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
is a security technology company and operates its business in one segment – hardware and software security systems and applications.
The Company is engaged in the development of proprietary products and solutions that serve multiple end markets, including the
security, healthcare, financial technology and the Internet of Things (“IoT”) markets. The Company evaluates the performance
of its business on, among other things, profit and loss from operations. With extensive experience in access control, biometric
and behavior-metric identity verification, security and privacy, encryption and data protection, payments, miniaturization, and
sensor technologies, the Company develops and markets solutions for payment, IoT and healthcare applications.
The
Company’s wholly-owned subsidiary, LogicMark LLC (“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.
The
Company’s former wholly-owned subsidiary, Fit Pay, Inc., had a proprietary technology platform that delivers payment, credential
management, authentication and other secure services to the IoT ecosystem. The platform uses tokenization, a payment security
technology that replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless
payment and authentication services. On September 21, 2018, the Company announced that its board of directors approved a plan
to separate the Company’s financial technology business from our healthcare business into an independent publicly traded
company. The Company originally planned to distribute shares of PartX, Inc., a newly created company and wholly-owned subsidiary
of the Company (“PartX”), to our stockholders through the execution of a spin-off. As a result, the Company reclassified
its financial technology business to discontinued operations for all periods reported. The Company’s financial technology
business was comprised of its Fit Pay subsidiary and the intellectual property developed by the Company, including the Flye Smartcard
and the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX with the U.S. Securities and Exchange
Commission (the “SEC”) in connection with the planned spin-off of our payments, authentication and credential management
business. On August 19, 2019, the Company’s subsidiary, PartX notified the SEC that it was withdrawing the Registration
Statement on Form 10. With the approval of the Company’s board of directors, and upon similar terms and conditions to those
set forth in that loan agreement, the Company entered into a non-binding letter of intent for the sale of its Fit Pay subsidiary,
excluding certain assets on August 6, 2019. In connection with the letter of intent, the Company was advanced $500,000 of non-interest
bearing working capital for Fit Pay. On September 9, 2019, the Company completed the sale of its Fit Pay subsidiary to Garmin
International, Inc. for $3.32 million in cash.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements as of September 30, 2020, and for the nine and three months
ended September 30, 2020 and 2019 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 September 30, 2020 and the condensed consolidated statements
of operations and changes in equity for the nine and three months ended September 30, 2020 and September 30, 2019 and the condensed
consolidated statements of cash flows for the nine months ended September 30, 2020 and September 30, 2019 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 nine and three months
ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, or for
any future interim period. The condensed consolidated balance sheet at December 31, 2019 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, 2019 and the notes thereto included in the Company’s Annual Report
on Form 10-K, which was filed with the SEC on March 30, 2020.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
2 – Liquidity
The
Company generated operating income of $409,655 and a net loss of $1,307,906 during the nine months ended September 30, 2020. As
of September 30, 2020, the Company had cash and stockholders’ equity of $2,092,532 and $7,451,852, respectively. At September
30, 2020, the Company had a working capital deficiency of $2,137,343. On July 14, 2020, the Company, received gross proceeds of
$1,864,528 from a registered direct offering. See Note 6 for details of this transaction.
Given
the Company’s cash position at September 30, 2020 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 additional 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 7, the coronavirus has significantly impacted, and could continue to 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 condensed 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,
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 nine months ended
September 30, 2020 and 2019, 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.
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 September 30, 2020 and December 31, 2019, and for the nine months ended September 30, 2020 and 2019.
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 September 30, 2020
and December 31, 2019, the Company had an allowance for doubtful accounts of $126,733.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September
30, 2020, inventory was comprised of $202,526 in raw materials and $669,810 in finished goods on hand. Inventory at December 31,
2019 was comprised of $167,357 in raw materials and $1,135,922 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 September 30, 2020 and December 31, 2019,
the Company had prepaid inventory of $216,587 and $201,496, 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.
