NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITIES
Nxt-ID, Inc. (“Nxt-ID” or the “Company”)
was incorporated in the State of Delaware on February 8, 2012. The Company provides personal emergency
response systems (PERS), health communications devices and IoT technology. The Company evaluates the performance of its business
on, among other things, profit and loss from operations.
The Company’s wholly-owned subsidiary, LogicMark,
LLC (“LogicMark”), manufactures and distributes non-monitored and monitored personal emergency response systems sold through
the United States Department of Veterans Affairs, healthcare durable medical equipment dealers, distributors, and monitored security dealers
and distributors.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
as of September 30, 2021, and for the nine and three months ended September 30, 2021 and 2020 have been prepared in accordance with the
accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and
pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC and on the same basis as the Company prepares its
annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of September 30, 2021 and the
condensed consolidated statements of operations and changes in equity for the nine and three months ended September 30, 2021 and September
30, 2020 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and September 30, 2020 are
unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows for the periods presented. The results for the nine and three
months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, or for
any future interim period. The condensed consolidated balance sheet at December 31, 2020 has been derived from audited consolidated financial
statements. However, it does not include all of the information and notes required by U.S. GAAP for complete consolidated financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
for the year ended December 31, 2020 and the notes thereto included in the Company’s Annual Report on Form 10-K, which was filed
with the SEC on April 15, 2021.
Net loss per share and all share data for the nine and three months
ended September 30, 2021 and 2020 have been retroactively adjusted to reflect the reverse stock split that occurred in October 2021, in
accordance with ASC 260-10-55-12, Restatement of EPS Data. See Note 7.
NOTE 2 – LIQUIDITY
The Company generated an operating loss of $1,491,445
and a net loss of $5,419,609 during the nine months ended September 30, 2021. As of September 30, 2021, the Company had cash and stockholders’
equity of $16,046,625 and $32,417,889, respectively. At September 30, 2021, the Company had working capital of $14,020,301.
The Company used cash of $3.3 million in operations in the first nine months
of 2021, which includes a $1.1 million payout of substantially past due accounts payable. The Company believes the cash balance of $16.0
million is sufficient to sustain operations for at least the next 12 months.
As described in Note 6, the coronavirus could
continue to significantly impact the Company’s business, which would potentially require the Company to raise funds to assist with
its working capital needs.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, stockbased 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 three and nine months ended September 30, 2021 and 2020, the Company had no sales recognized over
time. The Company invoices its customers at the same time that the Company’s performance obligation is satisfied. The Company generally
receives customer orders with a specified delivery date and orders typically fluctuate from month-to-month based on customer demand and
general business conditions.
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, 2021 and December 31, 2020, and for the three and
nine months ended September 30, 2021 and 2020.
ACCOUNTS RECEIVABLE
Accounts receivable is stated at net realizable
value. The Company regularly reviews accounts receivable balances and adjusts the receivable reserves as necessary whenever events or
circumstances indicate the carrying value may not be recoverable. At September 30, 2021 and December 31, 2020, the Company had an allowance
for doubtful accounts of $74,025 and $126,733, respectively.
INVENTORY
The Company performs regular reviews of inventory
quantities on hand and evaluates the realizable value of its inventories. The Company adjusts the carrying value of the inventory as necessary
with estimated valuation reserves for excess, obsolete, and slow-moving inventory by comparing the individual inventory parts to forecasted
product demand or production requirements. As of September 30, 2021, inventory was comprised of $113,956 in raw materials and $798,933
in finished goods on hand. Inventory at December 31, 2020 was comprised of $199,523 in raw materials and $567,828 in finished goods on
hand. These amounts reflect an aggregate reserve for obsolete inventory of approximately $274,000. The Company is required to prepay for
certain inventory with certain vendors until credit terms can be established. As of September 30, 2021 and December 31, 2020, the Company
had prepaid inventory of $380,350 and $332,475, respectively. These prepayments were made primarily for finished goods inventory, and
prepaid inventory is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OTHER INTANGIBLE ASSETS
At September 30, 2021, the other intangible assets
relating to the acquisition of LogicMark are comprised of patents of $2,166,931, trademarks of $931,467, and customer relationships of
$1,570,268. At December 31, 2020, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,445,709;
trademarks of $978,494; and customer relationships of $1,814,259. The Company will continue amortizing these intangible assets using the
straight-line method over their estimated useful lives which for the patents, trademarks and customer relationships are 11 years; 20 years;
and 10 years, respectively. During the nine and three months ended September 30, 2021 and 2020, the Company had amortization expense of
$569,796 and $192,019, respectively, related to the LogicMark intangible assets.
