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. Nxt-ID is a security technology company providing security for finance, assets and healthcare. The
Company operates its business in one segment — hardware and software security systems and applications. The
Company’s innovative MobileBio® solution mitigates risks associated with mobile computing, m-commerce and smart
OS-enabled devices. With extensive experience in biometric identity verification, security, privacy, encryption and data
protection, payments, miniaturization and sensor technologies, the Company partners with companies to provide solutions for
modern payment and the “Internet of Things” (“IoT”) applications.
On July 25, 2016, the Company completed the
acquisition of LogicMark, LLC (“LogicMark”) pursuant to an Interest Purchase Agreement by and among the Company, LogicMark
and the holders of all of the membership interests of LogicMark (the “LogicMark Sellers”), dated May 17, 2016. The
Company is required to pay the LogicMark Sellers an earn-out payment of (i) $1,500,000 for calendar year 2016 and (ii) and may
be required to pay the LogicMark Sellers an earn-out payment of up to $5,000,000 for calendar year 2017 if LogicMark meets certain
gross profit targets set forth in the Interest Purchase Agreement. The secured subordinated promissory note originally issued
to LogicMark Investment Partners on July 25, 2016 and amended on November 29, 2016 (the “LogicMark Note”) was to mature
on September 23, 2016 but was extended to April 15, 2017 and then extended to July 15, 2017. The Company and the LogicMark Sellers
also agreed to extend the due date on the 2016 earn-out payment to July 15, 2017.As of June 30, 2017, the 2016 earn-out payment
and principal and interest due on the LogicMark Note amount to an aggregate of $1,500,000 and $591,783, respectively, and have
been included as a component of current liabilities on the condensed consolidated balance sheet as of June 30, 2017. In July 2017,
the Company paid the 2016 earn-out payment in the amount of $1,500,000 to the LogicMark Sellers. In addition, in July 2017, the
remaining balance of $594,403 owed on the LogicMark Note, including accrued and unpaid interest, was purchased by certain investors
in exchange for $594,403 in principal amount of convertible notes of the Company and warrants exercisable for 297,202 shares of
Common Stock. See Note 9 hereto.
On
May 23, 2017, the Company completed a merger (the “Merger”) pursuant to an executed Agreement and Plan of Merger (the
“Merger Agreement”) by and among the Company, Fit Merger Sub, Inc., a wholly-owned subsidiary of the Company (the
“Merger Sub”), Fit Pay, Inc. (“Fit Pay”), Michael Orlando (“Orlando”), Giesecke & Devrient
Mobile Security America, Inc. (“G&D”), the other stockholders of Fit Pay (the “Other Holders”) and
Michael Orlando in his capacity as stockholder representative representing the Other Holders (the “Stockholder Representative”,
and together with Orlando and G&D, the “Sellers”). Pursuant to the Merger, Fit Pay merged with and into the Merger
Sub, with the Merger Sub continuing as the surviving entity and a wholly-owned subsidiary of the Company. See Note 5.
The
Company’s wholly-owned subsidiary, LogicMark, manufactures and distributes non-monitored and monitored
personal emergency response systems sold through the United States Department of Veterans Affairs, healthcare durable
medical equipment dealers and distributors and monitored security dealers and distributors. The Company’s wholly-owned
subsidiary, Fit Pay, Inc. (“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.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements as of June 30, 2017 and for the six and three months then ended
have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities
and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial
statements. The unaudited condensed consolidated balance sheet as of June 30, 2017 and the condensed consolidated statements of
operations for the six and three months ended June 30, 2017 and June 30, 2016 and the condensed consolidated statements of cash
flows for the six months ended June 30, 2017 and June 30, 2016 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 six and three months ended June 30, 2017 are not necessarily
indicative of results to be expected for the year ending December 31, 2017 or for any future interim period. The condensed consolidated
balance sheet at December 31, 2016 has been derived from audited consolidated financial statements. However, it does not include
all of the information and notes required by 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,
2016, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 14,
2017 (the “2016 10-K”), and Amendment No. 1 to the 2016 10-K filed with the SEC on July 7, 2017.
Note
2 – Reverse Stock Split
On
September 1, 2016, the Company’s board of directors and stockholders approved a resolution to amend the Company’s
Certificate of Incorporation and to authorize the Company to effect a reverse split of the Company’s outstanding common
stock at a ratio of 1-for-10 (the “Reverse Split”). On September 9, 2016, the Company effected the Reverse Split.
