PART
I
Nxt-ID
provides technology products and services for healthcare applications. We have extensive experience in access control, biometric
and behavior-metric identity verification, security and privacy, encryption and data protection, payments, miniaturization, and
sensor technologies.
During
the year ended December 31, 2019, two of our subsidiaries operated in the mobile and IoT-related markets: LogicMark, LLC (“LogicMark”),
a manufacturer and distributor of non-monitored and monitored personal emergency response systems (“PERS”) that are
sold through dealers, distributors and the United States Department of Veterans Affairs (the “VA”), and Fit Pay, Inc.
(“Fit Pay”), a proprietary technology platform that delivers end-to-end solutions to device manufacturers for contactless
payment capabilities, credential management, authentication and other secure services within the IoT ecosystem.
Our
former wholly-owned subsidiary, Fit Pay, Inc., had 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. On
September 21, 2018, we announced that our board of directors approved a plan to separate our financial technology business
from our healthcare business into an independent publicly traded company. We originally planned to distribute shares of
PartX, Inc., a newly created company and wholly-owned subsidiary of the Company (“PartX”), to our stockholders
through the execution of a spin-off. As a result, we reclassified our financial technology business to discontinued
operations for all periods reported. Our financial technology business was comprised of our Fit Pay subsidiary and the
intellectual property developed by the Company, including the Flye Smartcard and the Wocket. On April 29, 2019, a
Registration Statement on Form 10 was filed by PartX with the SEC in connection with the planned spin-off of our payments,
authentication and credential management business. On August 19, 2019, our subsidiary,
PartX notified the SEC that it was withdrawing the Registration Statement on Form 10. With the
approval of our board of directors, and upon similar terms and conditions to those set forth in that loan agreement,
we entered into a non-binding letter of intent for the sale of our Fit Pay subsidiary, excluding certain
assets on August 6, 2019. In connection with the letter of intent, we were advanced $500,000 of non-interest bearing
working capital for Fit Pay. On September 9, 2019, we completed the sale of our Fit Pay subsidiary to Garmin International,
Inc. for $3.32 million in cash.
Healthcare
Overview
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 four (4) 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; (3) rising healthcare costs – as healthcare spending continues to outpace the economy, the need to reduce hospital readmissions, increase staffing efficiency
and improve patient engagement remain the highest priorities; and (4) the critical shortage of labor in the home healthcare industry,
creating an increased need for technology to improve communication to home healthcare agencies by their clients. 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 2019. 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, 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.
Our
Healthcare Monitoring Market Opportunity
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,
rising healthcare costs and a severe shortage of workers in the home healthcare market worldwide. It is very beneficial for seniors
who have a history of falling or have been identified as having a high fall risk, older individuals who live alone and people
who have mobility issues. We believe that the aging population will spur the usage of medical
alert systems across the globe, as they offer safety and medical security while being affordable and accessible.
Global
PERS Market Growth
Source:
Kenneth Research 2020
The
PERS market is divided into three (3) device segments: landline-based PERS, mobile PERS, and standalone devices. The global
PERS market is projected to grow at a compound annual growth rate (“CAGR”) of 5.82% to $4.7 billion in 2027,
benefiting from strong demographic tailwinds. As landline usage continues to decrease, other technologies such as cellular
and WiFi will be used for in-home systems. According to Kenneth Research, North America, Asia and Europe are the largest
markets for PERS, accounting for approximately 36%, 31% and 25% of total sales, respectively, in 2027. According to
Kenneth Research, improvements in healthcare infrastructure and emerging economies will fuel growth and significantly improve the
relative market share of the rest of world regions.
Our
Health Care Products
LogicMark
produces a range of products within the PERS market and has differentiated itself by offering “no monthly fee” products,
which only require a one-time purchase fee, instead of a recurring monthly contract. The “no monthly fee” products
contact family, friends or 911 directly, eliminating the monthly fee from a monitoring center. As a result, we believe LogicMark’s
products are typically the most cost-effective PERS option. LogicMark’s non-monitored solution offers a significant value
proposition over monitored solutions.
The
cost of ownership of a monitored solution, which includes a monthly service fee, can be as much as $1,500 – $3,000 over
a five-year period. This compares to a one-time purchase of a LogicMark no monthly fee device, which provides a similar level
of security for a purchase price as low as one tenth of that amount.
LogicMark
offers both traditional (i.e., landline) and mPERS (i.e., cell-based) options. Our no monthly fee products are sold
primarily through the VA and healthcare distributors.
LogicMark
offers monitored products that are primarily sold by dealers and distributors for the monitored product channel. LogicMark sells
its devices to the dealers and distributors, who in turn offer the devices to consumers as part of their product/service offering.
The service providers charge consumers a monthly monitoring fee for the associated monitoring service. These products are monitored
by a third-party central station.
Our
Health Care Competition
LogicMark
offers a wide variety of products, enabling it to cater to users with different levels of health and safety needs. Compared to
its competitors, we believe LogicMark’s PERS products offer enhanced functionality at the best value due to the one-time
purchase for non-monitored solutions.
The
chart below summarizes LogicMark’s product offering versus those of its competitors:
Our
Health Care Business Strategy
We
intend to expand LogicMark’s product distribution by using larger distributors who can leverage the consumer value proposition
of offering a one-time device purchase as opposed to a leased monthly solution. We also intend to apply our technology to the
next generation of PERS devices that will have greater functionality, innovative design and clinical monitoring capability. We
believe that there is further potential for expansion in the domestic and international retail and institutional/senior living
markets, and we intend to take advantage of this through a new product offering, Notifi911+, which is a non-monitored device developed
for direct-to-consumer sales through retail channels and direct marketing initiatives. We are also seeking to leverage our PERS
experience to develop new offerings to serve the home healthcare and senior living markets with WiFi notification services.
Overall,
our healthcare division, through LogicMark, is positioned to take advantage of favorable market dynamics, a stable revenue-producing
customer base, a differentiated product line, a robust new product development pipeline and compelling growth opportunities.
Payments
and Financial Technology
Overview
Our
former wholly-owned subsidiary, Fit Pay, Inc., had a proprietary technology platform that delivered payment, credential management,
authentication and other secure services to the IoT ecosystem. The platform used tokenization, a payment security technology that
replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless payment
and authentication services. Fit Pay connected its customers to leading payment card networks, including VISA, Mastercard, Maestro
and Discover, and to credit card issuing banks globally. Fit Pay also commercialized its third-party token service provider platform
with the launch of Garmin Pay, which was powered by Fit Pay’s platform. Fit Pay’s technology and tokenization service
enabled the contactless payment feature that is included in smart watches manufactured by Garmin.
On
September 21, 2018, we announced that our board of directors approved a plan to separate our financial technology business
from our healthcare business into an independent publicly traded company. We originally planned to distribute shares
representing our financial technology business into a newly created company and wholly-owned subsidiary of the Company (which
we named “PartX”), to our stockholders through the execution of a spin-off. As a result, we reclassified our
financial technology business to discontinued operations for all periods reported. Our financial technology business was
comprised of our Fit Pay subsidiary and the intellectual property developed by the Company, including the Flye Smartcard and
the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX with the SEC in connection with the
planned spin-off of our payments, authentication and credential management business. On
August 19, 2019, our subsidiary, PartX notified the SEC that it was withdrawing the Registration Statement on Form 10 as
PartX was unable to secure sufficient investment within the time period specified in a term loan agreement to separately fund
the spinoff. With the approval of our board of directors, and upon similar terms and conditions to those set forth in that
loan agreement, we entered into a non-binding letter of intent for a potential sale of our Fit Pay subsidiary,
excluding certain assets on August 6, 2019. In connection with the letter of intent, the purchaser advanced $500,000 of
non-interest bearing working capital for Fit Pay. On September 9, 2019, we completed the sale of our Fit Pay subsidiary to
Garmin International, Inc. for $3.32 million in cash.
Our Intellectual Property
Our
ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We currently
rely and will continue to rely primarily on patents and trade secret laws and confidentiality procedures to protect our intellectual
property rights. We have filed the following patent applications, sixteen of which have been awarded to date:
THE
UN-PASSWORD™: RISK AWARE END-TO-END MULTI-FACTOR AUTHENTICATION VIA DYNAMIC PAIRING
Filed
March 17, 2014
Application
Number 14/217,202
Patent
Number 9,407,619
UNIVERSAL
AUTHENTICATION AND DATA EXCHANGE METHOD, SYSTEM AND SERVICE
Filed
October 26, 2018
Application
Number 16/172,667
METHOD
TO LOCALLY VALIDATE IDENTITY WITHOUT PUTTING PRIVACY AT RISK
Filed
September 1, 2015
Application
Number 14/842,252
Patent
Number 10,282,535
METHOD
TO LOCALLY VALIDATE IDENTITY WITHOUT PUTTING PRIVACY AT RISK
Filed
May 6, 2019
Application
Number 16/404,044
MULTI-INSTANCE
SHARED AUTHENTICATION (MISA) METHOD AND SYSTEM PRIOR TO DATA ACCESS
Filed
June 23, 2016
Application
Number 15/191,466
METHODS
AND SYSTEMS RELATED TO MULTI-FACTOR, MULTIDIMENSIONAL, MATHEMATICAL, HIDDEN AND MOTION SECURITY PINS
Filed
August 1, 2016
Application
Number 15/224,998
Patent
Number 10,565,569
COMPONENTS
FOR ENHANCING OR AUGMENTING WEARABLE ACCESSORIES BY ADDING ELECTRONICS THERETO
Filed
September 2, 2015
Application
Number 14/843,930
Patent
Number 10,395,240
The
Un-Password: Risk Aware End-to-end Multi-factor Authentication via Dynamic PairinG
Filed
March 14, 2016
Application
Number 15/068,834
Patent
Number 10,015,154
The
Un-Password: Risk Aware End-to-end Multi-factor Authentication via Dynamic PairinG
Filed
July 2, 2018
Application
Number 16/025,992
SYSTEM
AND METHOD TO PERSONALIZE PRODUCTS AND SERVICES
Filed
July 15, 2016
Application
No. 15/212,184
SYSTEM
AND METHOD TO PERSONALIZE PRODUCTS AND SERVICES
Filed
September 6, 2016
Application
No. 15/257,101
SYSTEM
AND METHOD TO AUTHENTICATE ELECTRONICS USING ELECTRONIC-METRICS
Filed
July 5, 2016
Application
No. 15/202,553
Patent
Number 10,419,428
SYSTEM
AND METHOD TO AUTHENTICATE ELECTRONICS USING ELECTRONIC-METRICS
Filed
September 15, 2019
Application
No. 16/571,171
SYSTEM
AND METHOD TO DETERMINE USER PREFERENCES
Filed
July 15, 2016
Application
No. 15/212,163
PREFERENCE
DRIVEN ADVERTISING SYSTEM AND METHOD
Filed
July 15, 2016
Application
Number 15/212161
AN
EVENT DETECTOR FOR ISSUING A NOTIFICATION RESPONSIVE TO OCCURRENCE OF AN EVENT
Filed
July 27, 2018
Application
Number 16/048,181
METHOD
AND SYSTEM TO IMPROVE ACCURACY OF FALL DETECTION USING MULTI-SENSOR FUSION
Filed
December 17, 2018
Application
Number 16/222,359
METHOD
AND SYSTEM TO REDUCE INFRASTRUCTURE COSTS WITH SIMPLIFIED INDOOR LOCATION AND RELIABLE COMMUNICATIONS
Filed
November 11, 2019
Application
Number 16/679,494
METHOD
AND SYSTEM TO DETERMINE AND RECORD CALORIC INTAKE
Filed
November 16, 2019
Application
Number 62/963,493
WIRELESS
CENTRALIZED EMERGENCY SERVICES SYSTEM
Filed
January 15, 2008
Application
Number 12/007740
Patent
Number 8,275,346
VOICE-EXTENDING
EMERGENCY RESPONSE SYSTEM
Filed
September 5, 2008
Application
Number 12/230,841
Patent
Number 8,121,588
LIST-BASED
EMERGENCY CALLING DEVICE
Filed
March 11, 2009
Application
Number 12/402,304
Patent
Number 8,369,821
ALARM
SIGNALING DEVICE AND ALARM SYSTEM
Filed
February 2, 2005
Application
Number 10/523,115
Patent
Number 7,312,709
FALL
DETECTION SYSTEM HAVING A FLOOR HEIGHT THRESHOLD AND A RESIDENT HEIGHT DETECTION DEVICE
Filed
June 27, 2008
Application
Number 12/216,053
Patent
Number 7,893,844
APPARATUS
AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS COMMUNICATION DEVICES
Filed
August 24, 2014
Application
Number 14/467,268
Patent
Number 9,472,088
APPARATUS
AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS COMMUNICATION DEVICES
Filed
September 8, 2016
Application
Number 15/259,247
Patent
Number 9,900,737
ALARM
SIGNALING DEVICE AND ALARM SYSTEM
Canadian
patent
Filed
August 1, 2003
Application
Number 2,494,166
Patent
Number 2,494,166
APPARATUS
AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS COMMUNICATION DEVICES
Canadian
Patent
Filed
August 11, 2015
Application
Number 2,900180
APPARATUS
AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS COMMUNICATIONS DEVICES
Filed
August 25, 2014
Application
Number 14/467,268
Patent
Number 9,472,088
WIRELESS,
CENTRALIZED EMERGENCY SERVICES SYSTEM
Filed
January 15, 2008
Application
Number 12/007,740
Patent
Number 8,275,346
We
enter into confidentiality agreements with our consultants and key employees, and maintain control over access to and distribution
of our technology, software and other proprietary information. The steps that we have taken to protect our technology may be inadequate
to prevent others from using what we regard as our technology to compete with us.