As of September 30, 2021, total amortization
expense estimated for the remainder of fiscal year 2021 is approximately $192,019, and for each of the next five fiscal years, the total
amortization expense is estimated to be as follows: 2022 - $761,815; 2023 - $761,815; 2024 - $761,815; 2025 - $761,815; and 2026 - $618,790.
STOCK-BASED COMPENSATION
The Company accounts for share-based awards exchanged
for employee services at the estimated grant date fair value of the award. The Company accounts for equity instruments issued to non-employees
at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying
equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period
or as earned. Stock-based compensation is recorded in the same component of operating expenses as if it were paid in cash. The Company
generally issues new shares of common stock to satisfy conversion and warrant exercises.
NET LOSS PER SHARE
Basic loss per share was computed using the weighted
average number of shares of common stock outstanding. Diluted loss per share includes the effect of diluted common stock equivalents.
Potentially dilutive securities from the exercise of stock options to purchase 40,858 shares of common stock and warrants to purchase
4,393,230 shares of common stock as of September 30, 2021 were excluded from the computation of diluted net loss per share because the
effect of their inclusion would have been anti-dilutive. As of September 30, 2020, potentially dilutive securities from the exercise of
stock options to purchase 31,027 shares of common stock and warrants to purchase 1,230,293 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.
Net loss per share for the nine and three months ended September 30,
2021 and 2020 have been retroactively adjusted to reflect the reverse stock split that occurred in October 2021, in accordance with ASC
260-10-55-12, Restatement of EPS Data. See Note 7.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting standards that have been issued
or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a
material impact on the Company’s consolidated financial statements upon adoption.
Nxt-ID,
Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – DEBT REFINANCINGS
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 original maturity date of the term loan was May 3, 2022 and required the Company to make minimum
principal payments over the three-year term amortized over 96 months.
During the nine months ended September 30, 2021,
the Company made scheduled principal repayments totaling $1,031,250. Pursuant to an amendment to the loan agreement, LogicMark made a
$5,000,000 voluntary principal prepayment and paid a prepayment premium of $125,000 The prepayment premium is included in interest expense
for the nine months ended September 30, 2021 in the condensed consolidated statement of operations. In addition, the maturity date of
the term loan was extended to March 22, 2023. The Company also made voluntary prepayments of the term loan with CrowdOut Capital LLC in
May and June 2021 of $3,000,000 and $1,000,000, and fully paid off the loan in July 2021 with a voluntary payment of $1,064,627 with cash
primarily provided by the issuance of equity securities and warrant exercises.
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, 2021, the Company amortized
$137,855 and $26,616, respectively of the original issue discount which is included in interest expense in the condensed consolidated
statement of operations. At September 30, 2021 the balance of the original issue discount was fully amortized. The Company also incurred
$1,831,989 in deferred debt issue costs related to the term loan. During the nine and three months ended September 30, 2021, the Company
amortized $713,119 and $118,205, respectively of the deferred debt issue costs which is included in interest expense in the condensed
consolidated statement of operations. At September 30, 2021 the balance of deferred debt issuance costs was fully amortized.
The Company also has an exit fee of $1,072,500 due to CrowdOut Capital
by December 1, 2021. The liability for the exit fee is included in other current liabilities in the Company’s condensed consolidated
balance sheet. On November 1, 2021, the Company paid the exit fee off in its entirety.