Goodwill
Authoritative accounting guidance allows
the Company to first assess qualitative factors to determine whether it is necessary to perform the more detailed two-step quantitative
goodwill impairment test. The Company performs the quantitative test if its qualitative assessment determined it is more likely
than not that a reporting unit’s fair value is less than its carrying amount. The Company may elect to bypass the qualitative
assessment and proceed directly to the quantitative test for any reporting units or assets. The quantitative goodwill impairment
test, if necessary, is a two-step process. The first step is to identify the existence of a potential impairment by comparing the
fair value of a reporting unit (the estimated fair value of a reporting unit is calculated using a discounted cash flow model)
with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the reporting
unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative goodwill impairment
test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative
goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step of the quantitative
goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized
in an amount equal to that excess. The implied fair value of goodwill is determined using the same approach as employed when determining
the amount of goodwill that would be recognized in a business combination. That is, the fair value of the reporting unit is allocated
to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value was
the purchase price paid to acquire the reporting unit.
As part of the annual evaluation of the LogicMark related
goodwill, the Company utilized the option to first assess qualitative factors, which include but are not limited to, economic,
market and industry conditions, as well as the financial performance of LogicMark. In accordance with applicable guidance, an entity
is not required to calculate the fair value of a reporting unit if, after assessing these qualitative factors, the Company determines
that it is more likely than not that its reporting unit’s fair value is greater than its carrying amount. As of September
30, 2020, the Company determined that it was more likely than not that the fair value of LogicMark exceeded its respective carrying
amount and therefore, a quantitative assessment was not required.
Other
Intangible Assets
At
September 30, 2020, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,539,656;
trademarks of $994,342; and customer relationships of $1,896,483. At December 31, 2019, the other intangible assets relating to
the acquisition of LogicMark are comprised of patents of $2,818,434; trademarks of $1,041,370; and customer relationships of $2,140,473.
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 nine
and three months ended September 30, 2020, the Company had amortization expense of $569,796 and $192,019, respectively, related
to the LogicMark intangible assets. During the nine and three months ended September 30, 2019, the Company had amortization expense
of $569,796 and $192,019, respectively, related to the LogicMark intangible assets.
As
of September 30, 2020, total amortization expense estimated for the remainder of fiscal year 2020 is approximately $192,000, and
for each of the next five fiscal years, 2021 through 2025, the total amortization expense is estimated to be as follows: 2021
- $762,000; 2022 - $762,000; 2023 - $762,000; 2024 - $762,000; and 2025 - $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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
310,272 shares of common stock and warrants to purchase 12,302,939 shares of common stock as of September 30, 2020 were excluded
from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive. As of
September 30, 2019, potentially dilutive securities from the exercise of warrants to purchase 6,973,221 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.
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. This ASU was adopted and did not have a material impact on the Company’s condensed consolidated
financial statements.
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.
Note
4 – Discontinued Operations
The
following table represents the financial results of the discontinued operations for the nine and three months ended September
30, 2019:
|
|
For
the Nine
Months Ended
September 30,
|
|
|
For
the Three
Months Ended
September 30,
|
|
|
|
2019
|
|
|
2019
|
|
Net
sales
|
|
$
|
625,771
|
|
|
$
|
171,709
|
|
Cost of
sales
|
|
|
194,856
|
|
|
|
72,980
|
|
Gross
profit
|
|
|
430,915
|
|
|
|
98,729
|
|
Operating
expenses
|
|
|
3,859,222
|
|
|
|
1,339,621
|
|
Interest
expense
|
|
|
3,963
|
|
|
|
838
|
|
Loss
from discontinued operations
|
|
$
|
(3,432,270
|
)
|
|
$
|
(1,241,730
|
)
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5 – Debt refinancings
On
May 24, 2018, LogicMark, a wholly-owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the “Credit
Agreement”) with the lenders thereto and Sagard Holdings Manager LP, as administrative agent and collateral agent for the
lenders party to the Credit Agreement (collectively, the “Lender”), whereby the Lender extended a term loan (the “Term
Loan”) to LogicMark in the principal amount of $16,000,000. The original maturity date of the Term Loan was May 24, 2023.