Upon effectiveness of the Reverse Split, every 10 shares of outstanding common stock decreased to one share of common stock. Throughout
this report, the Reverse Split was retroactively applied to all periods presented.
Note
3 - Liquidity and Management Plans
The
Company is an emerging growth company and recorded operating income of $1,733,303 and a net loss of $1,929,532 during
the six months ended June 30, 2017. As of June 30, 2017 the Company had a working capital deficiency of $7,644,184 (including
contingent consideration of $6,600,733) and stockholders’ equity of $5,598,260. Given the Company’s cash position
at June 30, 2017, proceeds from equity and note offerings subsequent to June 30, 2017 (See Note 9) and its projected cash
flow from operations over the next twelve months, the Company believes that it will have sufficient capital to sustain
operations over the next twelve months following the date of this filing. 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.
Note
4 - Summary Of Significant Accounting Policies
Use
of Estimates in the Financial Statements
The
preparation of financial statements in conformity with 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 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 values
of acquired assets and liabilities assumed in business combinations, stock based compensation, derivative financial
instruments, income taxes and related valuation allowances, accounts receivable and inventory, 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, 3D-ID, LogicMark
and Fit Pay. Intercompany balances and transactions have been eliminated in consolidation.
Concentrations
of Credit Risk
During
the six and three months ended June 30, 2017, the Company recognized revenue of $6,289,281 and $3,581,245 respectively,
from World Ventures Holdings, LLC (“WVH”), a related party based on its position as the Company’s largest
stockholder. At June 30, 2017, the Company’s accounts receivable balance included $1,797,941 due from WVH.
Revenue
Recognition
The
Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, the service has been
rendered or product delivery has occurred, the price is fixed or readily determinable and collectability of the sale
is reasonably assured.
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. The Company had no
allowance for doubtful accounts at June 30, 2017 and December 31, 2016.
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 June 30,
2017 inventory was comprised of $3,914,501 in raw materials and $1,343,149 in finished goods on hand. Inventory at December 31,
2016 was comprised of $3,797,499 in raw materials and $1,544,001 in finished goods on hand. The Company is required to prepay
for raw materials with certain vendors until credit terms can be established. As of June 30, 2017 and December 31, 2016, the
Company had prepaid inventory of $1,126,701 and $1,089,770, respectively. These prepayments were made primarily for raw materials
inventory and prepaid inventory is included in prepaid expenses and other current assets on the condensed consolidated balance
sheet.
Goodwill
The
Company’s goodwill relates to the acquisitions of LogicMark and Fit Pay. The Company will begin testing goodwill for
impairment annually in the third quarter of each year using data as of August 1 of that year. 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.
Other
Intangible Assets
The
Company’s intangible assets are all related to the acquisitions of LogicMark and FitPay and are included in other intangible
assets in the Company’s condensed consolidated balance sheets at June 30, 2017 and December 31, 2016.
At
June 30, 2017, the other intangible assets related to the acquisition of LogicMark are comprised of patents of $3,751,780; trademarks
of $1,198,822; and customer relationships of $2,957,346. At December 31, 2016, the other intangible assets are comprised of patents
of $3,936,612; trademarks of $1,230,002; and customer relationships of $3,119,111. 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 six and three months ended June 30, 2017, the Company
had amortization expense of $377,777 and $189,932, respectively related to the LogicMark intangible assets.
At
June 30, 2017, the other intangible assets related to the acquisition of Fit Pay,
which was completed on May 23,
2017, are comprised of trademarks of $396,299; technology of $3,348,102; and customer relationships of $1,421,624. The
Company will continue amortizing these intangible assets using the straight line method over their estimated useful lives
which for trademarks, technology and customer relationships are 25 years; 7 years; and 6 years, respectively. During the six
and three months ended June 30, 2017, the Company had amortization expense of $79,375 related to the Fit Pay intangible
assets.
As of June 30, 2017, amortization expense
estimated for the remainder of fiscal year 2017 related to both the LogicMark and Fit Pay intangibles is approximately
$755,000 and for each of the next five fiscal years, 2018 through 2022, the amortization expense is estimated to be
approximately $1,505,000 per year.
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. The Company generally issues
new shares of common stock to satisfy conversion and warrant exercises.