We
do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes on the
patents that are held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard
to similar technologies.
We
may face claims by third parties that our products or technology infringe their patents or other intellectual property rights
in the future. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim
is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary
rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or seek to
obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses
on commercially reasonable terms may not be successful, which would prevent us from selling our products, and in any case, could
substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations.
Corporate
Information
History
We
were incorporated in the State of Delaware on February 8, 2012. As of December 31, 2018, we were no longer an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “Jobs Act”). We are a security
technology company and we operate our business in one segment – hardware and software security systems and applications.
We are engaged in the development of proprietary products and solutions that serve multiple end markets, including the security,
healthcare, financial technology and the Internet of Things (“IoT”) markets. We evaluate the performance of our business
on, among other things, profit and loss from operations. With extensive experience in access control, biometric and behavior-metric
identity verification, security and privacy, encryption and data protection, payments, miniaturization, and sensor technologies,
we develop and market solutions for payment, IoT and healthcare applications.
Our
wholly-owned subsidiary, LogicMark LLC (“LogicMark”), manufactures and distributes non-monitored and monitored personal
emergency response systems sold through the United States Department of Veterans Affairs, healthcare durable medical equipment
dealers and distributors and monitored security dealers and distributors.
On May 23, 2017, we entered into an
agreement and plan of merger with Fit Pay, Inc. (“Fit Pay”). Fit Pay, which after the merger, became a
wholly-owned subsidiary, had 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. On September 21, 2018, we
announced that our board of directors approved a plan to separate our financial technology business from our healthcare
business into an independent publicly traded company. We originally planned to distribute shares of PartX, Inc., a newly
created company and wholly-owned subsidiary of the Company (“PartX”), to our stockholders through the execution
of a spin-off. As a result, we reclassified our financial technology business to discontinued operations for all periods
reported (See Note 4). Our financial technology business was comprised of our Fit Pay subsidiary and the intellectual
property developed by the Company, including the Flye Smartcard and the Wocket. On April 29, 2019, a Registration Statement
on Form 10 was filed by PartX with the SEC in connection with the planned spin-off of our payments, authentication and
credential management business. On August 19, 2019, our subsidiary, PartX notified the
SEC that it was withdrawing the Registration Statement on Form 10. With the approval of our board of
directors, and upon similar terms and conditions as those set forth in that loan agreement, we entered into a
non-binding letter of intent for the sale of our Fit Pay subsidiary, excluding certain assets on August 6, 2019. In
connection with the letter of intent, we were advanced $500,000 of non-interest bearing working capital for Fit Pay. On
September 9, 2019, we completed the sale of our Fit Pay subsidiary to Garmin International, Inc. for $3.32 million in cash
(See Note 4).
Other
Our
principal executive offices are located at 288 Christian Street, Hangar C 2nd Floor, Oxford, CT 06478, and our telephone
number is (203) 266-2103. Our website address is www.nxt-id.com. The information contained therein or connected
thereto shall not be deemed to be incorporated into this Report. The information on our website is not part of this
Report.
As
of December 31, 2018, we were no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”).
Employees
As
of December 31, 2019, we had a total of 30 full-time employees, comprising 4 employees in product engineering, 3 employees in
finance and administration, 12 employees in sales and customer service and 11 employees in product fulfillment. None of our employees
are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with
our employees to be good. Our future success depends on our continuing ability to attract and retain highly qualified engineers,
graphic designers, computer scientists, sales and marketing and senior management personnel. In addition, we have independent
contractors whose services we are using on an as-needed basis to assist with the engineering and design of our products.
Our
business, financial condition and operating results are subject to a number of risk factors, both those that are known to us and
identified below and others that may arise from time to time. These risk factors could cause our actual results to differ materially
from those suggested by forward-looking statements in this Report and elsewhere, and may adversely affect our business, financial
condition or operating results. If any of these risk factors should occur, moreover, the trading price of our securities could
decline, and investors in our securities could lose all or part of their investment in our securities. These risk factors should
be carefully considered in evaluating our prospects.
Risks
Relating to our Business
We
are uncertain of our ability to generate sufficient revenue and profitability in the future.
We
continue to develop and refine our business model, but we can provide no assurance that we will be able to generate a sufficient
amount of revenue, from our business in order to achieve profitability. It is not possible for us to predict at this
time the potential success of our business. The revenue and income potential of our proposed business and operations are currently
unknown. If we cannot continue as a viable entity, you may lose some or all of your investment in our Company.
The
Company incurred a net loss from continuing operations of $2,368,418 for the year ended December 31, 2019. As of
December 31, 2019, the Company had cash and stockholders’ equity of $1,587,250 and $6,714,588 respectively. At
December 31, 2019, the Company had a working capital deficiency of $2,308,407. We cannot provide any assurance that we will
be able to raise additional cash from equity financings, secure debt financing, and/or generate revenue from the sales of our
products. If we are unable to secure additional capital, we may be required to curtail our research and development
initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain
operations and meet our obligations.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories and we cannot offer any
assurance as to our future financial results, and you should not rely on the historical financial date included in this annual
report as an indicator of our future financial performance.
We
and the businesses we have recently acquired or propose to acquire have limited operating histories upon which to base any assumption
as to the likelihood that we will be successful in implementing our business plan, and we may not be able to generate significant
revenues or achieve profitability. You should consider our business and prospects in light of the risks and difficulties we face
with our limited operating history and should not rely on our past results or the past results of any of such businesses as an
indication of our future performance. There is no assurance that the growth rate we or they have experienced to date will continue.
Even if we generate future revenues sufficient to expand operations, increased infrastructure costs and cost of goods sold and
marketing expenses could impair or prevent us from generating profitable returns. We recognize that if we are unable to generate
significant revenues from our business development, we will not be able to earn profits or potentially continue operations. If
we are unsuccessful in addressing these risks, our business will most likely fail.
Significant
disruptions of information technology systems or security breaches could adversely affect our business.
We
are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary
course of business, we collect, store and transmit large amounts of confidential information (including, among other things, trade
secrets or other intellectual property, proprietary business information and personal information). It is critical that we do
so in a secure manner to maintain the confidentiality and integrity of such confidential information. We also have outsourced
elements of our operations to third parties, and as a result we manage a number of third-party vendors who may or could have access
to our confidential information. Attacks on information technology systems are increasing in their frequency, levels of persistence,
sophistication and intensity, and they are being conducted by increasingly sophisticated and organized groups and individuals
with a wide range of motives and expertise. The size and complexity of our information technology systems, and those of third-party
vendors with whom we contract, and the large amounts of confidential information stored on those systems, make such systems vulnerable
to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors,
and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks could include the deployment of harmful
malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten
the confidentiality, integrity and availability of information.
Significant
disruptions of our information technology systems, or those of our third-party vendors, or security breaches could adversely affect
our business operations and/or result in the loss, misappropriation and/or unauthorized access, use or disclosure of, or the prevention
of access to, confidential information, including, among other things, trade secrets or other intellectual property, proprietary
business information and personal information, and could result in financial, legal, business and reputational harm to us.
Any
failure or perceived failure by us or any third-party collaborators, service providers, contractors or consultants to comply with
our privacy, confidentiality, data security or similar obligations to third parties, or any data security incidents or other security
breaches that result in the unauthorized access, release or transfer of sensitive information, including personally identifiable
information, may result in governmental investigations, enforcement actions, regulatory fines, litigation or public statements
against us, could cause third parties to lose trust in us or could result in claims by third parties asserting that we have breached
our privacy, confidentiality, data security or similar obligations, any of which could have a material adverse effect on our reputation,
business, financial condition or results of operations. Moreover, data security incidents and other security breaches can be difficult
to detect, and any delay in identifying them may lead to increased harm. While we have implemented data security measures intended
to protect our information technology systems and infrastructure, there can be no assurance that such measures will successfully
prevent service interruptions or data security incidents.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
industry segments in which we are operating are evolving rapidly. They are characterized by changing technology, budding industry
standards, frequent new and enhanced product introductions, rapidly changing end-user/consumer preferences and product obsolescence.
In order to continue to compete effectively in these markets, we need to respond quickly to technological changes and to understand
their impact on our customers’ preferences. It may take significant time and resources to respond to these technological
changes. If we fail to keep pace with these changes, our business may suffer. Moreover, developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be unable to keep pace with technological developments
or other market factors. If any of our competitors implement new technologies before we are able to implement them, those competitors
may be able to provide more effective products than ours. Any delay or failure in the introduction of new or enhanced products
could have a material adverse effect on our business, results of operations and financial condition. Furthermore, our inability
to keep pace with changing industry technology and consumer preferences may cause our inventory to become obsolete at a rate faster
than anticipated, which may result in our taking goodwill impairment charges in past or future acquisitions that negatively impact
our results of operations.
