Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically, every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common
stock held by non-affiliates of the registrant, as of June 29, 2018, the last business day of the second fiscal quarter, was
approximately $36,641,740 based on a total number of shares of our common stock outstanding on that day of 24,511,662 and
a closing price of $1.72. Shares of common stock held by each director, each officer and each person who owns 10% or more of the
outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily conclusive.
The registrant had 26,441,188 shares of
its common stock outstanding as of March 29, 2019.
This Annual Report on Form 10-K (this “Report”)
contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking
statements may include words such as “anticipate,” “believe,” “estimate,” “intend,”
“could,” “should,” “would,” “may,” “seek,” “plan,” “might,”
“will,” “expect,” “predict,” “project,” “forecast,” “potential,”
“continue,” negatives thereof or similar expressions. These forward-looking statements are found at various places
throughout this Report and include information concerning possible or assumed future results of Nxt-ID, Inc.’s (“Nxt-ID”,
the “Company”, “our”, “us” or “we”) operations; business strategies; future cash
flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs,
business plans and future financial results; and any other statements that are not historical facts.
From time to time, forward-looking statements
also are included in our other periodic reports on Forms 10-Q and 8-K, in our press releases, in our presentations, on our website
and in other materials released to the public. Any or all of the forward-looking statements included in this Report
and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate.
These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and
are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause
actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these
risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to
a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning
other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this Report.
Except to the extent required by law,
we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future
events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
For discussion of factors that we believe
could cause our actual results to differ materially from expected and historical results, see “Item 1A - Risk Factors”
below.
PART I
Nxt-ID is a technology company engaged
in the development of proprietary products and solutions that serve multiple end markets, including the security, healthcare,
financial technology (“FinTech”) and the Internet of Things (“IoT”) markets. With extensive experience
in access control, biometric and behavior-metric identity verification, security and privacy, encryption and data protection,
payments, miniaturization, and sensor technologies, we develop and market groundbreaking solutions for payment, IoT, and healthcare
applications.
Two of Nxt-ID’s subsidiaries
operate in the mobile and IoT-related markets: LogicMark, LLC (“LogicMark”), a manufacturer and distributor of
non-monitored and monitored personal emergency response systems (“PERS”) that are sold through dealers,
distributors and the United States Department of Veterans Affairs (the “VA”), and Fit Pay, Inc. (“Fit
Pay”), a proprietary technology platform that delivers end-to-end solutions to device manufacturers for contactless
payment capabilities, credential management, authentication and other secure services within the IoT ecosystem, which we
acquired on May 23, 2017.
On September 21, 2018, the Company announced that it intends to separate its
payments, authentication and credential management business into an independent company and distribute shares of the newly
created company to its stockholders through the execution of a spin-off, which the Company believes will qualify as a tax
free distribution. Through these lines of business, Nxt-ID creates and markets technologies that are at the center of the
rapidly expanding IoT space. Our core competencies leverage emerging business opportunities with significant high-growth
potential, as well as revenue-producing lines of business with clear paths to expansion.
With technologies that validate and connect
users to devices, and devices to ecosystems, we are playing a central role in the expansion of IoT ecosystems, focusing on the
area of healthcare. Our strategic initiatives include: (1) monetizing our core technologies; (2) focusing on key
addressable market segments and verticals; and (3) executing clear go-market strategies for our products and services.
Healthcare
Overview
With respect to the healthcare market,
our business initiatives are driven by LogicMark, which serves a market that enables two-way communication, medical device connectivity
and patient data tracking of key vitals through sensors, biometrics, and security to make home health care a reality. There are
three (3) major trends driving this market: (1) an increased desire for connectivity; specifically, a greater desire for connected
devices by people over 60 years of age who now represent the fastest growing demographic for social media; (2) the growth of “TeleHealth”,
which is the means by which telecommunications technologies are meeting the increased need for health systems to better distribute
doctor care across a wider range of health facilities, making it easier to treat and diagnose patients; and (3) rising healthcare
costs – as health spending continues to outpace the economy, representing between 6% and 7% of the overall economy, the need
to reduce hospital readmissions, increase staffing efficiency and improve patient engagement remain the highest priorities. Together,
these trends have produced a large and growing market for us to serve. LogicMark has built a successful business on emergency communications
in healthcare. We have a strong business relationship with the VA today, serving veterans who suffer from chronic conditions that
often require emergency assistance. This business is steady and growing, producing record revenue in 2018. Our strategic plan calls
for expanding LogicMark’s business into other healthcare verticals as well as retail and enterprise channels in order to
better serve the expanding demand for connected and remote healthcare solutions.
