NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization and Basis of Presentation
Organization
and Principal Business Activities
Nxt-ID,
Inc. (“Nxt-ID” or the “Company”) was incorporated in the State of Delaware on February 8, 2012. The Company provides
technology products and services for healthcare applications. The Company evaluates the performance of its business on, among other things,
profit and loss from operations. The Company has extensive experience in access control, biometric and behavior-metric identity verification,
security and privacy, encryption and data protection, payments, miniaturization, sensor technologies, and healthcare applications.
The
Company’s wholly-owned subsidiary, LogicMark LLC (“LogicMark”), manufactures and distributes non-monitored and monitored
personal emergency response systems sold through the United States Department of Veterans Affairs, healthcare durable medical equipment
dealers and distributors and monitored security dealers and distributors.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements as of March 31, 2021, and for the three months ended March 31, 2021
and 2020 have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC
and on the same basis as the Company prepares its annual audited consolidated financial statements. The unaudited condensed consolidated
balance sheet as of March 31, 2021 and the condensed consolidated statements of operations, changes in equity and cash flows for the
three months ended March 31, 2021 and March 31, 2020 are unaudited, but include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows
for the periods presented. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected
for the year ending December 31, 2021, or for any future interim period. The condensed consolidated balance sheet at December 31, 2020
has been derived from audited consolidated financial statements. However, it does not include all of the information and notes required
by U.S. GAAP for complete consolidated financial statements. The accompanying condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements for the year ended December 31, 2020 and the notes thereto included in the
Company’s Annual Report on Form 10-K, which was filed with the SEC on April 15, 2021.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
2 – Liquidity
The
Company generated an operating loss of $782,890 and a net loss of $4,222,157 during the three months ended March 31, 2021. As of March
31, 2021, the Company had cash and stockholders’ equity of $8,515,824 and $18,490,578, respectively. At March 31, 2021, the Company
had working capital of $3,919,847.
Given
the Company’s cash position at March 31, 2021 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 increase its working capital and to accelerate the execution of its long-term strategic plan to develop
and commercialize its core products and to fulfill its product development commitments.
As
described in Note 6, the coronavirus could continue to significantly impact the Company’s business, which would require the Company
to raise funds to assist with its working capital needs.
Note
3 – Summary Of Significant Accounting Policies
Use
of estimates in the financial statements
The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s management evaluates
these significant estimates and assumptions including those related to the fair value of acquired assets and liabilities, stock based
compensation, derivative instruments, income taxes, accounts receivable and inventories, right-of-use assets and other matters that affect
the condensed consolidated financial statements and disclosures. Actual results could differ from those estimates.
Principles
of consolidation
The
condensed consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
Revenue
Recognition
The
Company’s revenues consist of product sales to either end customers or to distributors and its sales are recognized at a point-in-time
under the core principle of recognizing revenue when control of the product transfers to the customer. The Company recognizes revenue
when it ships or delivers the product from its fulfillment center to its customer, when the customer accepts and has legal title of the
product, and the Company has a present right to payment for the product. For the three months ended March 31, 2021 and 2020, the Company
had no sales recognized over time. The Company invoices its customers at the same time that the Company’s performance obligation
is satisfied. The Company generally receives customer orders with a specified delivery date and orders typically fluctuate from month-to-month
based on customer demand and general business conditions.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company offers standard product warranty coverage which provides assurance that the Company’s products will conform to the contractually
agreed-upon specifications for a limited period from the date of shipment. The Company’s warranty liabilities and related expense
have not been material and were not material in the accompanying condensed consolidated financial statements as of March 31, 2021 and
December 31, 2020, and for the three months ended March 31, 2021 and 2020.
Accounts
Receivable
Accounts
receivable is stated at net realizable value. The Company regularly reviews accounts receivable balances and adjusts the receivable reserves
as necessary whenever events or circumstances indicate the carrying value may not be recoverable. At March 31, 2021 and December 31,
2020, the Company had an allowance for doubtful accounts of $52,111 and $126,733, respectively.