If
we cannot obtain additional capital required to finance our research and development efforts, our business may suffer and you
may lose the value of your investment.
We
may require additional funds to further execute our business plan and expand our business. If we are unable to obtain additional
capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. We will have ongoing capital needs as we expand our business. If we
raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will
be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that
have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include
restrictive financial and operating covenants that would limit our ability to compete and expand. There can be no assurance that
we will be able to obtain the additional financing we may need to fund our business, or that such financing will be available
on terms acceptable to us.
We
face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial
or other resources to maintain or improve our competitive position.
A
number of other companies engage in the business of developing applications for facial recognition for access control. The market
for biometric security products is intensely competitive, and we expect competition to increase in the future from established
competitors and new market entrants. Our current competitors include both emerging or developmental stage companies, such as ourselves,
as well as larger companies. Many of our existing competitors have, and some of our potential competitors could have, substantial
competitive advantages such as:
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name recognition and longer operating histories;
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sales and marketing budgets and resources;
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broader
distribution and established relationships with distribution partners and end-customers;
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customer support resources;
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resources to make acquisitions;
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larger
and more mature intellectual property portfolios; and
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greater financial, technical, and other resources.
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addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on
other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing
our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Conditions
in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors
or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments
in research and development may invent similar or superior products and technologies that compete with our products and technology.
Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that
may further enhance their resources.
Our
markets are subject to technological change and our success depends on our ability to develop and introduce new products.
Each
of the governmental and commercial markets for our products is characterized by:
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changing
technologies;
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changing
customer needs;
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frequent
new product introductions and enhancements;
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increased
integration with other functions; and
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product
obsolescence.
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Our
success will be dependent in part on the design and development of new products. To develop new products and designs for our target
markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand
our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance
that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted on
a timely basis, or at all, or that the potential products will achieve market acceptance. Our failure to develop, obtain necessary
regulatory clearances or approvals for, or successfully market, potential new products could have a material adverse effect on
our business, financial condition and results of operations.
Claims
by others that we infringe their intellectual property rights could increase our expenses and delay the development of our business.
As a result, our business and financial condition could be harmed.
Our
industries are characterized by the existence of a large number of patents as well as frequent claims and related litigation regarding
patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents,
patents that may be issued in the future, or other intellectual property rights of others.
We
do not have the resources to conduct exhaustive patent searches to determine whether the technology used in our products infringe
patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, many of which are confidential when filed.
We
may face claims by third parties that our products or technology infringe on their patents or other intellectual property rights.
Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid,
and could distract our management. If any of our products are found to violate third-party proprietary rights, we may be required
to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties
to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms
may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs
and have a material adverse effect on our business, financial condition and results of operations.
We
may not be able to protect our intellectual property rights adequately.
Our
ability to compete for government contracts is affected, in part, by our ability to protect our intellectual property rights.
We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and
licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps
we take to protect our proprietary information will be adequate to prevent misappropriation of our technology or protect that
proprietary information. The validity and breadth of claims in technology patents involve complex legal and factual questions
and, therefore, may be highly uncertain. Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable,
or that the patents of others will not have an adverse effect on our ability to do business. In addition, the enforcement of laws
protecting intellectual property may be inadequate to protect our technology and proprietary information.
We
may not have the resources to assert or protect our rights to our patents and other intellectual property. Any litigation or proceedings
relating to our intellectual property, whether or not meritorious, will be costly and may divert the efforts and attention of
our management and technical personnel.
We
also rely on other unpatented proprietary technology, trade secrets and know-how and no assurance can be given that others will
not independently develop substantially equivalent proprietary technology, techniques or processes, that such technology or know-how
will not be disclosed or that we can meaningfully protect our rights to such unpatented proprietary technology, trade secrets,
or know-how. Although we intend to enter into non-disclosure agreements with our employees and consultants, there can be no assurance
that such non-disclosure agreements will provide adequate protection for our trade secrets or other proprietary know-how.
Our
success will depend, in part, on our ability to obtain new patents.
Our success will depend, in part, on our ability
to obtain patent and trade secret protection for proprietary technology that we currently possess or that we may develop in the
future. No assurance can be given that any pending or future patent applications will issue as patents, that the scope of any
patent protection obtained will be sufficient to exclude competitors or provide competitive advantages to us, that any of our
patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and
other proprietary rights held by us.
Furthermore,
there can be no assurance that our competitors have not or will not independently develop technology, processes or products that
are substantially similar or superior to ours, or that they will not duplicate any of our products or design around any patents
issued or that may be issued in the future to us. In addition, whether or not patents are issued to us, others may hold or receive
patents which contain claims having a scope that covers products or processes developed by us.
We
may not have the resources to adequately defend any patent infringement litigation or proceedings. Any such litigation or proceedings,
whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management
and technical personnel. In addition, we may be required to obtain licenses to patents or proprietary rights from third parties.
There can be no assurance that such licenses will be available on acceptable terms if at all. If we do not obtain required licenses,
we could encounter delays in product development or find that the development, manufacture or sale of products requiring such
licenses could be foreclosed. Accordingly, challenges to our intellectual property, whether or not ultimately successful, could
have a material adverse effect on our business and results of operations.
Our business, financial condition and
results of operations may be adversely affected by the recent coronavirus outbreak or other similar epidemics or adverse public
health developments
The outbreak of the novel coronavirus
(COVID-19) has caused many governments to implement quarantines and significant restrictions on travel, or to advise that
people remain at home where possible and avoid crowds. This has led to many businesses shutting down or limiting operations
as well as greater uncertainty in financial markets. Any economic downturns or adverse impacts resulting from the coronavirus
or other similar epidemics or adverse public health developments may increase the likelihood of our distributors and/or the
VA significantly reducing orders for our products or being unable to pay us in accordance with the terms of already fulfilled
orders. Additionally, our primary third-party suppliers are located in China and other countries in Asia. Notwithstanding
that the coronavirus pandemic appears to have been initiated in China, to date, we have not experienced any significant
disruptions in our sources of supply for our products. If, in the future, we experience, delays or disruptions, such as
difficulty obtaining components and temporary suspension of operations, our existing inventory levels may not be sufficient,
and our business, financial condition and results of operations could be materially and adversely affected, in the event that
the slowdown or suspension carries on for a long period of time. As a result of the current or future epidemics, we may also
be impacted by shutdowns, employee impacts from illness and other community response measures meant to prevent spread of the
virus, all of which could negatively impact our business, financial condition and results of operations. Further, if we are
regularly unable to meet our obligations to deliver our products to distributors and/or the VA, they may decide to terminate
or reduce their distribution arrangements with us and our business could be adversely affected. The extent to which the
coronavirus impacts our results will depend on future developments, which are highly uncertain and will include emerging
information concerning the severity of the coronavirus and the actions taken by governments and private businesses to attempt
to contain the coronavirus.
Our
future success depends on the continued service of management, engineering and sales personnel and our ability to identify, hire
and retain additional personnel.
Our
success depends, to a significant extent, upon the efforts and abilities of members of senior management. We have not entered
into an employment agreement with our President, Chief Executive Officer and Chief Financial Officer, or our Chief Technology
Officer. The loss of the services of one or more of our senior management or other key employees could adversely affect our business.
There
is intense competition for qualified employees in our industry, particularly for highly skilled design, applications, engineering
and sales people. We may not be able to continue to attract and retain developers, managers, or other qualified personnel necessary
for the development of our business or to replace qualified individuals who may leave us at any time in the future. Our anticipated
growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering
staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail
to recruit engineers or other technical and management personnel, our business could be harmed.
The
requirements of being a public company may strain our resources and divert management’s attention.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. Compliance
with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult,
time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that
we file annual and current reports with the SEC with respect to our business and operating results.
As
a result of disclosure of information in this Report and in filings required of a public company, our business and financial condition
is more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties.
If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation
or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert resources of our
management and harm our business and operating results.
Periods
of rapid growth and expansion could place a significant strain on our resources, including our employee base, which could negatively
impact our operating results.
We
may experience periods of rapid growth and expansion, which may place significant strain and demands on our management, our operational
and financial resources, customer operations, research and development, marketing and sales, administrative, and other resources.
To manage our possible future growth effectively, we will be required to continue to improve our management, operational and financial
systems. Future growth would also require us to successfully hire, train, motivate and manage our employees. In addition, our
continued growth and the evolution of our business plan will require significant additional management, technical and administrative
resources. If we are unable to manage our growth successfully we may not be able to effectively manage the growth and evolution
of our current business and our operating results could suffer.
We
depend on contract manufacturers, and our production and products could be harmed if it is unable to meet our volume and quality
requirements and alternative sources are not available.
We
rely on contract manufacturers to provide manufacturing services for our products. If these services become unavailable, we would
be required to identify and enter into an agreement with a new contract manufacturer or take the manufacturing in-house. The loss
of our contract manufacturers could significantly disrupt production as well as increase the cost of production, thereby increasing
the prices of our products. These changes could have a material adverse effect on our business and results of operations.
We
are presently a small company with too limited resources and personnel to establish a comprehensive system of internal controls.
If we fail to maintain an effective system of internal controls, we would not be able to accurately report our financial results
on a timely basis or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, our brand and operating results would be harmed. We may in the future discover areas
of our internal controls that need improvement. For example, because of size and limited resources, our external auditors may
determine that we lack the personnel and infrastructure necessary to properly carry out an independent audit function. Although
we believe that we have adequate internal controls for a company with our size and resources, we are not certain that the measures
that we have in place will ensure that we implement and maintain adequate controls over our financial processes and reporting
in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation,
would harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls would also
cause investors to lose confidence in our reported financial information, which would have a negative effect on our company and
the trading price of our common stock.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely
basis.
As
of December 31, 2019, we have identified certain matters that constituted material weaknesses in our internal controls over financial
reporting. See Item 9A. for further discussion on Controls and Procedures.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our
ability to grow successfully requires an effective planning and management process. The expansion and growth of our business
could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully,
we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems,
procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond
effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
We
may not be able to access the equity or credit markets.
We
face the risk that we may not be able to access various capital sources including investors, lenders, or suppliers. Failure to
access the equity or credit markets from any of these sources could have a material adverse effect on our business, financial
condition, results of operations, and future prospects.
Persistent
global economic trends could adversely affect our business, liquidity and financial results.
Although
improving, persistent global economic conditions, particularly the scarcity of capital available to smaller businesses, could
adversely affect us, primarily through limiting our access to capital and disrupting our clients’ businesses. In addition,
continuation or worsening of general market conditions in economies important to our businesses may adversely affect our clients’
level of spending and ability to obtain financing, leading to us being unable to generate the levels of sales that we require.
Current and continued disruption of financial markets could have a material adverse effect on our business, financial condition,
results of operations and future prospects.