Paycheck Protection Program
On May 6 and May 8, 2020, Nxt-ID Inc. and LogicMark,
LLC, a wholly owned subsidiary of the Company (the “Borrowers”), 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 were in the form of PPP promissory
notes and agreements, dated May 1, 2020 (the “Note Agreements”), were to mature on May 6 and May 8, 2022, and bear interest
at a rate of 1.00% fixed per annum, payable monthly commencing on November 6 and November 8, 2020, The Loans may be prepaid by the Borrowers
at any time prior to maturity with no prepayment penalties. The Borrowers used the proceeds from the Loans for payroll, payroll taxes,
and group healthcare benefits. Under the terms of the Note Agreements, certain amounts of the Loans may be forgiven if they are used for
qualifying expenses, as described in the Note Agreements.
On March 2, 2021, the Company’s wholly-owned
subsidiary, LogicMark, LLC received notification from the Small Business Administration that repayment of its loan in the amount of $301,390
plus accrued interest of $2,320 had been forgiven. On May 20, 2021, the Company received notification that repayment of its loan in the
amount of $45,000 plus accrued interest of $466 had been forgiven. The income resulting from the forgiveness of both of the PPP loans
and the related accrued interest is included in other income in the Company’s condensed consolidated statement of operations for
the nine months ended September 30, 2021.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – STOCKHOLDERS’ EQUITY
September 2021 Offering
On September 15, 2021, the Company sold an aggregate
of (i) 2,788,750 shares of common stock, par value $0.001 per share (the “Common Stock”), which includes 363,750 shares of
Common Stock issued upon the exercise of the underwriters’ over-allotment option (the “Shares”) and (ii) accompanying
warrants to purchase up to an aggregate of 2,788,750 shares of Common Stock, at an exercise price of $4.95 per share, subject to certain
adjustments, which includes additional warrants issued upon the exercise of the underwriter’s over-allotment option to purchase
up to an additional 363,750 shares of common stock (the “Warrants”), at a combined public offering price of $4.95 per Share
and accompanying Warrant. The Company granted the underwriters a 45-day option to purchase up to 363,750 additional Shares and additional
Warrants to purchase up to an additional 363,750 shares of Common Stock, which the underwriters exercised, in full, at closing.
The Shares and the Warrants were offered and sold
to the public pursuant to the Company’s registration statement on Form S-1, as amended (File No. 333-259105), filed by the Company
with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities
Act”), which became effective on September 14, 2021.
The Warrants are not immediately exercisable,
as the Company did not have a sufficient number of shares of Common Stock to reserve for issuance pursuant to the Warrants until the date
(the “Initial Exercise Date”) that the Company’s stockholders approved an amendment to the Company’s certificate
of incorporation to effect a reverse stock split of the shares of Common Stock so that there were a sufficient number of shares of Common
Stock for issuance upon exercise of the Warrants. The Warrants became exercisable on the Initial Exercise Date (the effective date of
the reverse stock split) and will terminate on the date that is five years after the Initial Exercise Date. The exercise price of the
Warrants is subject to customary adjustments for stock dividends, stock splits and other subdivisions, combinations and re-classifications,
and will be reset on the date of the Company’s reverse stock split to the lower of (i) the closing price per share of the Common
Stock immediately prior to such reverse stock split, giving effect to the reverse stock split and (ii) the exercise price then in effect.
The Warrants are also exercisable on a cashless basis under certain circumstances, any time after the Initial Exercise Date, pursuant
to the formula set forth in the Warrants. On October 15, 2021, after shareholder and Board approval of the reverse stock split, the exercise
price for the Warrants was adjusted to $3.956 per share, and is being retroactively reported in accordance with ASC 260-10-55-12, Restatement
of EPS Data. See Note 7.
On the Closing Date, the Company received gross
proceeds, inclusive of proceeds from the full exercise of the over-allotment option, of approximately $12.5 million, before deducting
underwriting discounts and commissions of 7% of the gross proceeds (or 3.5% of the gross proceeds in the case of certain identified existing
investors) and estimated Offering expenses. The Company intends to use the net proceeds from the Offering primarily for new product development,
marketing, working capital and liability reduction purposes.