Inventory
The
Company performs regular reviews of inventory quantities on hand and evaluates the realizable value of its inventories. The Company adjusts
the carrying value of the inventory as necessary with estimated valuation reserves for excess, obsolete, and slow-moving inventory by
comparing the individual inventory parts to forecasted product demand or production requirements. As of March 31, 2021, inventory was
comprised of $204,695 in raw materials and $575,784 in finished goods on hand. Inventory at December 31, 2020 was comprised of $199,523
in raw materials and $567,828 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 March 31, 2021 and December 31, 2020, the Company had prepaid inventory of $353,173 and
$332,475, respectively. These prepayments were made primarily for finished goods inventory, and prepaid inventory is included in prepaid
expenses and other current assets on the condensed consolidated balance sheets.
Other
Intangible Assets
At
March 31, 2021, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,353,804; trademarks
of $962,990; and customer relationships of $1,733,823. At December 31, 2020, the other intangible assets relating to the acquisition
of LogicMark are comprised of patents of $2,445,709; trademarks of $978,494; and customer relationships of $1,814,259. The Company will
continue amortizing these intangible assets using the straight-line method over their estimated useful lives which for the patents, trademarks
and customer relationships are 11 years; 20 years; and 10 years, respectively. During the three months ended March 31, 2021 and 2020,
the Company had amortization expense of $187,845 and $187,845, respectively, related to the LogicMark intangible assets.
As
of March 31, 2021, total amortization expense estimated for the remainder of fiscal year 2021 is approximately $574,000, and for each
of the next five fiscal years, 2022 through 2026, the total amortization expense is estimated to be as follows: 2022 - $762,000; 2023
- $762,000; 2024 - $762,000; 2025 - $762,000; and 2026 - $619,000.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 shares of common stock outstanding. Diluted loss per share includes
the effect of diluted common stock equivalents. Potentially dilutive securities from the exercise of stock options to purchase 363,640
shares of common stock and warrants to purchase 9,378,133 shares of common stock as of March 31, 2021 were excluded from the computation
of diluted net loss per share because the effect of their inclusion would have been anti-dilutive. As of March 31, 2020, potentially
dilutive securities from the exercise of stock options to purchase 114,288 shares of common stock and warrants to purchase 6,973,221
shares of common stock were excluded from the computation of diluted net loss per share because the exercise price of the common stock
equivalents was greater than the average market price of the common shares for the three month period ended March 31, 2020.
Recent
Accounting Pronouncements
Recent
accounting standards that have been issued or proposed by the 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
4 – Debt refinancing
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 prior term loan facility with
Sagard Holdings Manager LP and to pay other costs related to the refinancing. The original maturity date of the term loan with CrowdOut
Capital LLC was May 3, 2022 and required the Company to make minimum principal payments over the three-year term amortized over 96 months.
During the three months ended March 31, 2021, the Company made scheduled principal repayments totaling $515,625. On February 8, 2021,
LogicMark entered into a second amendment to the senior secured term loan with CrowOut Capital LLC. Pursuant to the second amendment,
LogicMark made a $5,000,000 voluntary prepayment on the principal amount of the term loan and paid a prepayment premium of $125,000,
which was equivalent to 2.5% of the prepayment, rather than 5% of the prepayment as required by the Credit Agreement. The prepayment
premium is included in interest expense for three months ended March 31, 2021 in the condensed consolidated statement of operations.
In addition, the maturity date of the term loan was extended to March 22, 2023. 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
March 31, 2021). The Company incurred $412,500 in original issue discount for closing related fees charged by the Lender. During the
three months ended March 31, 2021, the Company amortized $77,800 of the original issue discount which is included in interest expense
in the condensed consolidated statement of operations. At March 31, 2021 the unamortized balance of the original issue discount was $60,055.