Net
Loss per Share
Basic
loss per share was computed using the weighted average number of common shares outstanding. Diluted loss per share
includes the effect of diluted common stock equivalents. Potentially dilutive securities of 546,003 realizable from the
Series A Preferred Stock and Series B Preferred Stock (as defined in Note 7), and 575,000 from the convertible notes and from
the exercise of 1,829,049 warrants as of June 30, 2017 were excluded from the computation of diluted net loss per share
because the effect of their inclusion would have been anti-dilutive for the six and three months ended June 30, 2017. As of June 30,
2016, potentially dilutive securities from the conversion of convertible notes of $515,731 and related accrued interest and
from the exercise of warrants into 9,140,293 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.
Recent
Accounting Pronouncements
In
March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”), “Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 will affect all entities that issue share-based payment
awards to their employees and is effective for annual periods beginning after December 15, 2016 for public entities. The areas
for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The Company adopted this standard in the first quarter of 2017 and it did not have a material impact on its condensed consolidated
financial statements.
In May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”),
“Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients.” ASU 2016-12
will affect all entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s
ordinary activities) in exchange for consideration. The amendments in this update affect the guidance in ASU 2014-09 which is not
yet effective, the amendments in this update affect narrow aspects of Topic 606 including among others: assessing collectability
criterion, noncash consideration, and presentation of sales taxes and other similar taxes collected from customers. The effective
date and transition requirements for the amendments in this update are the same as the effective date and transition requirements
for ASU 2014-09. The Company is currently evaluating the effect that ASU 2016-12 will have on the Company’s condensed consolidated
financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the
Definition of a Business.” The amendments in this update clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses.
The amendments in this update provide a screen to determine when a set is not a business. If the screen is not met, it (1) requires
that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing
elements. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. Early adoption is permitted. This iASU is not expected to have a material impact on
the Company’s condensed consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”
to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,
Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in
this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. This ASU is not expected
to have a material impact on the Company’s condensed consolidated financial statements.
Note
5 – Acquisitions
Acquisition
of Logicmark LLC
On
July 25, 2016, the Company completed the acquisition of LogicMark. The Company determined that as of July 25, 2016, it was
more likely than not that the gross profit targets as they relate to the contingent considerations would be achieved and any
fair value adjustment of the earn-out was due to time value of the payout.
On
July 25, 2016, in order to fund part of the acquisition purchase price of LogicMark, the Company and a group of
lenders, including ExWorks Capital Fund I, L.P. as agent for the lenders (collectively, the “Lenders”), entered
into a Loan and Security Agreement (the “Loan Agreement”), whereby the Lenders extended a revolving loan (the
“Revolving Loan”) to the Company in the principal amount of $15,000,000 (the “Debt Financing”). The
Company incurred $1,357,356 in deferred debt issue costs related to the revolving loan. At June 30, 2017 the unamortized
balance of those deferred debt issue costs was $87,179. The initial maturity date of the Revolving Loan was July 25, 2017,
and the Revolving Loan bears interest at a rate of 15% per annum.
The
Loan Agreement contains customary covenants, including an EBITDA requirement and a fixed change ratio, as defined in the agreement.
As of June 30, 2017, the Company was in compliance with such covenants.
The
Company has the ability to extend the Revolving Loan for two additional years at its sole discretion with no
subjective acceleration by the lender, provided the Company is not in default on the loan. The Company exercised the option
to extend the maturity date to July 25, 2018 and accordingly, the Company has classified the Revolving Loan as a non-current
liability as of June 30, 2017 and December 31, 2016.
On
September 23, 2016, the Company entered into a forbearance agreement with LogicMark Investment Partners, LLC in connection
with the LogicMark Note originally issued on July 22, 2016 in the amount of $2,500,000 which expired on September 22, 2016.
The Company formally requested that the lender extend the LogicMark Note on September 20, 2016. As discussed below, the
LogicMark Note was extended to July 15, 2017 pursuant to an amendment.
