Note
2 – Liquidity And Management Plans
The Company generated operating
income from continuing operations of $507,651 and incurred a net loss from continuing operations of $292,973 during the three
months ended March 31, 2019. Certain of these factors raise substantial doubt about the Company’s ability to sustain
operations for at least one year from the issuance of these financial statements. However, given the Company’s cash
position at March 31, 2019, anticipated future cash proceeds from the sale of common stock from the January 2019
At-the-Market Offering and its projected cash flow from operations, the Company believes that it will have sufficient capital
to sustain operations over the next twelve months following the date of this filing to alleviate such substantial doubt. As
of March 31, 2019, the Company (excluding discontinued operations) had a working capital deficiency of $1,736,869 and
stockholders’ equity of $14,827,899. In order to execute the Company’s long-term strategic plan to develop and
commercialize its core products, fulfill its product development commitments and fund its obligations as they come due, the
Company may need to raise additional funds, through public or private equity offerings, debt financings, or other means.
Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue to fund its
operations, the Company would need to engage in certain cost containment efforts, and/or curtail certain of its operational
activities.
During the three months ended March 31,
2019, the Company received net proceeds of $1,282,810 from the sale of common stock in connection with the January 2019 At-the-Market
Offering (See Note 6). However, the Company can give no assurance that any cash raised subsequent to March 31, 2019 will be sufficient
to execute its business plan or meet its obligations. The Company can give no assurance that additional funds will be available
on reasonable terms, or available at all, or that it will generate sufficient revenue to alleviate these conditions.
The Company’s ability to execute
its business plan is dependent upon its ability to raise additional equity, secure debt financing, and/or generate revenue. Should
the Company not be successful in obtaining the necessary financing, or generate sufficient revenue to fund its operations, the
Company would need to curtail certain of its operational activities.
Note 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, 2019 and 2018, 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, 2019 and December 31, 2018,
and for the three months ended March 31, 2019 and 2018.
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, 2019 and December 31, 2018, the Company had an
allowance for doubtful accounts of $126,733.
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, 2019, inventory was comprised of $142,567
in raw materials and $1,081,770 in finished goods on hand. Inventory at December 31, 2018 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 March 31, 2019 and December 31, 2018, the Company had prepaid inventory of $271,242 and $317,488, 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, 2019, the other intangible
assets relating to the acquisition of LogicMark are comprised of patents of $3,099,254; trademarks of $1,088,742; and customer
relationships of $2,386,251. 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 three months ended March 31, 2019 and 2018,
the Company had amortization expense of $187,845 and $187,845, respectively, related to the LogicMark intangible assets.
As of March 31, 2019, total amortization
expense estimated for the remainder of fiscal year 2019 is approximately $574,000, and for each of the next five fiscal years,
2020 through 2024, the total amortization expense is estimated to be as follows: 2020 - $762,000; 2021 - $762,000; 2022 - $762,000;
2023 - $762,000; and 2024 - $762,000.
Stock-Based
Compensation
The Company accounts for share-based awards
exchanged for employee services at the estimated grant date fair value of the award. The Company accounts for equity instruments
issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation
charges are amortized over the vesting period or as earned. Stock-based compensation is recorded in the same component of operating
expenses as if it were paid in cash. The Company generally issues new shares of common stock to satisfy conversion and warrant
exercises.