August 2021 Offering
On August 13, 2021, the Company entered into a
securities purchase agreement (the Purchase Agreement) with institutional accredited investors (the Investors) providing for an aggregate
investment of $4,000,000 by the Investors for the issuance by the Company to them of (i) 1,333,333 shares of Series F Convertible Preferred
Stock, par value $0.0001 per share, of the Company (the Series F Preferred Stock) convertible into shares of common stock, par value $0.001
per share, of the Company (the Common Stock) that are issuable from time to time upon conversion of such shares of Series F Preferred
Stock (the Conversion Shares); (ii) warrants, with a term of five and a half (5.5) years exercisable after February 16, 2022, to purchase
an aggregate of up to 666,667 shares of Common Stock (the Warrant Shares) at an exercise price of $7.80 per share. The securities were
issued to the investors were exempt from registration under the Securities Act of 1933, as amended, or the Securities Act, in reliance
on Section 4(a)(2) thereof and Rule 506 of Regulation D thereunder, based on representations made by the investors, their prior relationship
with the Company, and the absence of any general solicitation. The Company used the net proceeds from this offering for working capital
and liability reduction purposes. In the quarter ended September 30, 2021, 1,160,000 shares of Series F preferred stock were converted
into 656,604 shares of common stock. On October 15, 2021, after shareholder and Board approval of the reverse stock split, the exercise
price for the Warrants was adjusted to $4.95 per share, and is being retroactively reported in accordance with ASC 260-10-55-12, Restatement
of EPS Data. See Note 7.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
February 2021 Offering
On February 2, 2021, the Company closed a registered
direct offering pursuant to which the Company issued (i) an aggregate of 1,476,016 shares of Series E preferred stock, convertible into
an aggregate of up to 295,203 shares of common stock, (ii) common stock purchase warrants to purchase up to an aggregate of 100,000 shares
of common stock at an exercise price of $12.30 per share, subject to customary adjustments thereunder, which were exercisable immediately
upon issuance and have a term of five years, and (iii) common stock purchase warrants to purchase up to an aggregate of 195,203 shares
of common stock at an exercise price of $12.30 per share with a term of five and one-half (5.5) years first exercisable nine (6) months
after issuance, subject to customary adjustments thereunder, for gross proceeds of $4,000,003, before deducting any offering expenses.
The Company used the net proceeds from this offering for working capital and liability reduction purposes including additional term debt
repayment. In February 2021, 1,476,016 shares of Series E preferred stock were converted into 295,203 shares of common stock. Also in
February 2021 the Company recorded a deemed dividend of $1,480,801 from the beneficial conversion feature associated with the issuance
of the Series E convertible preferred stock and warrants.
December 2020 Offering
On December 18, 2020, the Company closed a registered
direct offering pursuant to which the Company issued (i) an aggregate of 1,515,151 shares of Series D preferred stock, convertible into
an aggregate of up to 303,030 shares of common stock, (ii) common stock purchase warrants to purchase up to an aggregate of 100,000 shares
of common stock at an exercise price of $4.90 per share, subject to customary adjustments thereunder, which were exercisable immediately
upon issuance and have a term of five years, and (iii) common stock purchase warrants to purchase up to an aggregate of 505,060 shares
of common stock at an exercise price of $4.90 per share with a term of five and one-half (5.5) years first exercisable nine (6) months
after issuance, subject to customary adjustments thereunder, for gross proceeds of $2,000,000, before deducting any offering expenses.
The Company used the net proceeds from this offering for working capital, new product initiatives and other general corporate purposes.
On December 21, 2020, 1,515,151 shares of Series D preferred stock were converted into 303,030 shares of common stock. During the year
ended December 31, 2020, the Company recorded a deemed dividend of $758,922 from the beneficial conversion feature associated with the
issuance of the Series D convertible preferred stock and warrants.
