidation
The
condensed consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries, 3D-ID, LogicMark
and Fit Pay. Intercompany balances and transactions have been eliminated in consolidation.
Concentrations
of Credit Risk
The
Company is a party to a Master Development Agreement with World Ventures Holding, LLC (“WVH”), 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 three months
ended March 31, 2018 and 2017, the Company recognized revenue of $254,258 and $2,708,036, respectively from WVH. At March 31,
2018 and December 31, 2017, the Company’s accounts receivable, net balance included $995,787 and $1,364,405, respectively
due from WVH.
Revenue
Recognition
The
Company 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.
Accounts
Receivable
Accounts
receivable is stated at net realizable value. The Company regularly reviews accounts receivable balances and adjusts the receivable
reserves as necessary whenever events or circumstances indicate the carrying value may not be recoverable. At March 31, 2018 and
December 31, 2017, the Company had an allowance for doubtful accounts of $402,383.
Inventory
The
Company performs regular reviews of inventory quantities on hand and evaluates the realizable value of its inventories. The Company
adjusts the carrying value of the inventory as necessary with estimated valuation reserves for excess, obsolete, and slow-moving
inventory by comparing the individual inventory parts to forecasted product demand or production requirements. As of March 31,
2018 inventory was comprised of $1,588,842 in raw materials and $1,408,128 in finished goods on hand. Inventory at December 31,
2017 was comprised of $1,493,995 in raw materials and $1,565,522 in finished goods on hand. The Company is required to prepay
for raw materials with certain vendors until credit terms can be established. As of March 31, 2018, and December 31, 2017, the
Company had prepaid inventory of $910,568 and $887,021, respectively. These prepayments were made primarily for raw materials
inventory and prepaid inventory is included in prepaid expenses and other current assets on the condensed consolidated balance
sheet.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3 – 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. The Company will begin
testing the Fit Pay related goodwill for impairment annually in the second quarter of 2018. 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. As of March 31, 2018, there were no triggering events which would have necessitated
an interim period evaluation.
Other
Intangible Assets
The
Company’s intangible assets are all related to the acquisitions of Fit Pay and LogicMark and are included in other intangible
assets in the Company’s condensed consolidated balance sheets at March 31, 2018, and December 31, 2017.
At
March 31, 2018, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $3,471,980; trademarks
of $1,151,618; and customer relationships of $2,712,464. At December 31, 2017, the other intangible assets 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 three months ended March 31, 2018 and 2017, the Company
had amortization expense of $187,845 related to the LogicMark intangible assets.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
March 31, 2018, the other intangible assets relating to the acquisition of Fit Pay, which was completed on May 23, 2017, are comprised
of trademarks of $157,414; technology of $2,193,737; and customer relationships of $1,240,534. At December 31, 2017, the other
intangible assets 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 patents, trademarks and customer relationships are 5 years; 7 years; and 6 years, respectively. During the three
months ended March 31, 2018, the Company had amortization expense of $210,964 related to the Fit Pay intangible assets.
As
of March 31, 2018, total amortization expense estimated for the remainder of fiscal 2018 is approximately $998,000 and for each
of the next five fiscal years, 2019 through 2023 the total amortization expense is estimated to be as follows: 2019 - $1,400,000;
2020 - $1,400,000; 2021 - $1,400,000; 2022 - $1,388,000; 2023 - $1,248,000.
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 4,602,650 warrants as of March
31, 2018 were excluded from the computation of diluted net loss per share because the effect of their inclusion would have been
anti-dilutive. As of March 31, 2017, potentially dilutive securities of 1,749,805 realizable from the Series A Preferred Stock
and Series B Preferred Stock, 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.
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 was adopted and it did not have a material impact on the Company’s condensed 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. This ASU was adopted and it did not have a material impact on the Company’s condensed
consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. As permitted under the standard
for emerging growth companies, the Company plans to adopt ASU 2016-18 in the first quarter of 2019. The Company is currently
reviewing and evaluating this guidance and its impact on its condensed consolidated financial statements.
In
May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), “Revenue from Contracts with Customers (Topic 606):
Narrow- Scope Improvements and Practical Expedients.” ASU 2016-12 will affect all entities that enter into contracts with
customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration.