Home healthcare, which includes health
monitoring and management using IoT and cloud-based processing, is an emerging area for LogicMark. The long-term trend toward
more home-based healthcare is a massive shift that is being driven by demographics (an aging population) and basic economics.
People also value autonomy and privacy which are important factors in determining which solutions will suit the market. Consumers
are beginning to enjoy the benefits of smart home technologies and online digital assistants. One of the promising applications
of our VoiceMatch™ technology is enabling secure commands for restricted medical access. This solution, when coupled with
Nxt-ID BioCloud™, combines biometrics with encryption and distributed access control.
Our Healthcare Monitoring Market
Opportunity
PERS devices are used to call for help
and medical care during an emergency. These devices are also used by a wide patient pool, as well as the general population, to
ensure safety and security when living or traveling alone. The global medical alert systems market caters to different end-users
across the healthcare industry, including individual users, hospitals and clinics, assisted living facilities and senior living
facilities. The growing demand for home healthcare devices is mainly driven by an aging population and rising healthcare costs
worldwide. We believe that this will spur the usage of medical alert systems across the globe, as they offer safety and medical
security while being affordable and accessible.
The
PERS market is divided into three (3) device segments: landline-based PERS, mobile PERS, and standalone devices. The global PERS
market is projected to grow at a compound annual growth rate (“CAGR”) of 5.83% to $8.4 billion in 2020, benefiting
from strong demographic tailwinds. According to IndustryARC,
North
America and Europe are the largest markets for PERS, accounting for approximately 40% and 37% of total sales, respectively, in
2020. According to IndustryARC, improvements in healthcare infrastructure and emerging economies will fuel growth and significantly
improve the relative market share of the Asia Pacific and the rest of world regions.
Our Health Care Products
LogicMark produces a range of products
within the PERS market and has differentiated itself by offering non-monitored products, which only require a one-time purchase
fee, instead of a recurring monthly contract. As a result, we believe LogicMark’s products are typically the most cost-effective
PERS option. LogicMark’s non-monitored solution offers a significant value proposition over monitored solutions.
The cost of ownership of a monitored solution,
which includes a monthly service fee, can be as much as $1,500 – $3,000 over a five-year period. This compares to a one-time
purchase of a LogicMark non-monitored device, which provides a similar level of security for a purchase price as low as one tenth
of that amount.
LogicMark offers both traditional (
i.e.
,
landline) and mPERS (
i.e.
, cell-based) options. Our non-monitored products are sold primarily through the VA and healthcare
distributors.
LogicMark offers monitored products that
are primarily sold by dealers and distributors for the monitored product channel. LogicMark sells its devices to the dealers and
distributors, who in turn offer the devices to consumers as part of their product/service offering. The service providers charge
consumers a monthly monitoring fee for the associated monitoring service. These products are monitored by a third-party central
station.
Our Health Care Competition
LogicMark
offers a wide variety of products, enabling it to cater to users with different levels of health and safety needs.
Compared to its competitors, we believe LogicMark’s PERS products offer enhanced functionality at the best
value due to the one-time purchase for non-monitored solutions.
The chart below summarizes LogicMark’s
product offering versus those of its competitors:
Our Health Care Business Strategy
Through LogicMark, we intend to expand
distribution by using larger distributors who can leverage the consumer value proposition of offering a one-time device purchase
as opposed to a leased monthly solution. We also intend to apply our technology to the next generation of PERS devices that will
have greater functionality, innovative design and clinical monitoring capability. We believe that there is further potential for
expansion in the domestic and international retail and international markets, and we intend to take advantage of this through
a new product offering, Notify911, which is a non-monitored device developed for direct-to-consumer sales through retail channels
and direct marketing initiatives. We are also seeking to leverage our PERS experience to develop new offerings in the home healthcare
monitoring market.