Under
the terms of the forbearance agreement, the LogicMark Sellers agreed to extend the maturity date of the LogicMark Note
and the Company agreed to pay to the LogicMark Sellers in immediately available funds: (i) $250,000 on September 23,
2016; (ii) $100,000 on October 24, 2016; and (iii) $1,150,000, plus all accrued and unpaid interest due under the LogicMark
Note on October 31, 2016. The Company also agreed to reduce the Escrow Amount (as defined in the Interest Purchase Agreement)
by a total of $500,000, and to make certain other changes to the definition of “Escrow Amount” in the Purchase
Agreement. The Company also agreed to make certain representations and warranties in respect of the LogicMark Seller’s
forbearance. During June 2017, the Company paid down $250,000 of the LogicMark Note with cash generated from operations. The
LogicMark Note originally was to mature on September 23, 2016 but was extended to July 15, 2017. In July 2017, the remaining balance of the LogicMark Note including the accrued interest owed was settled. See Note 9.
Acquisition
of Fit Pay
As
discussed in Note 1, the Company completed the “Merger” on May 23, 2017.
Pursuant
to the terms of the Merger Agreement, the aggregate purchase price paid for Fit Pay stock was: (i) 1,912,303 shares of common
stock which was equivalent to 19.96% of the outstanding shares of common stock of the Company (the
“Common Stock”); (ii) 2,000 shares of the Series C Non-Convertible Preferred Stock of the Company (the
“Series C Preferred Stock”); (iii) the payment of certain debts by the Company; and (iv) the payment of certain
unpaid expenses of the Fit Pay Sellers of $724,116 by the Company. In addition, the Company will be required to pay the Fit
Pay Sellers an earn-out payment equal to 12.5% of the gross revenue derived from Fit Pay’s technology for sixteen (16)
fiscal quarters commencing on October 1, 2017 and ending on December 31, 2021. To date, Fit Pay has had minimal revenue. The
operating results of Fit Pay have been included in the condensed consolidated financial statements from the effective date of
the acquisition, May 23, 2017.
In connection with the merger on May 23, 2017,
the Company recorded deferred tax liabilities of $1,797,476 as part of its preliminary purchase price allocation. As indicated below, the Company is in the process of completing its analysis of the fair value of the net assets acquired
and the consideration granted and therefore the deferred tax liabilities recorded are considered preliminary and subject to change.
Preliminary
Allocation
of Purchase Price of Fit Pay
The
Merger Agreement was accounted for under the acquisition method of accounting. The purchase price was preliminarily
allocated to the tangible and identifiable assets acquired and liabilities assumed of Fit Pay based upon their estimated fair
values. The excess purchase price over the fair value of the underlying net assets acquired was allocated to goodwill. The
Company is in the process of completing its analysis of the fair value of the net assets acquired and the consideration
granted through the use of an independent valuation firm and management’s preparation of estimates. Since the following
information is based on preliminary assessments made by management, the acquisition accounting for Fit Pay is subject to
final adjustment and it is possible that the final assessment of values may differ from the preliminary assessment. The
following table summarizes the preliminary assessment of the estimated fair values of the identifiable assets acquired and
liabilities assumed net of cash acquired, as of the date of acquisition of May 23, 2017.
Cash
|
|
$
|
10,889
|
|
Accounts receivable
|
|
|
91,810
|
|
Other current assets
|
|
|
77,095
|
|
Property and equipment
|
|
|
31,967
|
|
Goodwill
|
|
|
7
,954,260
|
|
Intangible
assets (See Note 4)
|
|
|
5,245,400
|
|
Assets acquired
|
|
|
13,411,421
|
|
|
|
|
|
|
Accounts payable
|
|
|
165,650
|
|
Accrued liabilities
|
|
|
964
,463
|
|
Customer deposits
|
|
|
286,948
|
|
Deferred taxes
|
|
|
1,797,476
|
|
Liabilities assumed
|
|
|
3,
214,537
|
|
|
|
|
|
|
Net assets
acquired
|
|
$
|
10,196,884
|
|
Goodwill arising from the transaction consists of the expected operational synergies upon combining the
entity and intangibles not qualifying for separate recognition.
In connection with the Fit Pay
transaction, the Company entered into an employment agreement with Michael Orlando, the former Chief Executive Officer of
Fit Pay.
Mr. Orlando will serve as the Chief
Operating Officer of the Company and President of the wholly-owned subsidiary, Fit Pay, Inc. The term of the employment
agreement is for one year and the employment agreement includes provisions for term extensions. In addition to Mr.