The amendments in this update affect the guidance in ASU 2014-09 which is not yet effective, the amendments in this update affect
narrow aspects of Topic 606 including among others: assessing collectability criterion, noncash consideration, and presentation
of sales taxes and other similar taxes collected from customers. The effective date and transition requirements for the amendments
in this update are the same as the effective date and transition requirements for ASU 2014-09. The Company is currently evaluating
the effect that ASU 2016-12 will have on the Company’s financial position and results of operations.
In
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
condensed consolidated financial statements. Therefore, the Company’s results may not be comparable with others companies in our
industry until ASU 2014-09 is adopted.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
4 – 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 intends
to pay the 2017 earnout amount of $3,156,088 to the LogicMark Sellers in the second quarter of 2018.
See Note 8.
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 March 31, 2018 and December 31, 2017 the unamortized balance
of deferred debt issue costs was $112,613 and $200,744, respectively. 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 March 31, 2018, 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 March 31, 2018 and
December 31, 2017.
Acquisition
of Fit Pay
As
discussed in Note 1, the Company completed the Merger on May 23, 2017. Pursuant to the terms of the Merger Agreement,
the aggregate purchase price paid for Fit Pay stock was: (i) 1,912,303 shares of common stock which was equivalent to 19.96% of
the outstanding shares of common stock of the Company (the “Common Stock”); (ii) 2,000 shares of the Series C Non-Convertible
Preferred Stock of the Company (the “Series C Preferred Stock”); (iii) the payment of certain debts by the Company;
and (iv) the payment of certain unpaid expenses of the Fit Pay Sellers of $724,116 by the Company. In addition, the Company will
be required to pay the Fit Pay Sellers an earn-out payment equal to 12.5% of the gross revenue derived from Fit Pay’s technology
for sixteen (16) fiscal quarters commencing on October 1, 2017 and ending on December 31, 2021. To date, Fit Pay has had minimal
revenue. The operating results of Fit Pay have been included in the condensed consolidated financial statements from the effective
date of the acquisition, May 23, 2017.
In
connection with the Merger on May 23, 2017, the Company recorded deferred tax liabilities of $1,774,539 as part of its purchase
price allocation.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Pro
Forma Financial Information
The
following table summarizes the unaudited pro forma financial information assuming that the acquisition of Fit Pay occurred on
January 1, 2017, and its results had been included in the Company’s financial results for the three months ended March 31,
2017. The pro forma combined amounts are based upon available information and reflect a reasonable estimate of the effects of
the Fit Pay acquisition for the periods presented on the basis set forth herein. The following unaudited pro forma combined financial
information is presented for informational purposes only and does not purport to represent what the financial position or results
of operations would have been had the Fit Pay acquisition in fact occurred on the date assumed, nor is it necessarily indicative
of the results that may be expected in future periods.
|
|
Three months ended
|
|
|
|
March 31,
2017
|
|
|
|
|
(unaudited)
|
|
Pro forma:
|
|
|
|
|
Net Sales
|
|
$
|
6,737,301
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(1,712,165
|
)
|
Net Loss Per Share - Basic and Diluted applicable to Common Stockholders
|
|
$
|
(0.18
|
)
|
The
unaudited pro forma net loss attributable to Nxt-ID, Inc. has been calculated using actual historical information and is adjusted
for certain pro forma adjustments based on the assumption that the acquisition of Fit Pay and the application of fair value adjustments
to intangible assets occurred on January 1, 2017.
The
pro forma adjustments for the three months ended March 31, 2017 include the following adjustments, (a) amortization expense related
to the acquired intangible assets of $185,717; (b) interest expense of $10,648; and (c) dividends related to the Series C Preferred
Stock of $24,658.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5 – Stockholders’ Equity
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
686,037 at January 1, 2018.
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 three months ended March 31, 2018, the Company issued 47,793 shares of common stock under the LTIP to five
(5) non-executive directors for serving on the Company’s board. The aggregate fair value of the shares issued to
the directors was $95,111.
In addition, during the three months ended March 31, 2018, the Company issued 163,435 shares of
common stock with an aggregate fair value of $353,019 to executive and certain non-executive employees related to
the Company’s 2017 management incentive plan.
During
the three months ended March 31, 2018, the Company accrued $225,000 of discretionary management and employee bonus expense.