We
may seek or need to raise additional funds. Our ability to obtain financing for general corporate and commercial purposes or acquisitions
depends on operating and financial performance, and is also subject to prevailing economic conditions and to financial, business
and other factors beyond our control. The global credit markets and the financial services industry have recently experienced
a period of unprecedented turmoil characterized by the bankruptcy, failure or sale of various financial institutions. An unprecedented
level of intervention from the U.S. and other governments has been seen. As a result of such disruption, our ability to raise
capital may be severely restricted and the cost of raising capital through such markets or privately may increase significantly
at a time when we would like, or need, to do so. Either of these events could have an impact on our flexibility to fund our business
operations, make capital expenditures, pursue additional expansion or acquisition opportunities, or make another discretionary
use of cash and could adversely impact our financial results.
Although
recent trends point to continuing improvements, there is still lingering volatility and uncertainty. Recently there has been
greater volatility in the financial markets as a result of uncertainty caused by the outbreak of the coronavirus disease 2019
(“COVID-19”), which originated in China and continues to spread, including to the United States and Europe. A
change or disruption in the global financial markets for any reason, including COVID-19 or other epidemics, may cause
consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and
declining consumer confidence. Accordingly, demand for our products could decrease and differ materially from current
expectations. Further, some of our customers may require substantial financing in order to fund their operations and make
purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products and meet
their payment obligations to us or possible insolvencies of our customers could result in decreased customer demand, an
impaired ability for us to collect on outstanding accounts receivable, significant delays in accounts receivable payments,
and significant write-offs of accounts receivable, each of which could adversely impact our financial results.
Rising
interest rates could adversely impact our business.
Changes
in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:
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rising
interest rates would increase our cost of capital; and
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rising
interest rates may negatively impact our ability to secure financing on favorable terms and may impact our ability to provide
cost-effective financing to our end-customers or end-users, where applicable.
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Rising
interest rates could generally harm our business and financial condition.
Risks
Related to Our Biometric Recognition Applications and Related Products
Our
biometric products and technologies may not be accepted by the intended commercial consumers of our products, which could harm
our future financial performance.
There
can be no assurance that our biometric systems will achieve wide acceptance by commercial consumers of such security-based products,
and/or market acceptance generally. The degree of market acceptance for products and services based on our technology will also
depend upon a number of factors, including the receipt and timing of regulatory approvals, if any, and the establishment and demonstration
of the ability of our proposed device to provide the level of security in an efficient manner and at a reasonable cost. Our failure
to develop a commercial product to compete successfully with existing security technologies could delay, limit or prevent market
acceptance. Moreover, the market for new biometric-based security systems is largely undeveloped, and we believe that the overall
demand for mobile biometric-based security systems technology will depend significantly upon public perception of the need for
such a level of security. There can be no assurance that the public will believe that our level of security is necessary or that
the security industry will actively pursue our technology as a means to solve their security issues. Long-term market acceptance
of our products and services will depend, in part, on the capabilities, operating features and price of our products and technologies
as compared to those of other available products and services. As a result, there can be no assurance that currently available
products, or products under development for commercialization, will be able to achieve market penetration, revenue growth or profitability.
Our
biometric applications may become obsolete if we do not effectively respond to rapid technological change on a timely basis.
The
biometric identification and personal identification industries are characterized by rapid technological change, frequent new
product innovations, changes in customer requirements and expectations and evolving industry standards. If we are unable to keep
pace with these changes, our business may be harmed. Products using new technologies, or emerging industry standards, could make
our technologies less attractive. In addition, we may face unforeseen problems when developing our products, which could harm
our business. Furthermore, our competitors may have access to technologies not available to us, which may enable them to produce
products of greater interest to consumers or at a more competitive cost.
Our
biometric applications are new and our business model is evolving. Because of the new and evolving nature of biometric technology,
it is difficult to predict the size of this specialized market, the rate at which the market for our biometric applications will
grow or be accepted, if at all, or whether other biometric technologies will render our applications less competitive or obsolete.
If the market for our biometric applications fails to develop or grows slower than anticipated, we would be significantly and
materially adversely affected.
If
our products and services do not achieve market acceptance, we may never have significant revenues or any profits.
If
we are unable to operate our business as contemplated by our business model or if the assumptions underlying our business model
prove to be unfounded, we could fail to achieve our revenue and earnings goals within the time we have projected, or at all, which
would have a detrimental effect on our business. As a result, the value of your investment could be significantly reduced
or completely lost.
We
may in the future experience competition from other biometric application developers.
Competition
in the development of biometric recognition is expected to become more intense. Competitors range from university-based research
and development graphics labs to development-stage companies and major domestic and international companies. Many of these
entities have financial, technical, marketing, sales, distribution and other resources significantly greater than those that we
have. There can be no assurance that we can continue to develop our biometric technologies or that present or future competitors
will not develop technologies that render our biometric applications obsolete or less marketable or that we will be able to introduce
new products and product enhancements that are competitive with other products marketed by industry participants.
We
may fail to create new applications for our products and enter new markets, which would have an adverse effect on our operations,
financial condition and prospects.
Our
future success depends in part on our ability to develop and market our technology for applications other than those currently
intended. If we fail in these goals, our business strategy and ability to generate revenues and cash flow would be significantly
impaired. We intend to expend significant resources to develop new technology, but the successful development of new technology
cannot be predicted and we cannot guarantee we will succeed in these goals.
Our
products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers
and revenue and result in costly litigation or liability.
Our
products may contain defects for many reasons, including defective design or manufacture, defective material or software interoperability
issues. Products as complex as those we offer, frequently develop or contain undetected defects or errors. Despite testing defects
or errors may arise in our existing or new products, which could result in loss of revenue, market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, and increased service and maintenance cost. Defects
or errors in our products and solutions might discourage customers from purchasing future products. Often, these defects are not
detected until after the products have been shipped. If any of our products contain defects or perceived defects or have reliability,
quality or compatibility problems or perceived problems, our reputation might be damaged significantly, we could lose or experience
a delay in market acceptance of the affected product or products and might be unable to retain existing customers or attract new
customers. In addition, these defects could interrupt or delay sales. In the event of an actual or perceived defect or other problem,
we may need to invest significant capital, technical, managerial and other resources to investigate and correct the potential
defect or problem and potentially divert these resources from other development efforts. If we are unable to provide a solution
to the potential defect or problem that is acceptable to our customers, we may be required to incur substantial product recall,
repair and replacement and even litigation costs. These costs could have a material adverse effect on our business and operating
results.
We
will provide warranties on certain product sales and allowances for estimated warranty costs are recorded during the period of
sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair
or to replace the products under warranty. We will establish warranty reserves based on our best estimates of warranty costs for
each product line combined with liability estimates based on the prior twelve months’ sales activities. If actual return
rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of
sales may be required in future periods. In addition, because our customers rely on secure authentication and identification of
cardholders to prevent unauthorized access to programs, PCs, networks, or facilities, a malfunction of or design defect in its
products (or even a perceived defect) could result in legal or warranty claims against us for damages resulting from security
breaches. If such claims are adversely decided against us, the potential liability could be substantial and have a material adverse
effect on our business and operating results. Furthermore, the possible publicity associated with any such claim, whether or not
decided against us, could adversely affect our reputation. In addition, a well-publicized security breach involving smart card-based
or other security systems could adversely affect the market’s perception of products like ours in general, or our products
in particular, regardless of whether the breach is attributable to our products. Any of the foregoing events could cause demand
for our products to decline, which would cause its business and operating results to suffer.
Risks
Related to our Securities
The
market price for our common stock is particularly volatile given our status as a relatively unknown company with a small and thinly
traded public float, and lack of profits, which could lead to wide fluctuations in the price of our common stock.
The
market for our common stock is characterized by significant price volatility when compared to the securities of larger, more established
companies that trade on a national securities exchange and have large public floats, and we expect that the price of our common
stock will continue to be more volatile than the securities of such larger, more established companies for the indefinite future.
The volatility in the price of our common stock is attributable to a number of factors. First, as noted above, our common stock
is, compared to the securities of such larger, more established companies, sporadically and thinly traded. The price of our common
stock could, for example, decline precipitously in the event that a large number of shares of our common stock is sold on the
market without commensurate demand. Secondly, we are a speculative or “risky” investment due to our lack of profits
to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares of common stock on the market
more quickly and at greater discounts than would be the case with the securities of a larger, more established company that trades
on a national securities exchange and has a large public float. Many of these factors are beyond our control and may decrease
the market price of our common stock regardless of our operating performance.
If
we are not able to comply with the applicable continued listing requirements or standards of the NASDAQ Capital Market, our common
stock could be delisted from such exchange.
Our
common stock is currently listed on the NASDAQ Capital Market (“NASDAQ”). In order to maintain such listing, we must
satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence
and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance
requirements.
On May 24, 2019, we were notified by Nasdaq
that the bid price of our common stock had failed to satisfy the minimum bid price requirement and in accordance with Nasdaq’s
Listing Rules, we were granted a 180 calendar day compliance period, or until November 20, 2019, to regain compliance with the
minimum bid price requirements. In order to regain compliance, the closing bid price of our common stock was required to be at
least $1 per share for a minimum of 10 consecutive business days during this 180-day period. Our common stock did not regain compliance
with the minimum $1 bid price per share requirement as of November 20, 2019. By letter dated November 14, 2019, we requested an
extension of an additional 180 days in which to regain compliance. On November 21, 2019, we received notice from Nasdaq indicating
that, while we had not regained compliance with the minimum bid price requirement, the staff of Nasdaq had determined that we were
eligible for an additional 180-day period, or until May 18, 2020, to regain compliance. The staff’s determination was based
on (i) our meeting the continued listing requirement for market value of our publicly held shares and all other initial listing
standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) our providing written notice
to Nasdaq of our intent to cure the deficiency during this second compliance period, if necessary, by effecting a reverse stock
split. If at any time during this second 180-day period the closing bid price of our common stock is at least $1 per share for
at least a minimum of 10 consecutive business days, the Nasdaq staff stated it will provide written confirmation of compliance.
If compliance cannot be demonstrated by May 18, 2020, the Nasdaq staff will provide written notification that our securities will
be delisted. At that time, we may appeal the staff’s determination to a hearings panel.
There can be no assurances that we will
be able to regain compliance with Nasdaq’s listing standards or if we do later regain compliance with Nasdaq’s listing
standards, will be able to continue to comply with the applicable listing standards. If we are unable to maintain compliance with
these Nasdaq requirements, our common stock will be delisted from Nasdaq.
In
the event that our common stock is delisted from NASDAQ, U.S. broker-dealers may be discouraged from effecting transactions in
shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The
SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed
to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Exchange
Act. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity
securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is
provided by the exchange or system). Our shares of common stock have in the past constituted, and may again in the future constitute,
“penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon
U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could
severely limit the market liquidity of such shares of common stock and impede their sale in the secondary market.
A
U.S. broker-dealer selling a penny stock to anyone other than an established customer or “accredited investor”
(generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with his or her spouse) must make a special suitability determination for the purchaser and must receive the
purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise
exempt. In addition, the “penny stock” regulations require the U.S. broker-dealer to deliver, prior to any
transaction involving a “penny stock”, a disclosure schedule prepared in accordance with SEC standards relating
to the “penny stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S.
broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative
and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing
recent price information with respect to the “penny stock” held in a customer’s account and information
with respect to the limited market in “penny stocks”.