Net
Loss per Share
Basic loss per share was computed using
the weighted average number of shares of common stock outstanding. Diluted loss per share includes the effect of diluted common
stock equivalents. Potentially dilutive securities from the exercise of warrants to purchase 4,782,448 shares of common stock as
of March 31, 2019 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, 2018, potentially dilutive securities from the exercise of warrants to purchase 4,602,650
shares of common stock were excluded from the computation of diluted net loss per share because the effect of their inclusion would
have been anti-dilutive.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 Financial
Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 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. The Company is currently evaluating this guidance and the impact of this update on
its condensed 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 and did not
have a material impact on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, “Leases (Topic 84
2)”,
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 condensed consolidated statements of cash flow for the three months ended March 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 7 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 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 – Discontinued Operations
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 condensed consolidated balance sheets as of March 31, 2019 and December
31, 2018:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
127,135
|
|
|
$
|
125,318
|
|
|
Prepaid expenses and other assets
|
|
|
82,397
|
|
|
|
96,909
|
|
|
Total current assets associated with discontinued operations
|
|
$
|
209,532
|
|
|
$
|
222,227
|
|
|
Property and equipment, net
|
|
|
36,629
|
|
|
|
38,793
|
|
|
Right-of-use assets
|
|
|
91,655
|
|
|
|
-
|
|
|
Goodwill
|
|
|
9,119,709
|
|
|
|
9,119,709
|
|
|
Other intangible assets
|
|
|
2,958,489
|
|
|
|
3,112,224
|
|
|
Total non-current assets associated with discontinued operations
|
|
$
|
12,206,482
|
|
|
$
|
12,270,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
132,604
|
|
|
$
|
175,982
|
|
|
Accrued expenses
|
|
|
180,753
|
|
|
|
185,978
|
|
|
Customer deposits
|
|
|
2,500
|
|
|
|
3,333
|
|
|
Total liabilities associated with discontinued operations
|
|
$
|
315,857
|
|
|
$
|
365,293
|
|
The
following table represents the financial results of the discontinued operations for the three months ended March 31, 2019 and 2018:
|
|
|
For the Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
221,476
|
|
|
$
|
594,093
|
|
|
Cost of sales
|
|
|
62,981
|
|
|
|
262,132
|
|
|
Gross profit
|
|
|
158,495
|
|
|
|
331,961
|
|
|
Operating expenses
|
|
|
1,162,358
|
|
|
|
1,267,192
|
|
|
Interest expense
|
|
|
1,711
|
|
|
|
727
|
|
|
Loss from discontinued operations
|
|
$
|
(1,005,574
|
)
|
|
$
|
(935,958
|
)
|
|
|
(1)
|
The
contingent liability associated with the earn-out payment due to certain of the Fit Pay legacy shareholders
is not included in discontinued operations.
|
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
5 – 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 maturity date of
the Term Loan is May 24, 2023. The outstanding principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted
monthly, plus 9.5% per annum (approximately 11.99% as of March 31, 2019). The Company incurred $1,253,970 in deferred debt
issue costs related to the Term Loan. During the three months ended March 31, 2019, the Company amortized $62,698 of the
deferred debt issue costs which is included in interest expense in the condensed consolidated statement of operations. At
March 31, 2019 the unamortized
balance of deferred debt issue costs was $1,039,582. Pursuant to the terms and
conditions of the Credit Agreement, LogicMark is required to deposit 50% of its excess cash flow generated into a restricted
bank account for a maximum period of one (1) year. Excess cash flow is defined as LogicMark’s adjusted earnings before
interest, taxes, depreciation and amortization less any debt service, debt prepayments and capital expenditures. At the end
of the one (1) year period, the restricted cash may be used either to pay down the Term Loan or LogicMark will have the
ability to transfer the restricted cash balance to an operating bank account and use the cash for operational purposes. This
determination will be made solely at the discretion of the Lender. On December 10, 2018, LogicMark entered into a Consent to
the Credit Agreement (the “Consent”) with Sagard Holdings Manager LP whereby LogicMark temporarily withdrew
$500,000 from the restricted cash balance. In accordance with the Consent, the repayment of the temporary withdrawal was to
be made no later than January 31, 2019. On April 1, 2019, the Company entered into an amendment to the Consent where by the
repayment date of the temporary withdrawal was extended to no later than April 5, 2019. As a result of the Consent and the
amended Consent, the Company had an accrued usage fee of $125,000 due to the Lender as of March 31, 2019. The usage fee is
included in accrued liabilities on the Company’s condensed consolidated balance sheet at March 31, 2019. The
Company’s restricted cash balance at March 31, 2019 included $1,283,115 related to LogicMark’s excess cash flow
generated.
The
Credit Agreement contains customary financial covenants. As of March 31, 2019, the Company was in compliance with such
covenants.