During
the three months ended March 31, 2018, the Company issued 68,462 shares of common stock with a fair value of $158,527 to non-employees
for services rendered.
Warrants
As
of March 31, 2018, the Company had 4,602,650 warrants outstanding with a weighted average exercise price and remaining life
in years of $5.87 and 3.909, respectively. At March 31, 2018, the warrants had no aggregate intrinsic value. During the three
months ended March 31, 2018, 1,075,000 warrants were exercised on a cashless basis and were converted into 437,018 shares of
common stock. In addition, the Company received proceeds of $200,000 in connection with the exercise of 100,000 warrants into
100,000 shares of common stock at an exercise price of $2.00 per share.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 – Commitments and Contingencies
Legal
Matters
From
time to time we may be involved in various claims and legal actions arising in the ordinary course of our business. There is no
action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization
or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or
affecting our company, or any of our subsidiaries in which an adverse decision could have a material adverse effect upon our business,
operating results, or financial condition.
Commitments
The
Company is a party to certain leases for office space and warehouse facilities, with monthly payments ranging from $1,867 to $6,911,
expiring on various dates through August 2020. The Company incurred rent expense of $63,391 and $44,165 for the three months ended
March 31, 2018 and March 31, 2017, respectively. Minimum lease payments for non-cancelable operating leases are as follows:
Future Lease Obligations
|
|
|
|
|
|
|
|
2018
|
|
$
|
114,857
|
|
2019
|
|
|
128,195
|
|
2020
|
|
|
76,022
|
|
Total future lease obligations
|
|
$
|
319,074
|
|
The
maturity of the Company’s debt is as follows:
2018
|
|
$
|
159,720
|
|
2019
|
|
|
212,961
|
|
2020
|
|
|
212,961
|
|
2021
|
|
|
159,719
|
|
Total debt
|
|
$
|
745,361
|
|
Note
8 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
April 2, 2018, the Company issued 7,813 shares of its common stock for the payment of services with a grant date fair value of
$15,000.
On
April 10, 2018 and April 13, 2018, the Company paid $1,000,000 and $1,500,000, respectively of the 2017 earnout amount due
to the LogicMark Sellers of $3,156,088. The Company intends to pay the remaining balance owed of $656,088 in May
2018.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations for the three months ended March 31, 2018, should be read together with our
condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains
forward-looking statements and information relating to our business that reflect our current views and assumptions with respect
to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the date of this report.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United
States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking
statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results.
Overview
We were 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 June 25, 2012, the Company acquired
100% of the membership interests in 3D-ID LLC (“3D-ID”), a limited liability company formed in Florida in February
2011 and owned by the Company’s founders. By acquiring 3D-ID, the Company gained the rights to a portfolio of patented technology
in the field of three-dimensional facial recognition and imaging including 3D facial recognition products for access control, law
enforcement and travel and immigration. 3D-ID was an early stage company engaged in the design, research and development, integration,
analysis, modeling, system networking, sales and support of intelligent surveillance, three-dimensional facial recognition and
three-dimensional imaging devices and systems primarily for identification and access control in the security industries. Since
the Company’s acquisition of 3D-ID was a transaction between entities under common control in accordance with Accounting
Standards Codification (“ASC”) 805, “Business Combinations”, Nxt-ID recognized the net assets of 3D-ID
at their carrying amounts in the accounts of Nxt-ID on the date that 3D-ID was organized, February 14, 2011.
On July 25, 2016, 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 Note 4. 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 intends to pay the 2017 earnout amount of $3,156,088 to the LogicMark Sellers in
the second quarter of 2018. See Note 8.
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.
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.