Stockholders
should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns
of fraud and abuse. Such patterns include: (i) control of the market for the security by one or a few broker-dealers that are
often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false
and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic
price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the
penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of practical limitations to prevent the described patterns
from being established with respect to our securities.
If
and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly
volatile and subject to wide fluctuations, and you may be unable to resell your shares of common stock at or above the price at
which you acquired them.
The
market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors
that are beyond our control, including, but not limited to:
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variations
in our revenues and operating expenses;
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actual
or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding
our common stock, other comparable companies or our industry generally;
|
|
●
|
market
conditions in our industry, the industries of our customers and the economy as a whole;
|
|
●
|
actual
or expected changes in our growth rates or our competitors’ growth rates;
|
|
●
|
developments
in the financial markets and worldwide or regional economies;
|
|
●
|
announcements
of innovations or new products or services by us or our competitors;
|
|
●
|
announcements
by the government relating to regulations that govern our industry;
|
|
●
|
sales
of our common stock or other securities by us or in the open market; and
|
|
●
|
changes
in the market valuations of other comparable companies.
|
In
addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading
price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading
price of our common stock might also decline in reaction to events that affect other companies in our industry, even if these
events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock.
In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention
and resources, which could materially and adversely affect our business, operating results and financial condition.
We may acquire other technologies or
finance strategic alliances by issuing our equity or equity-linked securities, which may result in additional dilution to our
stockholders.
Our
stockholders may experience significant dilution.
Although
certain exercise restrictions are placed upon the holders of our warrants, the issuance of material amounts of common stock by
us would cause our existing stockholders to experience significant dilution in their investment in us. In addition, if we obtain
additional financing involving the issuance of equity securities or securities convertible into equity securities, our existing
stockholders’ investment would be further diluted. Such dilution could cause the market price of our common stock to decline,
which could impair our ability to raise additional financing.
We
do not anticipate paying dividends in the foreseeable future; you should not buy our common stock if you expect dividends.
The
payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors
affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if our stock price appreciates.
We
currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate
paying any cash dividends on our common stock in the foreseeable future.
We
could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder
interests and impairing their voting rights; and provisions in our charter documents could discourage a takeover that stockholders
may consider favorable.
Our
certificate of incorporation authorizes the issuance of up to 10,000,000 shares of “blank check” preferred stock
with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of
directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance
of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control of the Company. For
example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control of the Company.
Financial
Industry Regulatory Authority (“FINRA”) sales practice requirements may limit a stockholder’s ability to buy
and sell our common stock.
FINRA
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for certain customers. FINRA requirements will
likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect
of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market
in our common stock, reducing a stockholder’s ability to resell shares of our common stock.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
Properties
Our
principal executive offices are located in Oxford, Connecticut. On September 12, 2014, the Company entered into a
lease agreement for this office space. The lease term commenced on October 1, 2014 and the lease term was for two (2) years.
The Company is currently leasing this office space on a month-to-month basis with a monthly rent of $1,925.
On October 16, 2013, the Company entered into a lease agreement
for office space in Palm Bay, Florida. The term of the lease commenced on May 1, 2014 and was for three (3) years with a monthly
rent of $1,250 in the first year, increasing 3% annually thereafter. The Company is currently leasing this office space on a month-to-month
basis with a monthly rent of $1,918.
As
a result of the LogicMark acquisition on July 25, 2016, we assumed two (2) facility leases. One of the leases was for office space
located in Plymouth, Minnesota with a monthly rent of $1,170. This lease agreement expired in February 2018. In addition, LogicMark
subleased office and warehouse space located in Louisville, Kentucky. The subleasing agreement expired on August 31, 2017. On
June 6, 2017, we entered into a new three-year lease agreement for the same office and warehouse space located in Louisville,
Kentucky. The current monthly rent for the space is $7,279 and this lease agreement expires in August 2020.
Item
3.
|
Legal
Proceedings
|
Subsequent to December 31, 2019, on February
24, 2020, Michael J. Orlando, a former executive officer and director of the Company, as Shareholder Representative, and the other
stockholders of Fit Pay (collectively, the “Fit Pay Shareholders”), filed a lawsuit in the United States District Court
for the Southern District of New York against the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the “Complaint”). The Complaint alleges the Company has breached certain contractual obligations
under a merger agreement, dated May 23, 2017, between Fit Pay and the Company (the “Merger Agreement”), regarding certain
future, contingent earnout payments allegedly that could be owed to the Fit Pay Shareholders from future revenues (the “Earnout
Payments”). The Company previously disclosed the Merger Agreement in a Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 30, 2017. The Complaint seeks monetary damages from the defendants. The Company believes that these
claims are without merit and plans to vigorously defend the action.
From
time to time we may be involved in various claims and legal actions arising in the ordinary course of our
business. Other than the Complaint 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
our executive officers or the executive officers of any of our subsidiaries, threatened against or affecting us, or any of
our subsidiaries in which an adverse decision could have a material adverse effect upon our business, operating results,
or financial condition.
Item
4.
|
Mine
Safety Disclosures
|
Not
applicable.
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. As of
December 31, 2018, the Company was no longer an “emerging growth company” as defined in the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”). The Company is a security technology company and operates its business in one
segment – hardware and software security systems and applications. The Company is engaged in the development of proprietary
products and solutions that serve multiple end markets, including the security, healthcare, financial technology and the Internet
of Things (“IoT”) markets. The Company evaluates the performance of its business on, among other things, profit and
loss from operations. With extensive experience in access control, biometric and behavior-metric identity verification, security
and privacy, encryption and data protection, payments, miniaturization, and sensor technologies, the Company develops and markets
solutions for payment, IoT and healthcare applications.
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 former wholly-owned subsidiary, Fit Pay, Inc., had 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. On
September 21, 2018, the Company announced that its board of directors approved a plan to separate the Company’s
financial technology business from our healthcare business into an independent publicly traded company. The Company
originally planned to distribute shares of PartX, Inc., a newly created company and wholly-owned subsidiary of the Company
(“PartX”), to our stockholders through the execution of a spin-off. As a result, the Company reclassified its
financial technology business to discontinued operations for all periods reported (See Note 4). The Company’s financial
technology business was comprised of its Fit Pay subsidiary and the intellectual property developed by the Company, including
the Flye Smartcard and the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX with the SEC in
connection with the planned spin-off of our payments, authentication and credential management business. On
August 19, 2019, the Company’s subsidiary, PartX notified the SEC that it was withdrawing the Registration Statement on
Form 10. With the approval of the Company’s board of directors, and upon similar terms and conditions to those set
forth in that loan agreement, the Company entered into a non-binding letter of intent for the sale of its Fit Pay
subsidiary, excluding certain assets on August 6, 2019. In connection with the letter of intent, we were advanced
$500,000 of non-interest bearing working capital for Fit Pay. On September 9, 2019, the Company completed the sale of its Fit
Pay subsidiary to Garmin International, Inc. for $3.32 million in cash (See Note 4).
NOTE
2 - LIQUIDITY AND MANAGEMENT PLANS
The Company generated operating income
of $2,577,791 and a loss from continuing operations of $2,368,418 for the year ended December 31, 2019. As of December 31, 2019,
the Company had cash and stockholders’ equity of $1,587,250 and $6,714,588, respectively. At December 31, 2019, the Company’s
continuing operations had a working capital deficiency of $2,308,407. During the year ended December 31, 2019, The Company received
net proceeds of $3,214,042 from the issuance of common stock and warrants. In addition, the Company sold its subsidiary, Fit Pay,
Inc. and also significantly reduced its operating expenses by approximately $3.0 million on an annual basis. These strategic efforts
will significantly enhance the Company’s cash flow generation as it moves forward into 2020.
Given the Company’s cash position at December 31, 2019
and its projected cash flow from operations, the Company believes that it will have sufficient capital to sustain operations for
a period of one year following the date of this filing. The Company may also raise funds through equity or debt offerings to accelerate
the execution of its long-term strategic plan to develop and commercialize its core products and to fulfill its product development
commitments.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - 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, including those related to the fair value of acquired assets and liabilities, stock based compensation, income taxes, allowance for doubtful accounts, long-lived assets, 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. 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, 2019 and 2018, the Company had no cash equivalents.
RESTRICTED
CASH
At
December 31, 2019 and 2018, the Company had restricted cash of $150,130 and $1,189,452, respectively. Restricted cash includes
amounts held back by the Company’s third party credit card processor for potential customer refunds, claims and disputes.
Pursuant to the terms and conditions of the Credit Agreement with Sagard Holdings Manager LP, the Company was required to transfer
50% of the excess Cash Flow generated by LogicMark into a restricted bank account controlled by Sagard Holdings Manager LP (See
Note 9). At December 31, 2018, the Company’s restricted cash balance included $998,950 related to LogicMark’s excess
cash flow generated. Cash and restricted cash, as presented on the consolidated statements of cash flows, consists of $1,587,250
and $150,130 as of December 31, 2019, respectively, and $425,189 and $1,189,452 as of December 31, 2018.
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.
REVENUE
RECOGNITION
Adoption
of Topic 606
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”, and collectively with its related
subsequent amendments, “Topic 606”). Topic 606 supersedes previous revenue recognition guidance and requires entities
to 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. The Company adopted Topic 606 as of January
1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1,
2018. Under this transition method, the Company’s results in the consolidated statements of operations for the years ended
December 31, 2019 and 2018 are presented under Topic 606.
The
Company’s revenues consist of product sales to either end customers or to distributors. The Company’s revenues are
derived from contracts with customers, which are in most cases customer purchase orders. For each contract, the promise to transfer
the control of the products, each of which is individually distinct, is considered to be the identified performance obligation.
As part of the consideration promised in each contract, the Company evaluates the customer’s credit risk. Our contracts
do not have any financing components, as payment terms are generally due net 30 days after delivery. The Company’s products
are almost always sold at fixed prices. In determining the transaction price, we evaluate whether the price is subject to any
refunds, due to product returns or adjustments due to volume discounts, rebates or price concessions to determine the net consideration
we expect to be entitled to. The Company’s sales are recognized at a point-in-time under the core principle of recognizing
revenue when control transfers to the customer, which generally occurs when the Company ships or delivers the product from its
fulfillment center to our customers, when our customer accepts and has legal title of the goods, and the Company has a present
right to payment for such goods. Based on the respective contract terms, most of our contracts revenues are recognized either
(i) upon shipment based on free on board (“FOB”) shipping point, or (ii) when the product arrives at its destination.
For the years ended December 31, 2019 and 2018, none of our sales were recognized over time.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales
to Distributors and Resellers
Sales
to certain distributors and resellers are made under terms allowing limited rights of return of the Company’s products held
in their inventory or upon sale to their end customers. The Company maintains a reserve for unprocessed and estimated future price
adjustments claims and returns as a refund liability. The reserve is recorded as a reduction to revenue in the same period that
the related revenue is recorded and is calculated based on an analysis of historical claims and returns over a period of time
to appropriately account for current pricing and business trends. Similarly, sales returns and allowances are recorded based on
historical return rates, as a reduction to revenue with a corresponding reduction to cost of sales for the estimated cost of inventory
that is expected to be returned. These reserves were not material upon the adoption of Topic 606 on January 1, 2018, nor were
they material in the consolidated balance sheet at December 31, 2019 and 2018.