The performance of LogicMark
under the Credit Agreement is secured by: (a) a senior lien granted pursuant to a Security Agreement on all of the assets
of LogicMark, the Company, 3D-ID, LLC (one of the Company’s wholly-owned subsidiaries) and Fit Pay (one of
the Company’s wholly-owned subsidiaries); (b) a senior lien granted pursuant to an Intellectual Property Security
Agreement on all of the intellectual property assets of the foregoing companies; and (c) a pledge of certain pledged
securities of the foregoing companies pursuant to a Securities Pledge Agreement. The performance of LogicMark is guaranteed
pursuant to a Guaranty Agreement by the Company, 3D-ID, LLC and Fit Pay.
In
addition to entering into the Credit Agreement, the Company issued two (2) common stock purchase warrants (each, a “Sagard
Warrant”) to Sagard Credit Partners, LP. Each Sagard Warrant is exercisable for 244,081 shares of the Company’s common
stock (collectively, the “Sagard Warrant Shares”). Each Sagard Warrant will be exercisable beginning on May 24, 2018,
for a period of five (5) years. The exercise price per share is $3.90 for the first Sagard Warrant and $4.88 for the second Sagard
Warrant. The exercise price and the amount of shares of the Company’s common stock issuable upon exercise of each Sagard
Warrant are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications,
mergers or other corporate changes or dilutive issuances.
On May 24, 2018
the Company recorded a debt discount of $705,541. The debt discount is attributable to the aggregate fair value on the issuance
date of both Sagard Warrants. The debt discount is being amortized using the effective interest method over the five-year term
of the Term Loan. During the three months ended March 31, 2019, the Company recorded $35,277 of debt discount amortization related
to the Sagard Warrants. The debt discount amortization is included as part of interest expense in the condensed consolidated statement
of operations.
Each
Sagard Warrant contains a covenant of the Company that within ninety (90) days of May 24, 2018, at the Company’s sole cost
and expense, it will file or cause to be filed a registration statement covering the resale of the Sagard Warrant Shares, and will
promptly provide confirmation of such registration to the holder. The registration statement covering the resale of the Sagard
Warrant Shares was filed and became effective in July 2018. To the extent a legal opinion is required in connection therewith,
such opinion shall be obtained by the Company at the Company’s expense. In no event shall the Company be responsible for
any broker or similar commissions of any holder or any legal fees or other costs of the holder of the Sagard Warrants.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
6 – 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 may 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 will 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. will be 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 has 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 three months ended March 31, 2019, the Company received $1,282,810 in net proceeds from the sale of 1,084,227
shares of its common stock under the sales agreement with A.G.P.
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 975,886 shares of common stock at January 1,
2019.
During the three months ended March 31,
2019, the Company issued an aggregate of 112,485 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 $100,000.
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 (1
st
) business day of each new fiscal year; provided that for fiscal year 2017, 1,500,000
shares of common stock may be delivered to participants under the 2017 SIP. Thereafter, the 10% 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, 2019, the Company issued 40,000 shares of common stock with an aggregate fair value of $46,800 to certain non-executive
employees related to the Company’s 2018 management incentive plan.
During the three months ended March 31,
2019, the Company accrued $110,000 of management and employee bonus expense.
During the three months ended March 31,
2019, the Company issued 100,137 shares of common stock with a fair value of $85,250 to non-employees for services rendered.
Warrants
As of March 31, 2019, the Company had
outstanding warrants to purchase an aggregate of 4,782,448 shares of common stock with a weighted average exercise price and
remaining life of $5.32 and 3.29 years, respectively. At March 31, 2019, the warrants had no aggregate intrinsic value.
During the three months ended March 31, 2019, warrants to purchase an aggregate of 307,904 shares of common stock with
a weighted-average exercise price of $7.08 expired.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
7 – Commitments and Contingencies
Legal
Matters
From time to time, the Company may
be involved in various claims and legal actions arising in the ordinary course of our business. There is no action,
suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the executive officers of 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. The Company adopted Topic 842 effective January 1, 2019.
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. As a practical expedient under Topic 842, 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 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 three months ended March 31, 2019,
total operating lease cost was $41,938 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 2019 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, 2019:
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
|
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
126,487
|
|
|
2020
|
|
|
88,827
|
|
|
2021
|
|
|
23,279
|
|
|
2022
|
|
|
18,185
|
|
|
2023
|
|
|
12,123
|
|
|
Total future minimum lease payments
|
|
$
|
268,901
|
|
|
Less imputed interest
|
|
|
(33,181
|
)
|
|
Total present value of future minimum lease payments
|
|
$
|
235,720
|
|
|
As of March 31, 2019
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
233,165
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
135,976
|
|
|
Other long-term liabilities
|
|
$
|
99,744
|
|
|
|
|
$
|
235,720
|
|
|
As of March 31, 2019
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
1.6 years
|
|
|
Weighted Average Discount Rate
|
|
|
11.74
|
%
|
Prior to January 1, 2019, the Company
accounted for its leases in accordance with Topic 840, “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.