Healthcare
With respect to the healthcare market,
our business initiatives are driven by LogicMark, which serves a market that enables two-way communication, medical device connectivity
and patient data tracking of key vitals through sensors, biometrics, and security to make home health care a reality. There are
three major trends driving this market: (1) an increased desire for connectivity; specifically, a greater desire for connected
devices by people over 60 years of age who now represent the fastest growing demographic for social media; (2) the growth of “TeleHealth”,
which is the means by which telecommunications technologies are meeting the increased need for health systems to better distribute
doctor care across a wider range of health facilities, making it easier to treat and diagnose patients, and (3) rising healthcare
costs – as health spending continues to outpace the economy, representing between 6% and 7% of the overall economy, the need
to reduce hospital readmissions, increase staffing efficiency and improve patient engagement remain the highest priorities. Together,
these trends have produced a large and growing market for us to serve. LogicMark has built a successful business on emergency communications
in healthcare. We have a strong business relationship with the VA today, serving veterans who suffer from chronic conditions that
often require emergency assistance. This business is steady and growing, producing record revenue in 2017. Our strategic plan calls
for expanding LogicMark’s business into other healthcare verticals as well as retail and enterprise channels in order to
better serve the expanding demand for connected and remote healthcare solutions.
Home healthcare, which includes health
monitoring and management using IoT and cloud-based processing, is an emerging area for LogicMark. The long-term trend toward more
home-based healthcare is a massive shift that is being driven by demographics (an aging population) and basic economics. People
also value autonomy and privacy which are important factors in determining which solutions will suit the market. Consumers are
beginning to enjoy the benefits of smart home technologies and online digital assistants. One of the promising applications of
our VoiceMatch™ technology is enabling secure commands for restricted medical access. This solution, when coupled with Nxt-ID
BioCloud™, combines biometrics with encryption and distributed access control.
PERS devices are used to call for help
and medical care during an emergency. These devices are also used by a wide patient pool, as well as the general population, to
ensure safety and security when living or traveling alone. The global medical alert systems market caters to different end-users
across the healthcare industry, including individual users, hospitals and clinics, assisted living facilities and senior living
facilities. The growing demand for home healthcare devices is mainly driven by an aging population and rising healthcare costs
worldwide. We believe that this will spur the usage of medical alert systems across the globe, as they offer safety and medical
security while being affordable and accessible.
Payments and Financial Technology
We
conduct our payments business through Fit Pay, which was acquired by Nxt-ID in May 2017. Fit Pay’s core technology is a proprietary
platform that enables contactless payment capabilities, allowing manufacturers of “smart devices” to add payment capabilities
to their products with very little start-up time and minimal investment in software development, while granting them access to
the leading card network and global credit card issuing banks. It is one of the first successful commercializations of a token
requestor service provider integrated with the major payment card networks. The existing propriety capabilities of the contactless
payment companies are not available to other original equipment manufacturers (“OEMs”). The Fit Pay TPMP creates an
opportunity for a whole new range of devices to be payment-enabled.
Fit
Pay is currently on-boarding 15 device manufactures to its platform.
Garmin Pay™, a contactless payment feature for
a new line of smartwatches by Garmin International, Inc., is powered by Fit Pay’s TPMP technology and went live in the fall
of 2017. Fit Pay also announced the product launches for three other customers, including the
Token
ring by Tokenize Inc.,
the
Bee
payment device by Radiius and a luxury smart clasp by Wearatec Inc.
In addition to launching new customers,
our emerging payments business also announced key ecosystem partnerships with Visa International, Mastercard, Bank of America,
and Australia and New Zealand Banking Group Limited (ANZ). These agreements, along with the growing network of issuing banks, now
enables cardholders to use devices powered by the TPMP, increasing our revenue potential and providing the opportunity to expand
our customer and geographical footprint. At year-end, the TPMP was enabled by more than 60 issuing banks in 8 countries in the
largest markets worldwide.
Our payment and financial technology business
has also expanded to include new products and services. This includes growing the capabilities of the TPMP to integrate it with
additional payment networks and issuing banks. Fit Pay has also developed proprietary payment devices that it will offer through
business-to-business and direct-to-consumer channels. These new products will leverage the TPMP and allow us to access new customers
and emerging markets, such as cryptocurrency. Fit Pay’s initial product offering is a platform extension and contactless
payment device called Flip™, which enables Bitcoin holders to make contactless payment transactions at millions of retail
locations with value exchanged from their cryptocurrency.
Together,
these opportunities position our emerging payment and financial technology business for future growth as Fit Pay begins to monetize
its core TPMP technology, and expand its products and services to new markets and customers.
Our payments business targets the rapidly
expanding IoT and wearable devices markets. According to the research firm, Gartner, IoT devices will grow at a 32.9% CAGR through
2020, reaching an installed base of 20.4 billion units. Gartner estimates that by 2020 there will be more than 500 million wearable
devices in use alone and it predicts that 1 million IoT devices will be purchased every hour by 2021.