Orlando’s salary, the employment agreement also provides for all necessary and reasonable out-of-pocket expenses incurred in
the performance of his duties under the agreement, eligibility to participate in bonus or incentive compensation plans of the
Company and eligibility to receive equity awards as determined by the board of directors.
Pro
Forma Financial Information
The
following table summarizes the unaudited pro forma financial information assuming that the acquisitions of LogicMark and Fit Pay
occurred on January 1, 2016, and their respective results had been included in the Company’s financial results for the six
and three months ended June 30, 2017 and June 30, 2016. The pro forma combined amounts are based upon available information and
reflect a reasonable estimate of the effects of the LogicMark and Fit Pay acquisitions for the periods presented on the basis
set forth herein. The following unaudited pro forma combined financial information is presented for informational purposes only
and does not purport to represent what the financial position or results of operations would have been had the LogicMark and Fit
Pay acquisitions in fact occurred on the date assumed, nor is it necessarily indicative of the results that may be expected in
future periods.
|
|
Six Months
Ended
|
|
|
Three Months
Ended
|
|
|
Six Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
June
30, 2017
|
|
|
June
30, 2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Pro
forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
14,431,446
|
|
|
$
|
7,687,715
|
|
|
$
|
7,476,084
|
|
|
$
|
4,075,274
|
|
Net
Loss applicable to Common Stockholders
|
|
$
|
(3,760,809
|
)
|
|
$
|
(1,966,722
|
)
|
|
$
|
(11,800,016
|
)
|
|
$
|
(4,318,613
|
)
|
Net
Loss Per Share - Basic and Diluted applicable to Common Stockholders
|
|
$
|
(0.41
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(0.54
|
)
|
The
unaudited pro forma net loss attributable to Nxt-ID, Inc. has been calculated using actual historical information and
is adjusted for certain pro forma adjustments based on the assumption that the acquisitions of LogicMark and Fit Pay and
the application of fair value adjustments to intangible assets occurred on January 1, 2016. For the three and six months
ended June 30, 2017, the pro forma financial information excluded the Fit Pay acquisition-related expenses of $110,140
and $122,817, respectively, which are included in the actual reported results, as general and administrative expenses, but excluded
from the pro forma amounts above due to their nonrecurring nature. In addition, the pro forma adjustments for the three and
six months ended June 30, 2017 include the following adjustments, (a) amortization expense related to the acquired intangible
assets of $105,833 and $289,066, respectively; (b) interest expense of $77,416 and $211,406, respectively; and (c) dividends
related to the Series C preferred stock of $14,247 and $38,904, respectively.
For
the three and six months ended June 30, 2016, the pro forma financial information reflects the following adjustments, (a) the
exclusion of the acquisition-related expenses of $333,518; (b) amortization of the inventory fair value adjustment of $nil
and $945,212, respectively; (c) reduction in depreciation expense of $6,608 and $13,216, respectively; (d) amortization expense
related to the acquired intangible assets of $374,764 and $745,410, respectively; (e) interest expense including the amortization
of deferred debt issue costs of $1,441,506 and $2,867,617, respectively; and (f) dividends related to the Series B and Series
C preferred stock of $306,182 and $612,089, respectively.
Note
6 – Strategic Agreements with world ventures holdings
The Company is a party to a Master
Product Development Agreement with World Ventures Holdings, LLC, a related party.
During
the six and three months ended June 30, 2017, the Company recorded revenue of $6,289,281 and $3,581,245, respectively
related to WVH. At June 30, 2017, the Company’s accounts receivable balance included $1,797,941 due from
WVH.
Note
7 - Stockholders’ Equity
Series
A Preferred Stock
For
the six and three months ended June 30, 2017, the Company recorded Series A Preferred Stock dividends of $34,884 and
$3,489, respectively. During the six months ended June 30, 2017 holders of 100,899 shares of Series A Preferred Stock
converted $197,105 of Series A Preferred Stock and dividends into 83,876 shares of common stock. As of June 30, 2017 the
outstanding principal balance on the Series A Preferred Stock was $110,525.
Series
B Preferred Stock
For
the six and three months ended June 30, 2017, the Company recorded Series B Preferred Stock dividends of $562,500 and $281,250,
respectively. During the six months ended June 30, 2017 holders of 3,589,838 shares of Series B Preferred Stock converted $4,846,286
of Series B Preferred Stock, dividends and liquidated damages into 2,433,619 shares of common stock. As of June 30, 2017 the outstanding
principal balance on the Series B Preferred Stock was $910,162.