Debt Maturity
The maturity of the Company’s debt
is as follows:
|
2019 (remainder)
|
|
$
|
1,602,556
|
|
|
2020
|
|
|
212,961
|
|
|
2021
|
|
|
106,479
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
14,716,885
|
|
|
Total debt
|
|
$
|
16,638,881
|
|
Note
8 – Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued.
On April 1, 2019, the Company issued 8,436
shares of its common stock for the payment of services with a grant date fair value of $7,500.
On April 2, 2019, the Company entered
into a securities purchase agreement with an investor in connection with the registered direct public offering of 2,469,136
shares of the Company’s common stock, for a purchase price of approximately $2,000,000. The shares of common stock were
offered at a price of $0.81 per share. In connection with the offering, the Company also issued to the investor for
no additional consideration a common stock purchase warrant to purchase 2,469,136 shares of common stock. The warrant
was exercisable immediately upon issuance at an exercise price of $1.05 per share and will expire on the fifth
(5
th
) anniversary of the initial exercise date.
On April 25, 2019, the Company issued 105,833
shares of its common stock to certain employees under the 2017 management incentive plan.
On April 25, 2019, the Company issued 80,883
shares of its common stock to certain employees under the 2018 management incentive plan.
On May 3, 2019, LogicMark, a wholly-owned
subsidiary of the Company, completed the closing of a $16.5 million senior secured term loan. The Company will use the proceeds
from the term loan to refinance LogicMark’s existing term loan facility with Sagard Holdings Manager LP and to pay other
costs related to the refinancing. The key aspects of the new term loan facility include an interest rate of LIBOR plus 11.00%,
a three-year maturity date from the closing date and minimum principal payments over the three-year term amortized over 96 months.
This refinancing also removes a covenant included in LogicMark’s existing term loan facility with Sagard Holdings Manager
LP and allows the Company to proceed with the proposed spin-off of its Fit Pay subsidiary and its payments, authentication and
credential management business.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations for the three months ended March 31, 2019 should be read together with our
condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains
forward-looking statements and information relating to our business that reflect our current views and assumptions with respect
to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the date of this report.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United
States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking
statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results.
Overview
We were incorporated in the State of Delaware
on February 8, 2012. As of December 31, 2018, we are 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, manufactures and distributes non-monitored and monitored personal emergency response systems
sold through the United States Department of Veterans Affairs (the “VA”), healthcare durable medical equipment dealers
and distributors and monitored security dealers and distributors. Our wholly-owned subsidiary, Fit Pay, has a proprietary technology
platform that delivers payment, credential management, authentication and other secure services to the IoT ecosystem. The platform
uses tokenization, a payment security technology that replaces cardholders’ account information with a unique digital identifier,
to transact highly secure contactless payment and authentication services.
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 will 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 is 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.
Healthcare
With respect to the healthcare market,
our business initiatives are driven by LogicMark, which serves a market that enables two-way communication, medical device connectivity
and patient data tracking of key vitals through sensors, biometrics, and security to make home health care a reality. There are
three (3) major trends driving this market: (1) an increased desire for connectivity; specifically, a greater desire for connected
devices by people over 60 years of age who now represent the fastest growing demographic for social media; (2) the growth of “TeleHealth”,
which is the means by which telecommunications technologies are meeting the increased need for health systems to better distribute
doctor care across a wider range of health facilities, making it easier to treat and diagnose patients; and (3) rising healthcare
costs – as health spending continues to outpace the economy, representing between 6% and 7% of the overall economy, the need
to reduce hospital readmissions, increase staffing efficiency and improve patient engagement remain the highest priorities. Together,
these trends have produced a large and growing market for us to serve. LogicMark has built a successful business on emergency communications
in healthcare. We have a strong business relationship with the VA today, serving veterans who suffer from chronic conditions that
often require emergency assistance. This business is steady and growing, producing the highest annual revenue in its operational
history in 2018. Our strategic plan calls for expanding LogicMark’s business into other healthcare verticals as well as retail
and enterprise channels in order to better serve the expanding demand for connected and remote healthcare solutions.