The Term Loan Facility with Sagard Holdings Manager LP was repaid on May 3, 2019 with Term Loan proceeds received from CrowdOut
Capital LLC (See below). The outstanding principal amount of the Term Loan base interest at a rate of LIBOR, adjusted monthly,
plus 9.5% per annum (approximately 11.99% as of April 30, 2019). The Company incurred $1,253,970 in deferred debt issue costs
related to the Term Loan. During the nine and three months ended September 30, 2019, the Company amortized $86,969 and $0,
respectively, of the deferred debt issue costs which is included in interest expense in the condensed consolidated statement of
operations.
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 was amortized using the effective interest method over the
five-year term of the Term Loan. During the nine and three months ended September 30, 2019, the Company recorded $48,932 and
$0, respectively 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.
On
May 3, 2019, LogicMark, completed the closing of a $16,500,000 senior secured term loan with the lenders thereto and CrowdOut
Capital, LLC, as administrative agent. The Company used the proceeds from the term loan to repay LogicMark’s existing term
loan facility with Sagard Holdings Manager LP and to pay other costs related to the refinancing. The maturity date of the term
loan is May 3, 2022 and requires the Company to make minimum principal payments over the three-year term amortized over 96 months.
During the nine months ended September 30, 2020, the Company has made scheduled principal repayments totaling $1,546,875. In addition,
the Company prepaid an additional $150,000 of the term loan with CrowdOut Capital LLC during the nine months ended September 30,
2020 with cash flow generated from operations. The outstanding principal amount of the term loan bears interest at a rate of LIBOR,
adjusted monthly, plus 11.0% per annum (approximately 13.0% as of September 30, 2020). The Company incurred $412,500 in original
issue discount for closing related fees charged by the Lender. During the nine and three months ended September 30, 2020, the
Company amortized $80,368 and $25,849, respectively of the original issue discount which is included in interest expense in the
condensed consolidated statement of operations. At September 30, 2020 the unamortized balance of the original issue discount was
$163,702. 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 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 nine and three months ended September 30, 2020, the Company amortized $415,737 and $133,710, respectively
of the deferred debt issue costs which is included in interest expense in the condensed consolidated statement of operations.
At September 30, 2020 the unamortized balance of deferred debt issuance costs were $846,828.
Debt
Maturity
The
maturity of the Company’s term debt is as follows:
2020 (remainder)
|
|
|
$
|
515,625
|
|
2021
|
|
|
|
2,062,500
|
|
2022
|
|
|
|
9,033,377
|
|
Total
term debt
|
|
|
$
|
11,611,502
|
|
The senior secured term loan contains customary
financial covenants. As of September 30, 2020, the Company was in compliance with such covenants; see Subsequent Events (Note 8)
regarding the first amendment to the senior secured term loan.
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.
The
Company intends to apply for forgiveness of the Loans and as such has treated the Loans as other short-term debt on the
Company’s condensed consolidated balance sheet.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6 – Stockholders’ Equity
July
2020 Offerings
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.
January
2019 At-the-Market Offering
On
January 8, 2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“A.G.P.”) for an
at-the-market offering, pursuant to which the Company could sell, at its option, shares of its common stock, par value $0.0001
per share, having an aggregate offering price of up to $15 million to or through A.G.P., as sales agent. The Company was obligated
to pay A.G.P. commissions for its services in acting as the Company’s sales agent in the sale of its common stock pursuant
to the sales agreement. A.G.P. was entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the
sale of the Company’s common stock on the Company’s behalf pursuant to the sales agreement. The Company also agreed
to reimburse A.G.P. for its reasonable out-of-pocket expenses, including the fees and disbursements of counsel to A.G.P., incurred
in connection with the offering, in an amount not to exceed $35,000. During the 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.
The sales agreement with A.G.P. was terminated on October 10, 2019.