July 2020 Offering
On July 14, 2020, the Company closed a registered
direct offering of (i) an aggregate of 377,851 shares of the Company’s common stock, par value $0.001 per share; (ii) pre-funded
warrants to purchase up to an aggregate of 73,497 shares of Common Stock at an exercise price of $0.01 $0.10 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 157,972 shares of Common Stock (at an exercise price of $5.00 per share, subject to customary adjustments thereunder;
and (iv) unregistered warrants, with a term of five and one-half (5.5) years first exercisable nine (6) months after issuance, to purchase
an aggregate of up to 375,000 shares of Common Stock at an exercise price of $6.50 per share, subject to customary adjustments thereunder,
for gross proceeds of $1,864,528, before deducting any offering expenses. The Company used 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 $0.10. .
Nxt-ID,
Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2013 Long-Term Stock Incentive Plan
On January 4, 2013, a majority of the Company’s
stockholders approved by written consent the Company’s 2013 Long-Term Stock Incentive Plan (“LTIP”). The maximum aggregate
number of shares of common stock that may be issued under the LTIP, including stock awards, stock issued to directors for serving on the
Company’s board of directors, and stock appreciation rights, is limited to 10% of the shares of common stock outstanding on the
first business or trading day of any fiscal year. At January 1, 2021, a maximum of 406,200 shares of common stock may be issued. As of
September 30, 2021, 333,627 shares had been granted, leaving 72,573 available.
During the nine months ended September 30, 2021,
the Company issued an aggregate of 40,858 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 $5.90 and stock
options were fully vested at the issuance date. The aggregate fair value of the stock options issued to the directors was $80,000.
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, 150,000 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, 2021, the Company issued 13,283 shares of common stock with an aggregate fair value of $80,456 to certain employees related to the
Company’s 2018 and 2019 management incentive plans.
During the nine months ended September 30, 2021,
the Company accrued $150,000 of management and employee bonus expense. The Company has typically paid a substantial portion of the bonus
accrual with shares of common stock.
Warrants
On January 8, 2021, the Company entered into a
Warrant Amendment and Exercise Agreement (the “Amendment Agreement”) with holders (the “Holder”) of a common stock
purchase warrant, dated April 4, 2019, previously issued by the Company to the Holder (the “Original Warrant”).
In consideration for each exercise of the Original
Warrant that occurs within 45 calendar days of the date of the Amendment Agreement, in addition to the issuance of the Warrant Shares
(as defined in the Original Warrant) on or prior to the Warrant Share Delivery Date (as defined in the Original Warrant), the Company
has agreed to deliver to the Investor a new warrant to purchase a number of shares of the Company’s common stock, par value $0.001
per share (the “Common Stock”), equal to the number of Original Warrants that the Holder has exercised pursuant to the terms
of the Original Warrant, at an exercise price of $15,25 per share, which represents the average Nasdaq Official Closing Price of the Common
Stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the date of the Amendment Agreement (the “New
Warrants”). The Investor originally held Original Warrants exercisable for up to 246,914 shares of Common Stock, and, therefore,
could receive up to an equivalent number of New Warrants. Under the terms and conditions of the Warrant Amendment and Exercise Agreement,
the Investor could continue to exercise the Original Warrants after 45 calendar days of the date of the Amendment Agreement, but the Investor
would not receive any New Warrants in consideration for the exercise of any Original Warrants exercised thereafter.
The Amendment Agreement contains customary representations, warranties
and covenants by each of the Company and the Investor.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 29, 2021 and February 8, 2021, the
Investor exercised 500,000 and 1,969,136, respectively of the Original Warrants. The New Warrants issued, are exercisable for up to the
original expiration dates of the Original Warrants, which is April 4, 2024. The exercise price and number of shares issuable upon exercise
of the New Warrants are subject to traditional adjustment for stock splits, combinations, recapitalization events and certain dilutive
issuances. The New Warrants are required to be exercised for cash; however, if during the term of the New Warrants there is not an effective
registration statement under the Securities Act of 1933, as amended (the “Securities Act”), covering the resale of the shares
of Common Stock issuable upon exercise of the New Warrants, then the New Warrants may be exercised on a cashless (net exercise) basis
pursuant to the formula provided in the New Warrants.