Home healthcare, which
includes health monitoring and management using IoT and cloud-based processing, is an emerging area for LogicMark. The
long-term trend toward more home-based healthcare is a massive shift that is being driven by demographics (an aging
population) and basic economics. People also value autonomy and privacy which are important factors in determining which
solutions will suit the market. Consumers are beginning to enjoy the benefits of smart home technologies and online digital
assistants. We believe one of the promising applications of our VoiceMatch™ technology is enabling secure commands for
restricted medical access. This solution, when coupled with Nxt-ID BioCloud™, combines biometrics with encryption and
distributed access control.
PERS devices are used to call for help
and medical care during an emergency. These devices are also used by a wide patient pool, as well as the general population, to
ensure safety and security when living or traveling alone. The global medical alert systems market caters to different end-users
across the healthcare industry, including individual users, hospitals and clinics, assisted living facilities and senior living
facilities. The growing demand for home healthcare devices is mainly driven by an aging population and rising healthcare costs
worldwide. We believe that this will spur the usage of medical alert systems across the globe, as they offer safety and medical
security while being affordable and accessible.
Payments and Financial Technology
We
conduct our payments business through Fit Pay, a wholly owned subsidiary of Nxt-ID, which was acquired in May 2017. Fit Pay’s
core technology is a proprietary platform that enables contactless payment capabilities, allowing its customers, which include
manufacturers of “smart devices,” to add payment capabilities to their products. Fit Pay connects its customers to
leading payment card networks, including Visa, Mastercard, Maestro and Discover, and to credit card issuing banks, globally.
It
successfully commercialized its third-party token service provider platform with the launch of the Garmin Pay™, which is
powered by Fit Pay’s
platform. Fit Pay’s technology and tokenization service
enables the contactless payment
feature that is included in smartwatches manufactured by Garmin International, Inc. (“Garmin”).
The payment feature, which went live in the fall of 2017, is now included in 11 of Garmin’s smartwatches
.
In January 2019, Fit Pay extended its contactless payment functionality to another major brand, announcing that its Token Requester
Management Platform (“TRM Platform”) is also enabling SwatchPAY! on four (4) new watches announced by Swatch AG.
In addition, the geographic and issuer
footprint for Garmin Pay™ is expanding and now is a network of more than 280 issuing banks in 34 countries with additions
being made regularly. This represents a significant increase from year-end 2017, at which time the network included 60 issuing
banks in 8 countries. As a part of this growth, Fit Pay announced recent agreements with Chase, Westpac, Discover and Mastercard’s
Maestro network in Europe. This expansion of the Garmin Pay™ network increases the overall revenue opportunity of this flagship
customer and establishes banking and network relationships that may be leveraged for future payment solution offerings.
Fit Pay’s TRM Platform offers an
opportunity for a whole new range of devices to become payment-enabled, without the manufacturer of such devices having to invest
in and develop such capabilities. Fit Pay is continuously developing new products to leverage its TRM Platform and expanding its
network of payment card issuers and issuing banks. Fit Pay also develops proprietary payment devices that it expects to offer through
business-to-business and direct-to-consumer channels. These new products will leverage the TRM Platform and expand Fit Pay’s
reach to new customers and emerging markets, such as cryptocurrency and other connected devices and products, generally referred
to as the Internet of Things (“IoT”).
Fit Pay’s initial consumer product
offering is a platform extension and contactless payment device called Flip™, which enables Bitcoin holders to make contactless
payment transactions at millions of retail locations with value exchanged from their cryptocurrency. Fit Pay believes the product
represents an opportunity to bring to market a unique offering in an emerging market segment.
It was also announced in October 2018 that
Fit Pay is a technology partner for Visa’s Token Service for credential-on-file (“COF”) token requestors.