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 $658,889 and $605,067, respectively, for the years ended December 31, 2019
and 2018.
Accounts
Receivable
For
the years ended December 31, 2019 and 2018, the Company’s revenues primarily included 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, 2019
and 2018, the Company had an allowance for doubtful accounts of $126,733 and $126,733, 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. As of December
31, 2019, inventory was comprised of $167,357 in raw materials and $1,135,922 in finished goods on hand. As of December 31,
2018 inventory was comprised of $870,513 in finished goods on hand. The Company is required to prepay for certain inventory with
certain vendors until credit terms can be established. As of December 31, 2019 and 2018, $201,496 and $317,488, respectively,
of prepayments made for 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, and other intangibles are evaluated for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. When indicators exist, the Company tests for the impairment of
the definite-lived assets based on the undiscounted future cash flow the assets are expected to generate over their remaining
useful lives, 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
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
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, 2019, 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
goodwill associated with the Company’s acquisition of Fit Pay was $9,119,709 and was included as part of the Company’s
discontinued operations. On September 9, 2019, the Company sold its discontinued operations and the goodwill associated with Fit
Pay was written off and is included as part of the loss on sale of discontinued operations (See Note 4).
OTHER
INTANGIBLE ASSETS
The
Company’s intangible assets are related to the acquisition of LogicMark and are included in other intangible assets in the
Company’s consolidated balance sheet at December 31, 2019 and 2018.
At
December 31, 2019, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,818,434;
trademarks of $1,041,370; and customer relationships of $2,140,473. At December 31, 2018, the other intangible assets relating
to the acquisition of LogicMark are comprised of patents of $3,191,159; trademarks of $1,104,246; and customer relationships of
$2,466,687. 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, 2019 and 2018, the Company had amortization expense of $761,815 and $761,815, respectively, related
to the LogicMark intangible assets.
Amortization
expense estimated for each of the next five fiscal years, 2020 through 2024, is expected to be approximately $762,000 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
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE
INSTRUMENTS (CONTINUED)
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 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 consolidated 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 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, 2018.
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 6,973,221 and 5,090,352 warrants
as of December 31, 2019 and 2018, respectively, 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
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain
accounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the
presentation of the current period consolidated financial statements. These reclassifications had no effect on the
previously reported net loss.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
August 2018, the FASB issued ASU 2018-13, which eliminates, adds and modifies certain disclosure requirements for fair value measurements
as part of the FASB’s disclosure framework project. Adoption of this guidance is required for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2019. This ASU was adopted and did not have a material impact on the Company’s
consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11, I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception". Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. This ASU was adopted
as of January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amended, among other things, the existing
guidance by requiring lessees to recognize lease right-of-use assets (“ROU assets”) and liabilities arising from operating
leases on the balance sheet. Since issuing Topic 842, the FASB has issued various subsequent ASUs, including but not limited to
ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which clarified various aspects of the guidance under
Topic 842, as well as ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which allows entities the option of
recognizing the cumulative effect of applying Topic 842 as an adjustment to the opening balance of retained earnings in the year
of adoption while continuing to present all prior periods under previous lease accounting guidance. Prior
to the adoption, the Company evaluated Topic 842, including the initial review of any necessary changes to existing processes
and systems that would be required to implement this standard, in order to determine its impact on the Company’s consolidated
financial statements and related disclosures.
The Company adopted Topic 842 on January 1,
2019 using the updated modified retrospective transition approach allowed under ASU 2018-11 and did not restate prior periods.
The Company recognized ROU assets and related lease liabilities on its condensed consolidated balance sheet as of January 1, 2019
of approximately $267,516 and $269,820, respectively, related to its operating lease commitments, and there was no cumulative
impact on retained earnings as of January 1, 2019. Topic 842 did not have a material impact on the Company’s condensed consolidated
statements of income and consolidated statements of cash flow for the year ended December 31, 2019, nor did it have any impact
on the Company’s compliance with debt covenants. The adoption of Topic 842 provided various optional practical expedients
in transition, some of which the Company elected. Going forward, the impact of Topic 842 on the Company’s consolidated financial
statements will be dependent upon the Company’s lease portfolio. The accounting for finance leases (formerly referred to
as “capital leases”) remains substantially unchanged. See Note 10 herein for further details regarding the impact
of the adoption of Topic 842 and other information related to the Company’s lease portfolio.
Other
recent accounting standards that have been issued or proposed by FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4 - DISCONTINUED OPERATIONS
On
September 9, 2019 the Company entered into a stock purchase agreement (the “Purchase Agreement”), by and between Garmin
International, Inc., a Kansas corporation (“Garmin”), the Company and Fit Pay, a Delaware corporation and wholly owned
subsidiary of the Company, pursuant to which the Company sold and transferred all of the issued and outstanding shares of capital
stock of Fit Pay, which consisted of 1,000 shares of common stock, par value $0.0001 per share, of Fit Pay (the “Shares”),
to Garmin (the “Sale”). As previously disclosed, the Company conducted its payments business through Fit Pay, and
Fit Pay provided technology, platform and tokenization services to Garmin to power Garmin Pay™, a contactless payment feature
included on smartwatches manufactured by Garmin. In consideration for the Shares, Garmin paid the Company an aggregate amount
of approximately $3.32 million in cash (the “Purchase Price”). A portion of the proceeds received by the Company pursuant
to the Purchase Agreement were used to pay in full a promissory note issued by the Company to one of its directors, as well as
to pay down the promissory note that had been issued pursuant to the Credit Agreement (the “Promissory Note”). Garmin
previously paid the Company $500,000 of the Purchase Price as an advance on August 7, 2019, and paid the remainder of the Purchase
Price at the closing of the Sale. The Company recorded a loss on the sale of its discontinued operations of $5,988,767. The loss
on sale of discontinued operations for the year ended December 31, 2019 is comprised of the following:
Total sales price
|
|
$
|
3,323,198
|
|
Net book value of discontinued operations(1)
|
|
|
126,062
|
|
Write-off of goodwill related to acquisition of Fit Pay
|
|
|
(9,119,709
|
)
|
Write-off of unamortized other intangibles related to acquisition of Fit Pay
|
|
|
(2,674,607
|
)
|
Write-off of remaining contingent consideration
|
|
|
2,611,169
|
|
Transaction fees incurred
|
|
|
(254,880
|
)
|
Loss on sale of discontinued operations
|
|
$
|
(5,988,767
|
)
|
(1)
|
The
net book value of discontinued operations at September 8, 2019 included cash of $113,148.
|
Also
in connection with the Purchase Agreement, the Company entered into a Manufacturing and Distribution Agreement, dated as of September
9, 2019 (the “Manufacturing Agreement”), with Garmin Switzerland GmbH, a Swiss corporation (“Garmin Switzerland”),
pursuant to which Garmin Switzerland agreed to grant the Company a non-exclusive right to manufacture, distribute and sell Garmin
Switzerland’s proprietary smart wallet (the “Product”) to certain customers in the U.S. designated by Garmin
Switzerland on a royalty-free basis (the “License”), unless otherwise agreed to by the parties thereto. The Company
was also granted a right to sub-license the Product pursuant to the Manufacturing Agreement. The Company’s has been granted
the License for an initial term of three years, which term automatically renews for additional one-year periods unless either
party provides the other with at least ninety days written notice of its election not to renew such term. The Manufacturing Agreement
may be terminated by either party if (i) a party breaches any material provision of such agreement, which breach is not cured
within thirty calendar days after receipt of written notice of such breach, (ii) upon written notice, a party petitions for reorganization
or to be adjudicated to be bankrupt, or if a receiver is appointed for substantially all of either party’s business, or
a party makes a general assignment for the benefit of such party’s creditors, or if any involuntary bankruptcy petition
is brought against such party and has not been discharged within sixty calendar days of the date the petition is brought, or (iii)
in the event of a change of control (as defined in the Manufacturing Agreement).
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4 - DISCONTINUED OPERATIONS (CONTINUED)
The
following table presents the assets and liabilities related to the financial technology product line classified as assets and
liabilities associated with discontinued operations (See Note 1) in the consolidated balance sheets as of December 31, 2019 and
2018:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
125,318
|
|
Inventory, net
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other assets
|
|
|
-
|
|
|
|
96,909
|
|
Total current assets associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
222,227
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
38,793
|
|
Goodwill
|
|
|
-
|
|
|
|
9,119,709
|
|
Other intangible assets
|
|
|
-
|
|
|
|
3,112,224
|
|
Total non-current assets associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
12,270,726
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
175,982
|
|
Accrued expenses
|
|
|
-
|
|
|
|
185,978
|
|
Customer deposits
|
|
|
-
|
|
|
|
3,333
|
|
Total liabilities associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
365,293
|
|
The
following table represents the financial results of the discontinued operations for the years ended December 31, 2019 and 2018:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
625,771
|
|
|
$
|
1,696,414
|
|
Cost of sales
|
|
|
194,856
|
|
|
|
2,484,157
|
|
Gross profit (loss)
|
|
|
430,915
|
|
|
|
(787,743
|
)
|
Operating expenses
|
|
|
3,859,222
|
|
|
|
4,969,140
|
|
Interest expense
|
|
|
3,963
|
|
|
|
3,663
|
|
Income tax expense (benefit)
|
|
|
-
|
|
|
|
800
|
|
Loss from discontinued operations
|
|
$
|
(3,432,270
|
)
|
|
$
|
(5,761,346
|
)
|
|
(1)
|
The
contingent liability associated with the earn-out payment due to the Fit Pay Sellers is not included in discontinued operations.
|
|
(2)
|
During
the year ended December 31, 2018, the Company recognized revenue of $737,993 from WorldVentures Holdings, LLC (“WVH”),
a related party. Dr. D’Almada-Remedios, a director of the Company, was the former Chief Executive Officer of Flye Inc.,
a payment technology company owned by WVH. The Company’s accounts receivable, net balance at December 31, 2018 included
$0, due from WVH. The business with WVH is included as part of the Company’s discontinued operations for the year ended
December 31, 2018.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Salaries and payroll taxes
|
|
$
|
92,334
|
|
|
$
|
89,065
|
|
Consulting fees
|
|
|
53,563
|
|
|
|
236,000
|
|
Merchant bank fees
|
|
|
26,589
|
|
|
|
28,108
|
|
State income taxes
|
|
|
23,800
|
|
|
|
1,533
|
|
Professional fees
|
|
|
119,016
|
|
|
|
84,704
|
|
Management incentives
|
|
|
758,907
|
|
|
|
868,082
|
|
Interest expense
|
|
|
148,980
|
|
|
|
16,342
|
|
Lease liability
|
|
|
68,576
|
|
|
|
-
|
|
Dividends – Series C Preferred Stock
|
|
|
22,182
|
|
|
|
25,000
|
|
Agent and loan amendment fees
|
|
|
-
|
|
|
|
235,000
|
|
Other
|
|
|
178,164
|
|
|
|
117,727
|
|
Totals
|
|
$
|
1,492,111
|
|
|
$
|
1,701,561
|
|
NOTE
6 - FAIR VALUE MEASUREMENTS
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.