Series
C Preferred Stock
In May 2017, the Company authorized a new
Series C Preferred Stock. The terms of the Series C Preferred Stock are as follows:
Ranking
The
Series C Preferred Stock will rank junior to our Series A Preferred Stock, $0.0001 par value per share, and our Series
B Preferred, $0.0001 par value per share with respect to dividend rights and/or rights upon distributions, liquidation,
dissolution or winding up of the Company.
Dividends
on Series C Preferred Stock
Holders
of Series C Preferred Stock shall be entitled to receive from, from and after the first date of issuance of the Series C
Preferred Stock, cumulative dividends at a rate of 5% per annum on a compounded basis, which dividend amount shall be
guaranteed. Accrued and unpaid dividends shall be payable in cash. For the six and three months ended June 30, 2017,
the Company recorded Series C Preferred Stock dividends of
$10,685.
Redemption
of Series C Preferred Stock
The
Series C Preferred Stock may be redeemed by the Company solely at the Company’s option in cash at any time, in whole or
in part, upon payment of the stated value of the Series C Preferred Stock, and all related accrued but
unpaid dividends.
Fundamental
Change
If
a “fundamental change” occurs at any time while the Series C Preferred Stock is outstanding, the holders of shares
of Series C Preferred Stock then outstanding shall be immediately paid, out of the assets of the Company or the proceeds of such
fundamental change, as applicable, and legally available for distribution to its stockholders, an amount in cash equal to the
stated value of the Series C Preferred Stock, and all related accrued but unpaid dividends.
If
the legally available assets of the Company and the proceeds of such “fundamental change” are insufficient to pay
the all of the Holders of the Series C Preferred Stock, then the Holders of the Series C Preferred Stock shall share ratably in
any such distribution in proportion to the amount that they would have been entitled to. A fundamental change includes but is
not limited to any change in the ownership of at least 50% of the voting stock; liquidation or dissolution; or the Common Stock
ceases to be listed on the market upon which it currently trades.
Voting
Rights
The
holders of the Series C Preferred Stock shall be entitled to vote on any matter submitted to the stockholders of the Company for
a vote. One (1) share of Series C Preferred Stock shall carry the same voting rights as one (1) share of Common Stock.
Classification
The Series C Preferred Stock
was accounted for under Section 480-10-S99 - Distinguishing Liabilities from Equity (FASB Accounting Standards Codification
480) as amended by ASU 2009-04 - for Redeemable Equity Instruments (“ASU 2009-04”). Under ASU 2009-04, a
redeemable equity security is to be classified as temporary equity if it is conditionally redeemable upon the occurrence of
an event that is not solely within the control of the issuer. The Company’s financing is redeemable at the option of
the holder under the specified terms and conditions of such preferred stock however, the instrument was not redeemable as
of June 30, 2017. Therefore, the Company classified the Series C Preferred Stock as temporary equity in the condensed
consolidated balance sheet at June 30, 2017.
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, 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 737,992 at January 1, 2017.
During the six months ended June 30, 2017, the Company issued 85,908 shares
of common stock under the plan to five non-executive directors for serving on the Company’s board. The aggregate fair
value of the shares issued to the directors was $160,000. Also during the six months ended June 30, 2017, the Company issued
237,559 shares of Common Stock with an aggregate fair value of $400,000 to executive and certain non-executive employees
related to the Company’s 2016 management incentive plan. The vesting period for these restricted shares of common stock
is thirty-six months. During the six months ended June 30, 2017, the Company expensed $52,500 related to these restricted
stock awards. At June 30, 2017, a total of 507,414 shares of common stock have been issued from the Plan and 230,587
shares of common stock are available to be issued.
During
the six months ended June 30, 2017, the Company accrued $300,000 of discretionary management and employee bonus expense.
During
the six months ended June 30, 2017, the Company issued 55,754 fully-vested shares of common stock with a fair value of
$102,395 to non-employees for services rendered.