As the markets for wearables and IoT devices
expand, payments are also emerging as a key feature. A Business Insider Intelligence study estimates that by 2020 an estimated
63% of wearable devices will be payment-enabled. The research firm International Data Corporation predicts that wearable devices
will transact more than $501 billion payment by 2020, overtaking plastic payment methods as the primary payment method in the next
5-7 years.
A recent survey by Visa and the industry
publication, PYMTS, entitled “How We Will Pay: Consumers Connected Devices and the Future of Payments” supports consumer
demand for adding payment capabilities to devices. The survey found strong support among consumers for new forms of payments. Of
the survey’s respondents:
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60% found buying and paying for things unproductive and time-consuming, and in need of improvements;
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83% viewed using connected devices as a way to eliminate friction from how they pay;
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66% would use a connected device to enable a seamless payment experience; and
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77% want their financial institution/bankcard network to enable these new ways to pay.
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As an early and established entrant into
the payments market, we believe that we are well-positioned to take advantage of both the growth of payment-enabled devices and
the consumer demand for new forms of payments.
Results of Operations
Comparison of three months ended March 31, 2018 and March
31, 2017
Revenue.
Our revenues for the three
months ended March 31, 2018 were $4,930,608 compared to $6,681,297 for the three months ended March 31, 2017. The decrease in our
revenues for the three months ended March 31, 2018 versus the three months ended March 31, 2017 is directly related to a reduction
in shipments of the Flye
TM
smartcard to WVH. At December 31, 2017, WVH had sufficient Flye
TM
smart card inventory
on hand and as a result we expect to begin shipping such smart cards to WVH again in the latter part of 2018. The reduction in
Flye
TM
smartcard sales was partially offset by an increase in LogicMark product sales in the three months ended March
31, 2018 versus 2017 and Fit Pay sales which was acquired on May 23, 2017.
Cost of Revenue and Gross Profit.
Our gross profit for the three months ended March 31, 2018 remained relatively flat at $3,461,129 compared to a gross profit of
$3,509,290 for the three months ended March 31, 2017. The reduction in gross profit resulting from the lower Flye
TM
smartcard sales to WVH in the three months ended March 31, 2018 versus the three months ended March 31, 2017 was offset by the
higher gross profit resulting from the increased LogicMark product sales as well as the gross profit related to the Fit Pay sales.
Operating Expenses.
Operating expenses
for the three months ended March 31, 2018, totaled $4,201,877 and consisted of research and development expenses of $730,103, selling
and marketing expenses of $1,437,252 and general and administrative expenses of $2,034,522. The research and development expenses
related primarily to salaries and consulting services of $627,048. Selling and marketing expenses consisted primarily of salaries
and consulting services of $395,821, amortization of intangibles of $398,809, freight charges of $144,257, merchant processing
fees of $98,232, and sales commissions of $72,241. General and administrative expenses consisted of salaries and consulting services
of $698,962, accrued management and employee incentives of $225,000 and legal, audit and accounting fees of $250,463. Also included
in general and administrative expenses is $244,184 in non-cash stock compensation to consultants and board members.
Operating expenses for the three months
ended March 31, 2017, totaled $2,442,388 and consisted of research and development expenses of $84,944, selling and marketing expenses
of $996,758 and general and administrative expenses of $1,360,686. Selling and marketing expenses consisted primarily of salaries
and consulting services of $262,167, merchant processing fees of $108,127, and sales commissions of $72,241. General and administrative
expenses consisted of salaries and consulting services of $452,083 accrued management and employee incentives of $150,000 and legal,
audit and accounting fees of $200,707. Also included in general and administrative expenses is $86,140 in non-cash stock compensation
to consultants and board members.
Operating (Loss) Profit.
The operating
loss for the three months ended March 31, 2018, was $740,748 compared with operating income of $1,066,902 for the three months
ended March 31, 2017. The significant unfavorable change in operating profit (loss) for the three months ended March 31, 2018 as
compared to 2017 is primarily attributable to the inclusion of Fit Pay’s operating expenses which approximated $1.2 million
in the three months ended March 31, 2018. In addition, expenses related to salaries and wages and stock compensation to vendors
were higher in the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.