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 condensed consolidated balance sheet. During the three months
ended March 31, 2021, the Company amortized $402,454 of the deferred debt issue costs which is included in interest expense in the condensed
consolidated statements of operations. At March 31, 2021 the unamortized balance of deferred debt issue costs was $310,665.
Debt
Maturity
The
maturity of the Company’s term debt is as follows:
2021 (remainder)
|
|
$
|
1,546,875
|
|
2022
|
|
|
2,062,500
|
|
2023
|
|
|
1,970,877
|
|
Total term debt
|
|
$
|
5,580,252
|
|
On
November 16, 2020, the Company and CrowdOut Capital LLC, as administrative agent, entered into the first amendment to the senior secured
term loan. In connection with the first amendment, CrowdOut Capital LLC, as administrative agent, agreed to modify the financial ratios
contained in the senior secured term retroactively and prospectively. Based on the senior secured term loan, as amended, the Company
was in compliance with such covenants at March 31, 2021.
Paycheck
Protection Program
On
each of May 6 and May 8, 2020, Nxt-ID Inc. and LogicMark, LLC, a wholly owned subsidiary of the Company (the “Borrowers”),
respectively, received loans (the “Loans”) from Bank of America, NA in the aggregate amount of $346,390, pursuant to the
Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act,
which was enacted on March 27, 2020.
The
Loans, which are in the form of PPP promissory notes and agreements, dated May 1, 2020 (the “Note Agreements”), mature on
May 6 and May 8, 2022, respectively, and bear interest at a rate of 1.00% fixed per annum, payable monthly commencing on November 6 and
November 8, 2020, respectively. The Loans may be prepaid by the Borrowers at any time prior to maturity with no prepayment penalties.
The Borrowers used the proceeds from the Loans for payroll, payroll taxes, and group healthcare benefits. Under the terms of the Note
Agreements, certain amounts of the Loans may be forgiven if they are used for qualifying expenses, as described in the Note Agreements.
On
March 2, 2021, the Company’s wholly-owned subsidiary, LogicMark, LLC received notification from the Small Business Administration
that repayment of its loan under the Paycheck Protection Program in the amount of $301,390 plus accrued interest of $2,320 has been forgiven.
The income resulting from the forgiveness of the PPP loan and accrued interest is included in other income in the Company’s condensed
consolidated statement of operations for the three months ended March 31, 2021. The Company has also applied for forgiveness of its PPP
loan in the amount of $45,000; however, as of the date of this filing, the Company has not received formal notification from the SBA
that such loan repayment has been forgiven.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5 – Stockholders’ Equity
February 2021 Offering
On February 2, 2021, the Company closed a registered
direct offering pursuant to which the Company issued (i) an aggregate of 1,476,016 shares of Series E preferred stock, convertible into
an aggregate of up to 2,952,032 shares of common stock, (ii) common stock purchase warrants to purchase up to an aggregate of 1,000,000
shares of common stock at an exercise price of $1.23 per share, subject to customary adjustments thereunder, which were exercisable immediately
upon issuance and have a term of five years, and (iii) common stock purchase warrants to purchase up to an aggregate of 1,952,032 shares
of common stock at an exercise price of $1.23 per share with a term of five and one-half (5.5) years first exercisable six (6) months
after issuance, subject to customary adjustments thereunder, for gross proceeds of $4,000,003, before deducting any offering expenses.
The Company will use the net proceeds from this offering for working capital and liability reduction purposes including additional term
debt repayment. In February 2021, 1,476,016 shares of Series E preferred stock were converted into 2,952,032 shares of common stock. During
the three months ended March 31, 2021, the Company recorded a deemed dividend of $1,480,801 from the beneficial conversion feature associated
with the issuance of the Series E convertible preferred stock and warrants.