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 on a recurring basis as of December 31, 2019 and
2018.
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.
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 markets 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, 2019 and 2018, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - DEBT REFINANCING
On
May 24, 2018, LogicMark, a wholly owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the
“Credit Agreement”) with the lenders thereto and Sagard Holdings Manager LP, as administrative agent and
collateral agent for the lenders party to the Credit Agreement (collectively, the “Lender”), whereby the Lender
extended a term loan (the “Term Loan”) to LogicMark in the principal amount of $16,000,000. The original maturity
date of the Term Loan was May 24, 2023. The Term Loan Facility with Sagard Holdings Manager LP was repaid on May 3, 2019 with
Term Loan proceeds received from CrowdOut Capital LLC (see below). The outstanding principal amount of the Term Loan bears
interest at a rate of LIBOR, adjusted monthly, plus 9.5% per annum. The Company incurred $1,253,970 in deferred debt issue
costs related to the Term Loan. During the years ended December 31, 2019 and 2018, the Company amortized $86,969 and
$151,690, respectively of the deferred debt issue costs which is included in interest expense in the consolidated statement
of operations. Pursuant to the terms and conditions of the Credit Agreement with the lender, LogicMark was required to deposit
50% of its excess cash flow generated into a restricted bank account for a maximum period of one (1) year. The
Company’s restricted cash balance at December 31, 2018 included $998,950 related to LogicMark’s excess cash flow
generated.
On
May 24, 2018, the Company recorded a debt discount of $705,541. The debt discount was attributable to the aggregate fair
value of the warrants that were issued to the Lender in connection with the Term Loan Facility with Sagard Holdings Manager LP.
The debt discount was amortized using the effective interest method over the five-year term of the Term Loan. During the
years ended December 31, 2019 and 2018 the Company recorded $48,932 and $85,348 respectively of debt discount amortization
related to the Sagard Warrants. The debt discount amortization is included as part of interest expense in the consolidated
statements of operations.
On
May 3, 2019, LogicMark completed the closing of a $16,500,000 senior secured term loan with the lenders thereto and CrowdOut
Capital LLC, as administrative agent. The Company used the proceeds from the term loan to repay LogicMark’s existing
term loan facility with Sagard Holdings Manager LP and to pay other costs related to the refinancing. The maturity date of
the term loan with CrowdOut Capital LLC is May 3, 2022 and requires the Company to make minimum principal payments over the
three-year term amortized over 96 months. Since the inception of the refinancing, the Company has made scheduled principal
repayments totaling $1,203,125 through December 31, 2019. In addition, the Company prepaid an additional $1,988,498 of the
term loan with CrowdOut Capital LLC in September 2019 with a portion of the proceeds received from the sale of discontinued
operations. The outstanding principal amount of the Term Loan bears interest at a rate
of LIBOR, adjusted monthly, plus 11.0% per annum (approximately 13.0% as of December 31, 2019). The Company incurred $412,500
in original issue discount for closing related fees charged by the Lender. During the year ended December 31, 2019, the
Company amortized $168,430 of the original issue discount which is included in interest expense in the consolidated statement
of operations. At December 31, 2019 the unamortized balance of the original issue discount was $244,070. The Company also
incurred $1,831,989 in deferred debt issue costs related to the Term Loan. The deferred debt issue costs include an
exit fee of $1,072,500 which is equivalent to 6.5% of the term loan amount borrowed from CrowdOut Capital. The exit fee is
due to CrowdOut Capital upon the earlier of final repayment of the term loan facility or the maturity date. The liability for
the exit fee is included as part of other long-term liabilities in the Company’s consolidated balance sheet. During the
year ended December 31, 2019, the Company amortized $569,424, respectively of the deferred debt issue costs which is included
in interest expense in the consolidated statements of operations. At December 31, 2019 the unamortized balance of deferred
debt issue costs was $1,262,565.
Debt
Maturity
The
maturity of the Company’s term debt is as follows:
2020
|
|
$
|
2,062,500
|
|
2021
|
|
|
2,062,500
|
|
2022
|
|
|
9,183,377
|
|
Total term debt
|
|
$
|
13,308,377
|
|
In
connection with the Term Loan refinancing on May 3, 2019, the Company incurred a loss on extinguishment of debt of $2,343,879
which included the write off of unamortized deferred debt issuance costs and note discount of $1,015,311 and $571,260, respectively
resulting from the May 24, 2018 Term Loan facility with Sagard Holdings Manager LP and a yield maintenance premium, a prepayment
penalty and legal fees due to Sagard Holdings Manager LP. totaling $757,308.
The
Credit Agreement contains customary financial covenants. As of December 31, 2019, the Company was in compliance with such covenants.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY
January
2019 At-the-Market Offering
On
January 8, 2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“A.G.P.”)
for an at-the-market offering, pursuant to which the Company could sell, at its option, shares of its common stock, par value
$0.0001 per share, having an aggregate offering price of up to $15 million to or through A.G.P., as sales agent. The Company
was obligated to pay A.G.P. commissions for its services in acting as the Company’s sales agent in the sale of its
common stock pursuant to the sales agreement. A.G.P. was entitled to compensation at a fixed commission rate of 3.0% of
the gross proceeds from the sale of the Company’s common stock on the Company’s behalf pursuant to the sales
agreement. The Company also agreed to reimburse A.G.P. for its reasonable out-of-pocket expenses, including the fees and
disbursements of counsel to A.G.P., incurred in connection with the offering, in an amount not to exceed $35,000. During the
year ended December 31, 2019, the Company received $1,299,042 in net proceeds from the sale of 1,113,827 shares of its common
stock under the sales agreement with A.G.P. On April 2, 2019, the Company entered into a Securities Purchase agreement with
an investor in connection with a registered direct public offering of 2,469,136 shares of the Company’s common stock.
The shares of common stock were offered at a price of $0.81 per share and the Company received $1,915,000 in net proceeds
from the sale. The Company also issued to the investor for no additional consideration common stock purchase warrants to
purchase 2,469,136 shares of common stock. The warrants are exercisable upon issuance at an exercise price of $1.05 and
expire on the fifth (5th) anniversary of the initial exercise date. The sales agreement with A.G.P. was terminated
on October 10, 2019.
2013
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 of directors, 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 592,223 shares of common stock at January 1, 2020.
During
the year ended December 31, 2019, the Company issued an aggregate of 576,525 shares of common stock under the LTIP to five (5)
non-employee directors for serving on the Company’s board. The aggregate fair value of the shares issued to the directors
was $360,000.
2017
Stock Incentive Plan
On
August 24, 2017, a majority of the Company’s stockholders approved at the 2017 Annual Stockholders’ 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 (1st) 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% 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 are settled in a manner
such that all or some of such shares covered by an award are not issued to a participant or are exchanged for awards that do not
involve shares of common stock 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY (CONTINUED)
In
addition, during the year ended December 31, 2019, the Company issued 289,216 shares of common stock with an aggregate fair value
of $216,267 to certain non-executive employees related to the Company’s 2017 and 2018 management incentive plan.
During
the years ended December 31, 2019 and 2018, the Company accrued $200,000 and $909,364, respectively of management and employee
bonus expense.
During
the year ended December 31, 2019, the Company issued 372,078 shares of common stock with a fair value of $254,490 to non-employees
for services rendered.
During
the year ended December 31, 2018, the Company issued 317,700 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 $375,111. Also during the year ended December 31, 2018, the Company issued 322,185 shares of common stock with an aggregate
fair value of $546,694 to executive and certain non-executive employees related to the Company’s 2017 management incentive
plan.
During
the year ended December 31, 2018, the Company issued 317,576 fully-vested shares of common stock with a fair value of $534,163
to non-employees for services rendered. In addition, the Company issued 26,509 shares of common stock with a fair value of $59,380
as payment of interest expense.
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 years ended December 31, 2019 and 2018, the Company recorded Series C Preferred Stock dividends of $150,000 and $100,000,
respectively.
Redemption Provisions of Series C
Preferred Stock
The Series C Preferred Stock may be
redeemed by the Company 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. 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 shall
be immediately redeemed and repaid from 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 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY (CONTINUED)
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
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 upon the determination that such events are probable, the equity
security would be classified as a liability. Given the Series C Preferred Stock contains a fundamental change provision, the
security is considered conditionally redeemable. Therefore, the Company classified the Series C Preferred Stock as temporary
equity in the consolidated balance sheets at December 31, 2019 and 2018 until such time that events occur that indicate
otherwise.
On
June 11, 2019, the Company made a retroactive dividend payment adjustment of $50,000 to the Series C Preferred Stockholders pursuant
to the terms and conditions set forth in the Certificate of Designations, Preferences and Rights of the Series C Non-Convertible
Voting Preferred Stock.
Warrants
The
following table summarizes the Company’s warrants outstanding and exercisable at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at January 1, 2018
|
|
|
5,777,650
|
|
|
$
|
5.08
|
|
|
|
4.26
|
|
|
$
|
6,672,902
|
|
Issued
|
|
|
638,162
|
|
|
|
3.83
|
|
|
|
4.45
|
|
|
|
-
|
|
Exercised (1)
|
|
|
(1,325,000
|
)
|
|
|
1.94
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(460
|
)
|
|
|
10.00
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2018
|
|
|
5,090,352
|
|
|
$
|
5.42
|
|
|
|
3.32
|
|
|
$
|
6,672,902
|
|
Issued
|
|
|
2,469,136
|
|
|
|
1.05
|
|
|
|
5.00
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(586,267
|
)
|
|
|
17.87
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2019
|
|
|
6,973,221
|
|
|
$
|
2.83
|
|
|
|
3.53
|
|
|
$
|
-
|
|
(1)
|
During
the year ended December 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 $425,000 in connection with the exercise of warrants into 250,000
shares of common stock at an average exercise price of $1.70 per share.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY (CONTINUED)
On
September 14, 2018, the Company entered into a Warrant Amendment and Exercise Agreement with certain holders (collectively, the
“Investors”) of previously issued Common Stock Purchase Warrants (the “Old Warrants”). In connection with
those certain Common Stock Purchase Warrants between the Company and the Investors dated July 13, 2017, July 19, 2017 and November
13, 2017 (the “Warrant Agreements”), the Company agreed to issue to the Investors warrants to purchase up to 3,273,601
shares of common stock at an exercise price of $2.00 per share, (the “New Warrants”), under certain circumstances.
Under the terms of the Amendment Agreement, in consideration of the Investors’ exercising up to 3,273,601 of the Old Warrants,
the exercise price per share of the Old Warrants was reduced to $1.50 per share. The Investors may continue to exercise the Old
Warrants after December 31, 2018, but will not receive any New Warrants for any warrants exercised after that date. The exercise
price per share of the New Warrants represented a 30% premium to the closing price for the Company’s common stock on September
14, 2018.