Net Loss.
The net loss for the three
months ended March 31, 2018 was primarily attributable to the operating loss discussed above of $740,748, interest expense of $758,205
and an unfavorable change in fair value of contingent consideration related to the Fit Pay acquisition of $197,709 all of which
was partially offset by a tax benefit of $83,849. The net loss for the three months ended March 31, 2017, was $730,215. The net
loss was primarily attributable to the interest expense incurred of $1,703,930.
Liquidity and Capital Resources
We have incurred an operating loss of $740,748
and a net loss of $1,612,813, respectively, for the three months ended March 31, 2018.
Cash and Working Capital.
As of
March 31, 2018, the Company had cash and stockholders’ equity of $4,402,769 and $18,225,489, respectively. At March 31, 2018,
the Company had working capital of $738,830.
Cash Generated by Operating Activities.
Our primary ongoing uses of operating cash relate to payments to subcontractors and vendors for product, research and development,
salaries and related expenses and professional fees. Our vendors and subcontractors generally provide us with normal trade payment
terms. During the three months ended March 31, 2018, net cash used in operating activities totaled $1,131,201, which was comprised
of a net loss of $1,612,813, positive non-cash adjustments to reconcile net loss to net cash used in operating activities of $1,035,161,
and changes in operating assets and liabilities of negative $553,549, as compared to net cash used in operating activities of $737,634
for the three months ended March 31, 2017, which was comprised of a net loss of $730,215, positive non-cash adjustments to reconcile
net loss to net cash used in operating activities of $1,339,082, and changes in operating assets and liabilities of negative $1,346,501.
Cash Used in Investing Activities.
During
the three months ended March 31, 2018, net cash used in investing activities totaled $150,721 and was primarily related to an increase
in restricted cash of 143,855 and the purchase of equipment of $6,866. During the three months ended March 31, 2017, net cash used
in investing activities totaled $101,460 and was primarily related to a purchase of equipment of $1,460 and a deposit of $100,000
related to the acquisition of Fit Pay which closed on May 23, 2017.
Cash (Used in) Provided by Financing
Activities.
During the three months ended March 31, 2018, net cash provided by financing activities totaled $48,276 and was
primarily related to the proceeds received from the exercising of warrants into common stock of $200,000 partially offset by a
pay down in short term debt of $106,481 and fees paid in connection with equity offerings of $45,243. During the three months ended
March 31, 2017, we paid $7,500 for legal expenses related to the issuance of the Exchange Notes issued in November 2016.
Sources of Liquidity.
We are an
emerging growth company and have generated losses from operations since inception. We incurred an operating loss of $740,748 and
a net loss of $1,612,813 during the three months ended March 31, 2018. As of March 31, 2018, the Company had working capital and
stockholders’ equity of $738,830 and $18,225,489, respectively. 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.
As of March 31, 2018, the Company had cash of $4,402,769.
Given our cash position at March 31,
2018 and our projected cash flow from operations over the next twelve months, we believe that we will have sufficient capital
to sustain operations over the next twelve months following the date of this report to alleviate such substantial doubt. In order
to execute our long-term strategic plan to develop and commercialize our core products, fulfill our product
development commitments and fund our obligations as they come due, including the 2017 earn-out payment related to the
acquisition of LogicMark, we may need to raise additional funds, through public or private equity offerings, debt financings,
or other means. Should we not be successful in obtaining the necessary financing, or generate sufficient revenue to fund
our operations, we would need to curtail certain of our operational activities.
The Company can give no assurance that any cash raised subsequent
to March 31, 2018 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.
Impact of Inflation
We believe that our business has not been affected
to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the worldwide
economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost of certain
raw materials, component parts and labor used in the production of our products. It also may increase our operating expenses, manufacturing
overhead expenses and the cost to acquire or replace fixed assets. We have generally been able to maintain or improve our profit
margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent, price increases, and
we expect to be able to do the same during 2018. As such, we do not believe that inflation will have a significant impact on our
business during 2018.
Off Balance Sheet Arrangements
We do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
such relationships.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 to our condensed
consolidated financial statements for the three months ended March 31, 2018, included elsewhere in this document.