December 2020 Offering
On December 18, 2020, the Company closed a registered
direct offering pursuant to which the Company issued (i) an aggregate of 1,515,151 shares of Series D preferred stock, convertible into
an aggregate of up to 3,030,304 shares of common stock, (ii) common stock purchase warrants to purchase up to an aggregate of 1,000,000
shares of common stock at an exercise price of $0.49 per share, subject to customary adjustments thereunder, which were exercisable immediately
upon issuance and have a term of five years, and (iii) common stock purchase warrants to purchase up to an aggregate of 5,060,606 shares
of common stock at an exercise price of $0.49 per share with a term of five and one-half (5.5) years first exercisable six (6) months
after issuance, subject to customary adjustments thereunder, for gross proceeds of $2,000,000, before deducting any offering expenses.
The Company will use the net proceeds from this offering for working capital, new product initiatives and other general corporate purposes.
On December 21, 2020, 1,515,151 shares of Series D preferred stock were converted into 3,030,304 shares of common stock. During the year
ended December 31, 2020, the Company recorded a deemed dividend of $758,922 from the beneficial conversion feature associated with the
issuance of the Series D convertible preferred stock and warrants.
July 2020 Offering
On July 14, 2020, the Company closed a registered
direct offering of (i) an aggregate of 3,778,513 shares of the Company’s common stock, par value $0.0001 per share; (ii) pre-funded
warrants to purchase up to an aggregate of 734,965 shares of Common Stock at an exercise price of $0.01 per share, subject to customary
adjustments thereunder; (iii) registered warrants, with a term of five (5) years exercisable immediately upon issuance, to purchase an
aggregate of up to 1,579,718 shares of Common Stock (at an exercise price of $0.50 per share, subject to customary adjustments thereunder;
and (iv) unregistered warrants, with a term of five and one-half (5.5) years first exercisable six (6) months after issuance, to purchase
an aggregate of up to 3,750,000 shares of Common Stock at an exercise price of $0.65 per share, subject to customary adjustments thereunder,
for gross proceeds of $1,864,528, before deducting any offering expenses. The Company will continue to use the net proceeds from this
Offering for working capital, new product initiatives and other general corporate purposes.
On July 28, 2020, the Company received proceeds
of $7,350 in connection with the exercise of 734,965 pre-funded warrants to purchase common stock at an exercise price of $0.01.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 1,201,715 shares of common stock at January 1, 2021.
On March 31, 2021, the Company issued an aggregate
of 28,368 stock options to purchase shares of common stock under the LTIP to four (4) non-employee directors for serving on the Company’s
board. The exercise price of these stock options is $1.41 and stock options were fully vested at the issuance date. The aggregate fair
value of the stock options issued to the directors was $40,000.
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.
In addition, during the three months ended March
31, 2021, the Company issued 132,826 shares of common stock with an aggregate fair value of $80,456 to certain employees related to the
Company’s 2018 and 2019 management incentive plans.
During the three months ended March 31, 2021,
the Company accrued $50,000 of management and employee bonus expense.
Warrants
On January 8, 2021, the Company entered into a
Warrant Amendment and Exercise Agreement (the “Amendment Agreement”) with holders (the “Holder”) of a common stock
purchase warrant, dated April 4, 2019, previously issued by the Company to the Holder (the “Original Warrant”).
In consideration for each exercise of the Original
Warrant that occurs within 45 calendar days of the date of the Amendment Agreement, in addition to the issuance of the Warrant Shares
(as defined in the Original Warrant) on or prior to the Warrant Share Delivery Date (as defined in the Original Warrant), the Company
has agreed to deliver to the Investor a new warrant to purchase a number of shares of the Company’s common stock, par value $0.0001
per share (the “Common Stock”), equal to the number of Original Warrants that the Holder has exercised pursuant to the terms
of the Original Warrant, at an exercise price of $1.525 per share, which represents the average Nasdaq Official Closing Price of the Common
Stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the date of the Amendment Agreement (the “New
Warrants”). The Investor originally held Original Warrants exercisable for up to 2,469,136 shares of Common Stock, and, therefore,
could receive up to an equivalent number of New Warrants. Under the terms and conditions of the Warrant Amendment and Exercise Agreement,
the Investor could continue to exercise the Original Warrants after 45 calendar days of the date of the Amendment Agreement, but the Investor
would not receive any New Warrants in consideration for the exercise of any Original Warrants exercised thereafter.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Amendment Agreement contains customary representations, warranties
and covenants by each of the Company and the Investor.