The
New Warrants, if issued, are exercisable for up to the original expiration dates of the Old Warrants, or July 19, 2022, January
23, 2023, or May 13, 2023, as applicable. The exercise price and number of shares issuable upon exercise of the New Warrants are
subject to traditional adjustments for stock splits, combinations, recapitalization events and certain dilutive issuances. The
New Warrants are required to be exercised for cash; however, if during the term of the New Warrants there is not an effective
registration statement under the Securities Act of 1933, as amended (the “Securities Act”), covering the resale of
the shares issuable upon exercise of the New Warrants, then the New Warrants may be exercised on a cashless (net exercise) basis.
As
a result of this Warrant Amendment and Exercise Agreement, the Company recorded a warrant modification expense of $165,640 for
the year ended December 31, 2018 related to the reduction in the exercise price of the Old Warrants from $2.00 to $1.50. In addition,
the Company also recorded a warrant modification expense of $179,640 for the year ended December 31, 2018 resulting from the issuance
of 150,000 replacement warrants with an exercise price of $2.00 for warrants that were exercised during 2018.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES
As
of December 31, 2019, the Company had US federal and state net operating loss (“NOLs”) carryovers of $39,434,056
and $23,783,357, respectively. Federal and state NOL’s generated through December 31, 2017 are available to offset
future taxable income, which expire beginning in 2033. Federal NOL’s generated for years starting after December 31,
2018 are available to offset future taxable income indefinitely. The Company has Federal Capital loss carryovers of
$11,779,190 at December 31, 2019, which expire in 2024. In addition, the Company had tax credit carryforwards of $205,028 at
December 31, 2019 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, 2019 with respect to the Nxt-ID NOLs and therefore no limitation under Section 382 has been
computed related to the Nxt-ID NOLs, including NOL’s generated by Fit Pay following its acquisition in 2017. Management
will review for such limitations before any of the Nxt-ID NOLs against future taxable income. The NOLs as of December 31,
2018 included those related to Fit Pay. As of December 31, 2019 the remaining NOLs held by the Company exclude those that
left the consolidated group upon sale of Fit Pay.
The
Company has no material uncertain tax positions for any of the reporting periods presented. No interest or penalty expense
was recorded during the year or has been accrued as of December 31, 2018 or 2019. The Company does not expect any material
changes to any uncertain tax positions in the next twelve months. The Company has filed all of its tax returns for all prior
periods through December 31, 2018 and intends to timely file the income tax returns for the period ending December 31, 2019.
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, 2019, the Company’s tax years
post 2015 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2019 the Company is no longer
subject to U.S. federal or state examinations by tax authorities for years before December 31, 2016. 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,
|
|
|
|
2019
|
|
|
2018
|
|
Current income tax provision from continuing operations
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
32,826
|
|
|
|
4,327
|
|
|
|
|
32,826
|
|
|
|
4,327
|
|
Deferred income tax (benefit) from continuing operations
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,589,359
|
)
|
|
|
(1,418,827
|
)
|
State
|
|
|
(542,836
|
)
|
|
|
(439,301
|
)
|
Change in valuation allowance from continuing operations
|
|
|
3,766,798
|
|
|
|
1,888,124
|
|
|
|
|
(365,397
|
)
|
|
|
29,996
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision from continuing operations
|
|
|
(332,571
|
)
|
|
|
34,323
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) from discontinued operations
|
|
|
-
|
|
|
|
800
|
|
Total income tax provision (benefit)
|
|
$
|
(332,571
|
)
|
|
$
|
35,123
|
|
A
reconciliation of the effective income tax rate and the statutory federal income tax rate from continuing operations is as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
U.S. federal statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State income tax rate, net of federal benefit
|
|
|
7.83
|
|
|
|
12.89
|
|
Other permanent differences
|
|
|
(4.59
|
)
|
|
|
(5.63
|
)
|
Loss on sale of Fit Pay
|
|
|
45.02
|
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(56.95
|
)
|
|
|
(30.91
|
)
|
Provision for income taxes
|
|
|
(12.31
|
)%
|
|
|
(2.65
|
)%
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - 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 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 become 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 uncertainty exists with respect to future realization of all of the deferred tax assets
and has therefore established a full 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, 2018, resulting in net deferred tax liability after applying valuation allowance. For the period
ended December 31, 2019, sufficient net operating losses with indefinite carryforward periods have been generated, such that
the deferred tax liabilities related to indefinite lived intangibles now represent a source of future taxable income with
respect to the utilization of these deferred tax assets. As a result,
the net deferred tax liability is zero as
of December 31, 2019.
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
9,362,936
|
|
|
$
|
9,819,344
|
|
Tax credits
|
|
|
205,028
|
|
|
|
333,673
|
|
Lease liabilities
|
|
|
25,768
|
|
|
|
-
|
|
Accruals and reserves
|
|
|
278,648
|
|
|
|
1,616,359
|
|
Capital loss carryforwards
|
|
|
2,820,405
|
|
|
|
-
|
|
Tangible and intangible assets
|
|
|
325,754
|
|
|
|
315,493
|
|
Charitable donations
|
|
|
5,874
|
|
|
|
3,036
|
|
Total deferred tax assets before valuation allowance:
|
|
|
13,024,413
|
|
|
|
12,087,905
|
|
Valuation allowance
|
|
|
(12,212,147
|
)
|
|
|
(10,967,136
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
812,266
|
|
|
|
1,120,769
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
(25,409
|
)
|
|
|
-
|
|
Tangible and intangible assets
|
|
|
(786,857
|
)
|
|
$
|
(1,486,166
|
)
|
Total deferred tax liabilities
|
|
$
|
(812,266
|
)
|
|
$
|
(1,486,166
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
-
|
|
|
$
|
(365,397
|
)
|
NOTE
10 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
Subsequent to December 31, 2019, on February
24, 2020, Michael J. Orlando, a former executive officer and director of the Company, as Shareholder Representative, and the other
stockholders of Fit Pay (collectively, the “Fit Pay Shareholders”), filed a lawsuit in the United States District
Court for the Southern District of New York against the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the “Complaint”). The Complaint alleges the Company has breached certain contractual obligations
under a merger agreement, dated May 23, 2017, between Fit Pay and the Company (the “Merger Agreement”), regarding
certain future, contingent earnout payments allegedly that could be owed to the Fit Pay Shareholders from future revenues (the
“Earnout Payments”). The Company previously disclosed the Merger Agreement in a Current Report on Form 8-K filed with
the Securities and Exchange Commission on May 30, 2017. The Complaint seeks monetary damages from the defendants. The Company
believes that these claims are without merit and plans to vigorously defend the action.
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 the Complaint described above, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory organization or governmental 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.
COMMITMENTS
The
Company leases office space and a fulfillment center in the U.S., which are classified as operating leases expiring at various
dates. The Company determines if an arrangement qualifies as a lease at the lease inception. Operating lease liabilities are recorded
based on the present value of the future lease payments over the lease term, assessed as of the commencement date. The Company’s
real estate leases, which are for office space and a fulfillment center, generally have a lease term between 3 and 5 years. The
Company also leases a copier with a lease term of 5 years. The Company’s leases are comprised of fixed lease payments and
also include executory costs such as common area maintenance, as well as property insurance and property taxes. The Company has
elected to account for the lease and non-lease components as a single lease component for its real estate leases. Lease payments,
which may include lease components and non-lease components, are included in the measurement of the Company’s lease liabilities
to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as
stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The
Company’s lease agreements generally do not specify an implicit borrowing rate, and as such, the Company utilizes its incremental
borrowing rate by lease term, in order to calculate the present value of the future lease payments. The discount rate represents
a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease
liability payment streams commensurate with the lease term. On January 1, 2019, the discount rate used on existing leases at adoption
was determined based on the remaining lease term using available data as of that date. The Company did not have new or renewed
leases commencing in 2019.
Certain
of the Company’s lease agreements, primarily related to real estate, include options for the Company to either renew (extend)
or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 3
years. Renewal options are reviewed at lease commencement to determine if such options are reasonably certain of being exercised,
which could impact the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company
considers several factors, including but not limited to, significance of leasehold improvements incurred on the property, whether
the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain
that the Company would exercise such option. In most cases, the Company has concluded that renewal and early termination options
are not reasonably certain of being exercised by the Company (and thus not included in the Company’s ROU asset and lease
liability) unless there is an economic, financial or business reason to do so.
For
the year ended December 31, 2019, total operating lease cost was $167,754 and is recorded in cost of sales and selling, general
and administrative expenses, dependent on the nature of the leased asset. The operating lease cost is recognized on a straight-line
basis over the lease term. The following summarizes (i) the future minimum undiscounted lease payments under non-cancelable lease
for each of the next four years and thereafter, incorporating the practical expedient to account for lease and non-lease components
as a single lease component for our existing real estate leases, (ii) a reconciliation of the undiscounted lease payments to the
present value of the lease liabilities recognized, and (iii) the lease-related account balances on the Company’s consolidated
balance sheet, as of December 31, 2019:
Year
Ending December 31,
|
|
|
|
|
|
2020
|
|
$
|
76,750
|
2021
|
|
|
18,186
|
2022
|
|
|
18,185
|
2023
|
|
|
12,124
|
Total
future minimum lease payments
|
|
$
|
125,245
|
Less
imputed interest
|
|
|
(15,204)
|
Total
present value of future minimum lease payments
|
|
$
|
110,041
|
As
of December 31, 2019
|
|
|
|
|
|
|
|
Operating
lease right-of-use assets
|
|
$
|
108,508
|
|
|
|
|
|
|
Other
accrued expenses
|
|
$
|
68,576
|
|
Other
long-term liabilities
|
|
$
|
41,465
|
|
|
|
$
|
110,041
|
|
As
of December 31, 2019
|
|
|
|
|
|
|
|
|
|
Weighted
Average Remaining Lease Term
|
|
|
1.2
years
|
|
Weighted
Average Discount Rate
|
|
|
11.74
|
%
|
Prior
to January 1, 2019, the Company accounted for its leases in accordance with Topic 842, “Leases.” At December 31, 2018,
the Company was committed under operating leases for office space and a fulfillment center, which expired at various dates. As
previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and under previous
lease accounting guidance, future minimum lease payments under non-cancelable operating leases as of December 31, 2018 totaled
$173,062, comprised of $97,597 for 2019, $70,309 for 2020, and $5,156 for 2021.
Coronavirus – COVID-19
In early 2020, the coronavirus that causes
COVID-19 was reported to have surfaced in China. The Company’s primary supply chain is located in China and other Asian-based
locations. To date, the Company’s supply chain has not experienced any significant disruptions. The global spread of this
virus has caused significant business disruption around the world including the United States, the primary area in which the Company
operates and sells its products. The business disruption is currently expected to be temporary, however there is considerable uncertainty
around the duration of the business disruption. Therefore, while the Company expects this matter to negatively impact the Company’s
financial condition, results of operations, or cash flows, the extent of the financial impact and duration cannot be reasonably
estimated at this time.
NOTE
11 - SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
February 27, 2020, the Company issued 279,287 shares of its common stock to certain members of management under the Company’s
incentive plans.
F-23