Overall, our healthcare division, through
LogicMark, is positioned to take advantage of favorable market dynamics, a stable revenue-producing customer base, a differentiated
product line, a robust new product development pipeline and compelling growth opportunities.
Payments and Financial Technology
Overview
On September 21, 2018, we announced that
our board of directors approved a plan to separate our payments and financial technology business from its healthcare business
into an independent publicly traded company. We will distribute shares of the newly created company to our stockholders through
the execution of a spin-off. As a result, we reclassified our financial technology business to discontinued operations for all
periods reported. Our payment and financial technology business is comprised of our Fit Pay subsidiary and the intellectual property
developed by Nxt-ID, Inc., including the Flye Smartcard and the Wocket.
We
conduct our payments business through Fit Pay, Inc., a wholly owned subsidiary of Nxt-ID, which was acquired in May 2017. Fit Pay’s
core technology is a proprietary platform that enables contactless payment capabilities, allowing its customers, which include
manufacturers of “smart devices,” to add payment capabilities to their products. Fit Pay connects its customers to
leading payment card networks, including Visa, Mastercard, Maestro and Discover, and to credit card issuing banks, globally.
It
successfully commercialized its third-party token service provider platform with the launch of the Garmin Pay™, which is
powered by Fit Pay’s
platform. Fit Pay’s technology and tokenization service
enables the contactless payment
feature that is included in smartwatches manufactured by Garmin International, Inc. (“Garmin”).
The payment feature, which went live in the fall of 2017, is now included in 11 of Garmin’s smartwatches
.
In January 2019, Fit Pay extended its contactless payment functionality to another major brand, announcing that its Token Requester
Management Platform (“TRM Platform”) is also enabling SwatchPAY! on four (4) new watches announced by Swatch AG.
In addition, the geographic and issuer
footprint for Garmin Pay™ is expanding and now is a network of more than 280 issuing banks in 34 countries with additions
being made regularly. This represents a significant increase from year-end 2017, at which time the network included 60 issuing
banks in 8 countries. As a part of this growth, Fit Pay announced recent agreements with Chase, Westpac, Discover and Mastercard’s
Maestro network in Europe. This expansion of the Garmin Pay™ network increases the overall revenue opportunity of this flagship
customer and establishes banking and network relationships that may be leveraged for future payment solution offerings.
Fit Pay’s TRM Platform offers an
opportunity for a whole new range of devices to become payment-enabled, without the manufacturer of such devices having to invest
in and develop such capabilities. Fit Pay is continuously developing new products to leverage its TRM Platform and expanding its
network of payment card issuers and issuing banks. Fit Pay also develops proprietary payment devices that it expects to offer
through business-to-business and direct-to-consumer channels. These new products will leverage the TRM Platform and expand Fit
Pay’s reach to new customers and emerging markets, such as cryptocurrency and other connected devices and products, generally
referred to as the Internet of Things (“IoT”).
Fit Pay’s initial consumer product
offering is a platform extension and contactless payment device called Flip™, which enables Bitcoin holders to make contactless
payment transactions at millions of retail locations with value exchanged from their cryptocurrency. Fit Pay believes the product
represents an opportunity to bring to market a unique offering in an emerging market segment.
It was also announced in October 2018
that Fit Pay is a technology partner for Visa’s Token Service for credential-on-file (“COF”) token requestors.
Through this program, Fit Pay will be able to tokenize COF digital payments on behalf of merchant and payment ecosystem clients,
greatly expanding the addressable market for its platform services. Fit Pay leverages the EMVCo Payment Tokenization Standard
to “tokenize” or replace sensitive personal information, such as payment card numbers and expiration dates, with a
unique digital identifier or “token.” Tokenizing COF records offers increased security for consumers and merchants
by never exposing personal information and therefore potentially lowering fraud related expenses to payment card networks and
issuing banks.