2013
Long-Term Stock Incentive Plan
On
January 4, 2013, a majority of the Company’s stockholders approved by written consent the Company’s 2013 Long-Term
Stock Incentive Plan (“LTIP”). The maximum aggregate number of shares of common stock that may be issued under the
LTIP, including stock awards, stock issued to directors for serving on the Company’s board of directors, and stock appreciation
rights, is limited to 10% of the shares of common stock outstanding on the first business or trading day of any fiscal year, which
is 592,223 shares of common stock at January 1, 2020.
During
the nine months ended September 30, 2020, the Company issued an aggregate of 310,272 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 weighted average exercise
price of these stock options is approximately $0.39 and stock options were fully vested at the issuance date. The aggregate fair
value of the stock options issued to the directors was $120,000.
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 nine months ended September 30, 2020, the Company issued 447,620 shares of common stock with an aggregate
fair value of $200,794 to certain employees related to the Company’s 2017, 2018 and 2019 management incentive plans.
During
the nine months ended September 30, 2020, the Company accrued $120,000 of management and employee bonus expense. The Company has
typically paid a substantial portion of the bonus accrual with shares of common stock.
Warrants
As
of September 30, 2020, the Company had outstanding warrants to purchase an aggregate of 12,302,939 shares of common stock with
a weighted average exercise price and remaining life of $1.87 and 3.66 years, respectively. At September 30, 2020, all of the
warrants were exercisable and had no aggregate intrinsic value.
Nxt-ID,
Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 – 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 plans to vigorously defend the action. The Company
waived service of the summons and received an automatic extension of time to answer the Complaint. 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. Since the litigation is still in its early
stages, the Company is not yet able to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential
loss.
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. Since the
litigation is still in its early stages, the Company is not yet able to evaluate the likelihood of an unfavorable outcome or estimate
the amount or range of potential loss beyond the amount stated in the action.
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. 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’s lease agreement for
its 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 September 30, 2020.
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 nine months ended September 30, 2020, total operating lease cost was $113,257 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 2020 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 September 30, 2020:
Year
Ended December 31,
|
|
|
|
|
2020
(excluding the nine months ended September 30, 2020)
|
|
|
$
|
22,546
|
|
2021
|
|
|
|
90,986
|
|
2022
|
|
|
|
93,385
|
|
2023
|
|
|
|
89,724
|
|
2024
|
|
|
|
80,000
|
|
2025
|
|
|
|
54,400
|
|
Total
future minimum lease payments
|
|
|
$
|
431,041
|
|
Less
imputed interest
|
|
|
|
(110,264
|
)
|
Total
present value of future minimum lease payments
|
|
|
$
|
320,777
|
|
As
of September 30, 2020
|
|
|
|
Operating
lease right-of-use assets
|
|
$
|
320,378
|
|
|
|
|
|
|
Other
accrued expenses
|
|
$
|
52,199
|
|
Other
long-term liabilities
|
|
$
|
268,578
|
|
|
|
$
|
320,777
|
|
As
of September 30, 2020
|
|
|
|
Weighted
Average Remaining Lease Term
|
|
|
4.67
years
|
|
Weighted
Average Discount Rate
|
|
|
12.80
|
%
|
Coronavirus
– COVID-19
In
early 2020, the coronavirus that causes COVID-19 was reported to have surfaced in China. The Company’s primary supply
chain is located in China and other Asian-based locations. To date, the Company’s supply chain has not experienced any
significant disruptions. The global spread of this virus has caused significant business disruption around the world
including the United States, the primary area in which the Company operates and sells its products. The business disruption
is currently expected to be temporary, however there is considerable uncertainty around the duration of the business
disruption. Therefore, the Company expects this matter to continue to negatively impact the Company’s financial
condition, results of operations, or cash flows.
Note
8 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On November 16, 2020, the Company and CrowdOut
Capital LLC, as administrative agent, entered into the first amendment (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 loan retroactively and prospectively. Based on the senior secured term loan, as amended,
the Company was in compliance with such financial covenant requirements as of September 30, 2020.