On January 29, 2021 and February 8, 2021, the
Investor exercised 500,000 and 1,969,136, respectively of the Original Warrants. The New Warrants issued, are exercisable for up to the
original expiration dates of the Original Warrants, which is April 4, 2024. The exercise price and number of shares issuable upon exercise
of the New Warrants are subject to traditional adjustment 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
of Common Stock issuable upon exercise of the New Warrants, then the New Warrants may be exercised on a cashless (net exercise) basis
pursuant to the formula provided in the New Warrants.
The Company intends to use the proceeds from the
exercise of the Original Warrants for working capital purposes, the launch of new products and to reduce its debt outstanding.
The Company recorded a warrant modification
expense of $2,881,729 for the three months ended March 31, 2021 resulting from the issuance of 2,469,136 replacement warrants with
an exercise price of $1.525 for warrants that were exercised during the three months ended March 31, 2021.
As of March 31, 2021, the Company had outstanding
warrants to purchase an aggregate of 9,378,133 shares of common stock with a weighted average exercise price and remaining life of $1.70
and 3.71 years, respectively. During the three months ended March 31, 2021, 86,072 warrants expired. At March 31, 2021, the warrants had
an aggregate intrinsic value of $2,328,639.
During the three months ended March 31, 2021,
3,749,000 warrants were exercised on a cashless basis and were converted into 2,073,687 shares of common stock.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6 – Commitments and Contingencies
Legal
Matters
On February 24, 2020, Michael J. Orlando, as shareholder
representative (the “Shareholder Representative”), and the other stockholders of Fit Pay, Inc. (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”). See Orlando v. Nxt-ID, Inc. No. 20-cv-1604 (S.D.N.Y.).
The Complaint alleges that the Company has breached certain contractual obligations under a merger agreement, dated May 23, 2017, between
Fit Pay, Inc. and the Company, regarding certain future, contingent earnout payments allegedly that could be owed to the Fit Pay Shareholders
from future revenues. The Complaint seeks unspecified monetary damages from the defendants. The Company believes that these claims are
without merit and is vigorously defending the action. On May 12, 2020, the Company filed an answer and counterclaims alleging, among
other things, fraud and breach of fiduciary duty of the Shareholder Representative as well as arguing that the Shareholder Representative
should be estopped from pursuing these claims. The Company has moved for summary judgment to have the lawsuit dismissed. The Company has
been able to successfully stay discovery pending the court’s ruling on motions to dismiss by Garmin International, Inc. and CrowdOut
Capital, LLC. In March 2021, following our successful application to stay all discovery, the court granted CrowdOut’s and Garmin’s
separate motions to dismiss. Orlando’s claim against the Company still remains and the Company’s motion for summary judgment
is still pending.
In connection with the sale of Fit-Pay,
Inc., Giesecke+Devrient Mobile Security America, Inc. (“GDMSAI”) has identified a disagreement with the Company over
calculation of dividends with respect to GDMSAI’s Series C Non-Convertible Voting Preferred Stock (the “Series C”)
of the Company. On August 13, 2020, the Company was sued by GDMSAI seeking, among other things, $440,000 of dividends that it
believes are owed to it pursuant to the terms of the Series C. The Company believes that GDMSAI’s claims are not correct and
plans to vigorously defend the action. The Company has moved to have the case removed from Delaware to New York, where the Company
claims the forum clause requires the claims to be heard. The Company has opposed GDMSAI’s motion for summary judgment. In
March 2021, a Delaware Chancery court rejected our argument that the Fit Pay merger agreement requires litigation solely in New York
and thereafter granted GDMSAI summary judgment on the merits, holding that relevant dividend language required a perpetually paid
dividend once the $50M threshold had been achieved. The Company has filed a notice of appeal and plans to appeal the Delaware
Chancery court decision. There are no assurances that our appeal will be successful and even if our appeal is successful that a New
York court will agree with our interpretation of the manner in which dividends on the Series C Preferred are to be calculated. If
the Company is unsuccessful, it will be responsible for paying $440,000 of dividends plus interest. The judgment may also trigger an
event of default with our senior debt facility. Although the Company is attempting to negotiate a waiver of this provision in its
credit agreement, there are no assurances that it will be successful in doing so or on terms reasonably favorable to the Company.