In addition to enhancing security, Fit
Pay’s technology will allow financial institutions to seamlessly update expired or compromised payment credentials at one
point of reference, thereby eliminating a significant point of friction for consumers and merchants. Fit Pay believes these additional
services will be buoyed by the overall growth in digital payments.
Together, Fit Pay believes these opportunities
position its emerging payment and financial technology business for growth as it monetizes its core TRM Platform technology and
expands its products and services to new markets and customers.
As an early and established entrant into
the contactless and digital payments market, Fit Pay believes that it is well-positioned to take advantage of both the growth
of payment-enabled devices and the consumer demand for new methods of payments.
Strategic Product and Service Offerings
Fit Pay offers a range of technology platform
services and products. These include:
Token
Requestor Manager Platform (TRM Platform) Integrations
With Fit Pay’s TRM Platform, manufacturers
can add contactless payment capabilities to their products with very little start up time, no investment in software development,
and instant access to the leading card networks.
The TRM Platform provides IoT and wearable
devices with contactless payment capabilities and full digital wallet functionality. It enables consumers to simply tap and pay
at near field communication (“NFC”) enabled point-of-sale (“POS”) terminals or ATMs using an existing
credit, debit or prepaid card account. The TRM Platform uses tokenization, a payment security technology that replaces cardholders’
account information with a unique digital identifier (a “token”), to transact highly secure contactless payments and
authentication services. Fit Pay leverages embedded secure element chip technology within devices to offer a payment solution
that is very power and memory efficient. This frees devices from needing to be tethered to a host device or connected to the Internet
to transact payments, creating a convenient and completely frictionless payment experience for consumers.
Fit Pay serves as the primary connection
point between card networks, banks, merchants and the wearable user. It has built a payment ecosystem that includes device manufacturers,
the Visa, Mastercard, Maestro, Discover card networks (with additional networks expected to be added), and more than 280 issuing
banks in 34 countries, including the largest markets worldwide. Issuing banks accepting payments from devices connected to the
TRM Platform include Bank of America, Capital One, U.S. Bank and Wells Fargo in the United States, and BonusCard, Cornérbank,
ANZ and NAB (National Australia Bank), among others, elsewhere.
Ecommerce and Credential-on-file
Tokenization
Fit Pay’s real-time ecommerce tokenization
allows retailers to offer their customers fast, secure transactions—no matter how they shop–removing card data from
the payment process and reducing risk. By tokenizing card-on-file transactions for everything from utility bills to gym memberships,
card data can be removed from merchant databases, reducing risk and giving consumers more control.
Connected Devices
Fit Pay designs, develops and produces
connected, proprietary payment and credential management devices that generate or have the potential to generate revenue with:
monthly “subscription” fees, reload, interchange, and exchange fees, as well as revenue generated from the sale of
the device itself. These devices include:
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●
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Full-function and passive
contactless payment devices
|
|
●
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White-labeled connected cards
with cryptocurrency and file vaults
|
|
●
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Contactless cryptocurrency
payments
|
Fit Pay offers these devices through strategic
partnership and distribution channels. Prototypes of certain offerings are undergoing testing and the network devices certification
process. It anticipates commercial distribution through selected partners will begin in 2019.
Financial Services
Fit Pay offers general purpose reloadable
(or “GPR”) prepaid account capabilities on devices connected to the TRM Platform as an added feature of its core TRM
Platform as well as the basis for stand-alone product offerings. The GPR program provides the opportunity to give consumers with
contactless payment-enabled devices the convenience of storing funds directly on their devices. The GPR program provides consumers
with the ease and security of contactless payments. The GPR accounts will be available to device OEMs that integrate their
products with the TRM Platform. The program allows consumers to load their Fit Pay-enabled IoT or wearable device with a prepaid
value for contactless purchases. A digital wallet allows the user to re-load the account, set top-off thresholds and manage account
settings. As a part of the GPR program, Fit Pay earns certain recurring account-based fees for the use, management and maintenance
of the accounts.