Through this program, Fit Pay will be able to tokenize COF digital payments on behalf of merchant and payment ecosystem clients,
greatly expanding the addressable market for its platform services. Fit Pay leverages the EMVCo Payment Tokenization Standard to
“tokenize” or replace sensitive personal information, such as payment card numbers and expiration dates, with a unique
digital identifier or “token.” Tokenizing COF records offers increased security for consumers and merchants by never
exposing personal information and therefore potentially lowering fraud related expenses to payment card networks and issuing banks.
In addition to enhancing security, Fit
Pay’s technology will allow financial institutions to seamlessly update expired or compromised payment credentials at one
point of reference, thereby eliminating a significant point of friction for consumers and merchants. Fit Pay believes these additional
services will be buoyed by the overall growth in digital payments.
Together, Fit Pay believes these opportunities
position its emerging payment and financial technology business for growth as it monetizes its core TRM Platform technology and
expands its products and services to new markets and customers.
As an early and established entrant into
the contactless and digital payments market, Fit Pay believes that it is well-positioned to take advantage of both the growth of
payment-enabled devices and the consumer demand for new methods of payments.
Results of Operations
Comparison of three months ended March 31, 2019 and March
31, 2018
Revenue.
Our revenues
from continuing operations for the three months ended March 31, 2019 were $4,181,710, compared to $4,336,515 for the three
months ended March 31, 2018. The decrease in our revenues for the three months ended March 31, 2019 as compared to the three
months ended March 31, 2018 is primarily attributable to LogicMark’s decreased sales volume in commercial sales offset
in part by a favorable shift in product sales mix from land-based products to mobile products which typically have a higher
sales price on a per unit basis.
Cost of Revenue and Gross
Profit.
Our gross profit from continuing operations for the three months ended March 31, 2019 was $3,162,076 compared to
a gross profit of $3,129,168 for the three months ended March 31, 2018. The increase in gross profit in the three months
ended March 31, 2019 as compared to the three months ended March 31, 2018 is primarily attributable to the higher gross
profit resulting from the favorable shift in product sales mix discussed above which was partially offset by the decreased
volume in LogicMark’s commercial product sales.
Operating Expenses.
Operating expenses
for the three months ended March 31, 2019 totaled $2,654,425 and consisted of research and development expenses of $204,953, selling
and marketing expenses of $849,513 and general and administrative expenses of $1,599,959. The research and development expenses
related primarily to salaries and consulting services of $172,186. Selling and marketing expenses consisted primarily of salaries
and consulting services of $185,146, amortization of intangibles of $187,845, freight charges of $155,847, merchant processing
fees of $103,819, and sales commissions of $73,126. General and administrative expenses consisted of salaries and consulting services
of $476,862, accrued management and employee incentives of $110,000 and legal, audit and accounting fees of $245,881. Also included
in general and administrative expenses is $141,250 in non-cash stock compensation to consultants and board members.
Operating expenses for the three months
ended March 31, 2018 totaled $2,934,685 and consisted of research and development expenses of $146,137, selling and marketing expenses
of $1,067,810 and general and administrative expenses of $1,720,738. The research and development expenses relate primarily to
salaries and consulting services of $107,031. Selling and marketing expenses consisted primarily of salaries and consulting services
of $322,598, amortization of intangibles of $187,845, freight charges of $144,257, merchant processing fees of $98,232, and sales
commissions of $72,168. General and administrative expenses consisted of salaries and consulting services of $461,462, accrued
management and employee incentives of $225,000, legal, audit and accounting fees of $252,023. Also included in general and administrative
expenses is $244,184 in non-cash stock compensation to consultants and board members.
Operating Profit.
The operating
profit from continuing operations for the three months ended March 31, 2019 was $507,651 compared with operating profit of $194,483
for the three months ended March 31, 2018. The increase in operating profit for the three months ended March 31, 2019 as compared
to the three months ended March 31, 2018 is primarily attributable to the lower operating expenses incurred in the three months
ended March 31, 2019 as compared to the three months ended March 31, 2018.
Net Loss from Continuing Operations.
The net loss from continuing operations for the three months ended March 31, 2019 was $292,973 compared to a net loss of $676,855
for the three months ended March 31, 2018. The net loss for the three months ended March 31, 2019 was primarily attributable to
the operating profit discussed above of $507,651 offset by interest expense incurred of $586,201 and an unfavorable change in fair
value of contingent consideration of $214,423. The net loss from continuing operations for the three months ended March 31, 2018
was $676,855 and was primarily attributable to operating profit of $194,483 offset by interest expense incurred of $757,478 and
an unfavorable change in fair value of contingent consideration of $197,709 and an income tax benefit of $83,849.