From time to time, the Company may be involved
in various claims and legal actions arising in the ordinary course of our business. Other than the above, there is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to
the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting our company, or any
of our subsidiaries in which an adverse decision could have a material adverse effect upon our business, operating results, or financial
condition.
Commitments
The Company 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, non-lease components and non-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.
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’s lease agreement for its former warehouse space located in Louisville, Kentucky expired
on August 31, 2020. As a result, the Company entered into a new five-year lease agreement in June 2020 for new warehouse space also located
in Louisville, Kentucky. The monthly rent which commenced in September 2020 is $6,000 per month and increases approximately 3% annually
thereafter. The ROU asset value added as a result of this new lease agreement was $279,024. The Company’s ROU asset and lease liability
accounts reflect the inclusion of this new lease agreement on the Company’s condensed consolidated balance sheet as of March 31,
2021.
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.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended March 31, 2021, total
operating lease cost was $26,736 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 the remainder of 2021 as well as each of the next five 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 condensed consolidated balance sheet, as of March 31, 2021:
Year Ending December 31,
|
|
|
|
|
|
|
|
2021 (excluding the three months ended March 31, 2021)
|
|
$
|
68,439
|
|
2022
|
|
|
93,385
|
|
2023
|
|
|
89,724
|
|
2024
|
|
|
80,000
|
|
2025
|
|
|
54,400
|
|
Total future minimum lease payments
|
|
$
|
385,948
|
|
Less imputed interest
|
|
|
(90,412
|
)
|
Total present value of future minimum lease payments
|
|
$
|
295,536
|
|
As of March 31, 2021
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
292,797
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
56,827
|
|
Other long-term liabilities
|
|
$
|
238,709
|
|
|
|
$
|
295,536
|
|
As of March 31, 2021
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
4.03 years
|
|
Weighted Average Discount Rate
|
|
|
12.86
|
%
|
Coronavirus – COVID-19
On March 11, 2020, the
World Health Organization designated COVID-19 as a global pandemic. Sales volumes and the related revenues for most of the
Company’s products and services were significantly impacted during the latter portion of the first quarter and throughout the
balance of 2020 as a result of the healthcare industry’s focus on COVID prevention and treatment, which impacted the markets
we serve, in particular the VA hospitals and clinics. Sales of the Company’s products and services have continued to be impacted as
various policies were implemented by federal, state and local governments in response to the COVID-19 pandemic, the public remains
wary of real or perceived opportunities for exposure to the virus. The Company believes the extent of the COVID-19 pandemic’s
impact on its operating results and financial condition has been and will continue to be driven by many factors, most of which are
beyond the Company’s control and ability to forecast. Although the Company has experienced some positive trends during the
first four months of 2021, because of these uncertainties, the Company cannot estimate how long or to what extent the pandemic will
impact its operations.
Note
7 – Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the financial statements are issued.
On May 3, 2021, the Company’s wholly-owned subsidiary, LogicMark, LLC, made a $3,000,000 voluntary prepayment (the “Prepayment”)
on its term loan. The Company did not incur a prepayment premium as it relates to this voluntary prepayment. After this prepayment, the
Company’s term loan balance is $2,236,502.