The Company used the proceeds from the exercise
of the Original Warrants for working capital purposes, new product development efforts and to reduce its term debt outstanding.
The Company recorded a warrant modification expense
of $2,881,729 for the nine months ended September 30, 2021 resulting from the issuance of 246,914 replacement warrants with an exercise
price of $15.25 for warrants that were exercised in January and February 2021.
As of September 30, 2021, the Company had outstanding
warrants to purchase an aggregate of 4,393,230 shares of common stock with a weighted average exercise price and remaining life of $6.88
and 4.8 years, respectively. During the nine months ended September 30, 2021, 86,072 warrants expired. At September 30, 2021, the warrants
had no intrinsic value.
During the nine months ended September 30, 2021,
warrants exercised on a cashless basis were converted into 423,933 shares of common stock.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
On February 24, 2020, Michael J. Orlando, as
shareholder representative (the “Shareholder Representative”), and the other stockholders of Fit Pay, Inc. (collectively,
the “Fit Pay Shareholders”), filed a lawsuit in the United States District Court for the Southern District of New York against
the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the “Complaint”). See Orlando v. Nxt-ID, Inc. No. 20-cv-1604
(S.D.N.Y.). The Complaint alleges that the Company has breached certain contractual obligations under a merger agreement, dated May 23,
2017, between Fit Pay, Inc. and the Company, regarding certain future, contingent earnout payments allegedly that could be owed to the
Fit Pay Shareholders from future revenues. The Complaint seeks unspecified monetary damages from the defendants. The Company believes
that these claims are without merit and is vigorously defending the action. On May 12, 2020, the Company filed an answer and counterclaims
alleging, among other things, fraud and breach of fiduciary duty of the Shareholder Representative as well as arguing that the Shareholder
Representative should be estopped from pursuing these claims. The Company has moved for summary judgment to have the lawsuit dismissed.
The Company has been able to successfully stay discovery pending the court’s ruling on motions to dismiss by Garmin International,
Inc. and CrowdOut Capital, LLC. In March 2021, following our successful application to stay all discovery, the court granted CrowdOut’s
and Garmin’s separate motions to dismiss. Orlando’s claim against the Company still remains and the Company’s motion
for summary judgment is still pending.
In connection with the sale of Fit-Pay, Inc.,
Giesecke+Devrient Mobile Security America, Inc. (“GDMSAI”) 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 and
on August 13, 2020, GDMSAI sued the Company in Delaware Chancery Court seeking, among other things, $540,000 of dividends that it believes
are owed to it pursuant to the terms of the Series C. In March 2021, a Delaware Chancery granted GDMSAI summary judgment on the merits,
holding that relevant dividend language required a perpetually paid dividend once the $50 million threshold had been achieved. On August
11, 2021, the Company entered into a settlement agreement whereby the Company would pay $540,000 of dividends plus $55,000 of pre-judgement
interest, but no post-judgement interest. The settlement is payable in tranches ending in November 2021. This amount has been accrued
on the accompanying balance sheet at September 30, 2021.
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.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 current 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 September 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, 2021.
Certain of the Company’s lease agreements,
primarily related to real estate, include options for the Company to either renew (extend) or early terminate the lease. Leases with renewal
options allow the Company to extend the lease term typically between 1 and 3 years. Renewal options are reviewed at lease commencement
to determine if such options are reasonably certain of being exercised, which could impact the lease term. When determining if a renewal
option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, significance of
leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the
particular lease that would make it reasonably certain that the Company would exercise such option. In most cases, the Company has concluded
that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in the
Company’s ROU asset and lease liability) unless there is an economic, financial or business reason to do so.