Liquidity and Capital Resources
We generated operating income
from continuing operations of $507,651 and incurred a net loss from continuing operations of $292,973 for the three months
ended March 31, 2019.
Cash and Working Capital.
As of
March 31, 2019, the Company had cash and stockholders’ equity of $1,227,803 and $14,827,899, respectively. At March 31, 2019,
the Company’s continuing operations had a working capital deficiency of $1,736,869.
Cash Generated by Operating Activities.
Our primary ongoing uses of operating cash relate to payments to subcontractors and vendors for product, research and development,
salaries and related expenses and professional fees. Our vendors and subcontractors generally provide us with normal trade payment
terms. During the three months ended March 31, 2019, net cash provided by operating activities totaled $765,858, which was comprised
of a net loss of $292,973, positive non-cash adjustments to reconcile net loss to net cash used in operating activities of $748,519,
and changes in operating assets and liabilities of positive $310,312, as compared to net cash used in operating activities of $65,450
for the three months ended March 31, 2018, which was comprised of a net loss of $676,855, positive non-cash adjustments to reconcile
net loss to net cash used in operating activities of $821,276, and changes in operating assets and liabilities of negative $209,871.
Cash Used in Investing Activities.
During
the three months ended March 31, 2019 and 2018, we did not have any net cash used in investing activities.
Cash Provided by Financing
Activities.
During the three months ended March 31, 2019, net cash provided by financing activities totaled $1,267,606
and was primarily related to the net proceeds received from the sale of stock of $1,282,810 from our January 2019
At-the-Market Offering which was partially offset by fees paid in connection with equity offerings totaling $15,204. During
the three months ended March 30, 2018, net cash provided by financing activities totaled $48,276 and was primarily related to
the net proceeds received from the exercising of warrants into common stock of $200,000 partially offset by a pay down in
short-term debt of $106,481 and fees paid in connection with equity offerings of $45,243.
Sources of Liquidity.
We have
generated operating income from continuing operations of $507,651 and incurred a net loss from continuing operations of
$292,973 during the three months ended March 31, 2019. As of March 31, 2019, the Company (excluding discontinued operations)
had a working capital deficiency of $1,736,869 and stockholders’ equity of $14,827,899. Certain of these factors
raise substantial doubt about the Company’s ability to sustain operations and to continue as a going concern for at
least one year from the issuance of these financial statements.
As of March 31, 2019, the Company had cash of $1,227,803.
Given our cash position at March 31,
2019, anticipated future cash proceeds from the sale of common stock from the January 2019 At-the Market Offering and our
projected cash flow from operations over the next twelve months, we believe that we will have sufficient capital to sustain
operations and to continue as a going concern over the next twelve months following the date of this report to alleviate
such substantial doubt. In order to execute our long-term strategic plan to develop and commercialize our core products,
fulfill our product development commitments and fund our obligations as they come due, we may need to raise additional funds,
through public or private equity offerings, debt financings, or other means. Should we not be successful in obtaining the
necessary financing, or generating sufficient revenue to fund our operations, we would need to curtail certain of our
operational activities.
The Company can give no assurance that
any cash raised subsequent to March 31, 2019 will be sufficient to execute its business plan or meet its obligations. The Company
can give no assurance that additional funds will be available on reasonable terms, or available at all, or that it will generate
sufficient revenue to fund its operations.
Impact of Inflation
We believe that our business has not been
affected to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the
worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost
of certain raw materials, component parts and labor used in the production of our products. It also may increase our operating
expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets. We have generally been able to maintain
or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent,
price increases, and we expect to be able to do the same during the remainder of fiscal year 2019. As such, we do not believe
that inflation will have a significant impact on our business during the remainder of fiscal year 2019.
Off Balance Sheet Arrangements
We do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
such relationships.
Recent Accounting Pronouncements
See Note 3 to our condensed consolidated
financial statements for the three months ended March 31, 2019, included elsewhere in this document.