Note
8 - Commitments and Contingencies
Legal
Matters
From
time to time we 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 our 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 is a party to certain leases for office space and warehouse facilities, with monthly payments ranging from $1,750 to
$8,850, expiring on various dates through August 2020. The Company incurred rent expense of $93,503 and $64,879 for the six
months ended June 30, 2017 and June 30, 2016, respectively. Minimum future lease payments for non-cancelable operating leases
are as follows:
2017
|
|
$
|
100,424
|
|
2018
|
|
|
110,867
|
|
2019
|
|
|
112,015
|
|
2020
|
|
|
65,235
|
|
Total future
lease obligations
|
|
$
|
388,541
|
|
The
maturity of the Company’s debt over each of the next four years ending May 19, 2021 is as follows :
2017
|
|
$
|
523,969
|
|
2018
|
|
|
266,200
|
|
2019
|
|
|
212,961
|
|
2020
|
|
|
212,961
|
|
2021
|
|
|
159,719
|
|
Total debt
|
|
$
|
1,375,810
|
|
Note
9 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
July 3, 2017, the Company issued 11,500 shares of its common stock for the payment of services with a grant date fair value
of $22,540.
On
July 5, 2017, a purchaser of the Series A Preferred Stock converted an aggregate $141,644 of Series A Preferred Stock and
dividends into 75,343 shares of common stock.
Subsequent to these conversions, there is no longer any Series A
Preferred Stock outstanding as of July 5, 2017.
On
July 3, 2017 through July 14, 2017, purchasers of the Series B Preferred Stock converted an aggregate $1,265,581 of Series
B Preferred Stock, dividends and liquidated damages into 673,183 shares of common stock. Subsequent to these conversions,
there is no longer any Series B Preferred Stock
outstanding as of July 15, 2017.
On
July 13, 2017, the Company closed a registered direct offering of an aggregate of 2,170,000 shares of the Company’s common
stock, and pre-funded warrants to purchase 230,000 shares of common stock. The Company sold the shares
at a price of $1.43 per share and received $1.42 per pre-funded warrant. The Company received gross proceeds from the offering,
before deducting placement agent fees and other estimated offering expenses payable by the Company, of approximately $3,429,700.
On
July 13, 2017, the Company also closed on a concurrent private placement with the same investors for no additional
consideration, of warrants to purchase 1,800,000 shares of common stock.
In
order to consummate the registered direct offering and concurrent private placement, the Company was required to obtain consent
from the holders (the “November Holders”) of the Company’s (i) Amended and Restated Secured Subordinated Promissory
Notes, originally issued on July 25, 2016, and amended on November 29, 2016 (the “November Notes”), and (ii) certain
common stock purchase warrants (the “November Warrants”) that are initially exercisable on November 29, 2016. In consideration
of the November Holders providing such consent to the registered direct offering and concurrent private placement, the Company
and the November Holders agreed, as of July 11, 2017, to the following additional amendments to their respective November Notes,
November Warrants, and that certain Exchange Agreement, dated November 29, 2016 (the “Exchange Agreement”):
|
1.
|
The
conversion price of the November Notes was lowered from $3.00 to $2.00.
|
|
2.
|
The
exercise price of the November Warrants was lowered from $3.00 to $2.00.
|
|
3.
|
The
Company’s prohibition under the Exchange Agreement providing that for so long as the November Holders are holders of
the November Notes, the November Warrants, or the shares of Common Stock issuable thereunder, the Company may not issue shares
of our Common Stock at a price per share less than $3.00 per share, was lowered to $2.00 per share.
|
On July 19, 2017, the November Holders
purchased from LogicMark Investment Partners, LLC (“LogicMark Investment Partners”), the representative of
LogicMark, LLC, the outstanding balance of $594,403, including accrued and unpaid interest on the LogicMark Note.
In connection therewith, the Company, LogicMark Investment Partners and the November Holders entered into an Assignment and
Assumption Agreement, dated July 19, 2017, pursuant to which LogicMark Investment Partners assigned the LogicMark Note to the
November Holders. In addition, on July 19, 2017, the Company and the November Holders entered into a Securities Exchange
Agreement pursuant to which the Company exchanged the LogicMark Note held by the November Holders for (i) an aggregate
principal amount of $594,403 of secured subordinated convertible promissory notes of the Company (the “July 2017
Notes”) due in July 2018, and (ii) warrants exercisable into 297,202 shares of Common Stock (the “July 2017
Warrants”). The July 2017 Notes are convertible into shares of Common Stock at a conversion price of $2.00 per share
and the July 2017 Warrants are exercisable into shares of Common Stock with a five year term and an exercise price of $2.00
per share.