For the nine months ended September 30, 2021,
total operating lease cost was $923,762 and is recorded in cost of sales and selling, general and administrative expenses, dependent on
the nature of the leased asset. The operating lease cost is recognized on a straight-line basis over the lease term. The following summarizes
(i) the future minimum undiscounted lease payments under non-cancelable lease for the remainder of 2021 as well as each of the next five
years and thereafter, incorporating the practical expedient to account for lease and non-lease components as a single lease component
for our existing real estate leases, (ii) a reconciliation of the undiscounted lease payments to the present value of the lease liabilities
recognized, and (iii) the lease-related account balances on the Company’s condensed consolidated balance sheet, as of September
30, 2021:
Year Ended December 31,
2021 (excluding the nine months ended September 30, 2021)
|
|
$
|
23,146
|
|
2022
|
|
|
93,385
|
|
2023
|
|
|
89,724
|
|
2024
|
|
|
80,000
|
|
2025
|
|
|
54,400
|
|
Total future minimum lease payments
|
|
$
|
340,655
|
|
Less imputed interest
|
|
|
(72,077
|
)
|
Total present value of future minimum lease payments
|
|
$
|
268,578
|
|
As of September 30, 2021
Operating lease right-of-use assets
|
|
$
|
263,578
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
61,760
|
|
Other long-term liabilities
|
|
$
|
206,819
|
|
|
|
$
|
268,579
|
|
As of September 30, 2021
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
3.54 years
|
|
Weighted Average Discount Rate
|
|
|
12.80
|
%
|
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Coronavirus – COVID-19
On March 11, 2020, the World Health Organization
designated COVID-19 as a global pandemic. Sales volumes and the related revenues for most of the Company’s products and services
were significantly impacted during the latter portion of the first quarter and throughout the balance of 2020 as a result of the healthcare
industry’s focus on COVID prevention and treatment, which impacted the markets we serve, in particular the VA hospitals and clinics.
Sales of the Company’s products and services have continued to be impacted as various policies were implemented by federal, state
and local governments in response to the COVID-19 pandemic, and the public remains wary of real or perceived opportunities for exposure
to the virus. The Company believes the extent of the COVID-19 pandemic’s impact on its operating results and financial condition
has been and will continue to be driven by many factors, most of which are beyond the Company’s control and ability to forecast.
Because of these uncertainties, the Company cannot estimate how long or to what extent the pandemic will impact its operations.
NOTE 7 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued.
Reverse stock split
On October 15, 2021, the Company announced that the shareholders had
approved a reverse split of its common stock and Series C Preferred at a ratio of 1 for 10. As a result of the reverse split, each 10
pre-split shares of common stock outstanding and each 10 pre-split shares of Series C Preferred stock outstanding were automatically exchanged
for one new share of each without any action on the part of the holders. The number of outstanding common shares was reduced from approximately
88.3 million shares to approximately 8.8 million shares, and the number of outstanding Series C preferred shares was reduced from
2,000 shares to 200 shares. No fractional shares were issued as a result of the reverse stock split, all of which were rounded up to the
nearest whole number. The reverse stock split did not affect the total number of shares of capital stock, including Series C Preferred
Stock, that the company is authorized to issue.
Earnings per share and all share data for the nine and three months
ended September 30, 2021 and 2020 have been retroactively adjusted to reflect the reverse stock split in accordance with ASC 260-10-55-12,
Restatement of EPS Data.
Compliance with Nasdaq Listing Rule
On November 3, 2021, the Company received a letter from The Nasdaq
Stock Market acknowledging that the Company had regained compliance with Nasdaq Listing Rule 5550(a)(2), which requires the Company’s
common stock listed on Nasdaq to maintain a minimum bid price of $1.00 per share, and that such common stock will remain listed on Nasdaq
subject to the Company’s ongoing compliance with all Nasdaq listing rules.
Payment of senior debt obligation
On November 1, 2021, the Company’s wholly-owned subsidiary, LogicMark,
LLC, made a $1.1 million payment to its senior lender, completely satisfying all of its financial obligations with that lender. As of
November 1, 2021, the Company had no senior debt obligations.