Cryptocurrency, Blockchain Payments
and Loyalty
Fit Pay is extending its platform to integrate
with the latest financial technology, including cryptocurrency, blockchain payments and loyalty programs.
In 2018, Fit Pay announced Flip™,
a new contactless payment device that will enable cryptocurrency holders to use the value of their currency to make purchases
at millions of retail locations. The new device leverages an expansion of the TRM Platform to connect cryptocurrencies to the
payment ecosystem. Flip™ uses value exchanged from Bitcoin to make traditional payment transactions.
Flip™ is NFC-enabled, allowing it
to transact payments at any retail point of sale location that accepts contactless payments. Flip™ will store a preloaded
amount of U.S. dollars that are exchanged from a user’s existing cryptocurrency account. It includes a digital wallet that
allows users to set how much value they would like their Flip™ to hold and when they would like it to reload, and to suspend
the account should the device become lost or stolen. Flip™ accepts value exchanged from Bitcoin and will potentially expand
to other cryptocurrencies in the future.
Credential Provisioning and
Management
Fit Pay’s TRM Platform is built
to securely authenticate and provision any credential, making it ideal for digital hotel room keys, transit, ticketing, access,
and other use cases. Fit Pay believes that each of these markets represents an area of potential future growth.
Competition
Fit Pay operates in the digital payments
industry, and therefore its products compete on the basis of ease-of-use, security and functionality. Its primary offering includes
a tokenization platform that enable secure payments and other authenticated digital transactions. Fit Pay’s current and
future target markets and customers include device manufacturers, merchants, financial institutions, businesses with large membership
or user communities and consumers.
Other companies competing to offer similar
or related services to these markets include, NXP Semiconductors N.V., Digiseq, Giesecke+Devrient Mobile Security (with which
Fit Pay also partners), Gemalto NV, Rambus, Inc., Fidesmo AB, IDEMIA, and Sequent Software Inc. While the solution offerings,
technology, market focus, and level of commercialization and product readiness varies among these companies, all can be considered
among the current and future competitive set for Fit Pay’s services. New entrants and companies with comparable technological
capabilities not listed here may also compete with Fit Pay.
The digital wallet marketplace in which
Fit Pay operates also includes Google Wallet, ApplePay, SamsungPay and Fitbit Pay. While these services may be considered indirect
competitors, Fit Pay offers its services on a “white-label” basis, which means it can be deployed across any operating
platform or device. The digital wallets of the other “pays” are intended primarily for their proprietary operating
systems and products, and are generally not offered to other OEMs or device manufacturers. As such, they generally do not directly
compete to serve Fit Pay’s primary target customers and markets (i.e. other device manufacturers).
In addition, Fit Pay is currently one
of the few platform providers that is certified by the major card networks (Visa, Mastercard, Discover and Maestro) to provide
tokenization services, particularly within an embedded secure element chipset, which many wearables and IoT devices utilize because
it requires less power and memory capacity.
As Fit Pay expands its offerings to include
ecommerce/credential-on-file tokenization and other services that leverage its TRM Platform, the competitive landscape will also
expand, and could include direct competition from the companies included above, new entrants, or other companies not currently
identified as potential competitors.
Fit Pay believes that its payment products
have certain competitive advantages. The existing contactless payment companies’ propriety capabilities are not
available to other device manufacturers. Its TRM Platform creates an opportunity for a whole new range of devices to be payment-enabled
by significantly reducing the cost and time to market. While other companies are seeking to build a similar white-labeled solution,
Fit Pay believes that the extent of its existing relationships and range of added services it offers provide it with an advantage
in the market.
Fit Pay’s payment solutions offer
several distinctive features, the primary of which is that its contactless payment solutions remove friction from the consumer
payment experience by reducing user interaction. Its solutions also enhance security by tokenizing customer payment information,
therefore reducing the probability for payment card fraud, which improves the consumer experience and reduces costs for payment
card networks and issuing banks. Fit Pay’s technology has been developed to work without requiring an internet connection
at the point of sale and also without requiring a secondary device, such as a mobile phone, to be present. Fit Pay’s solutions
are extendible to any operating system or device.
Furthermore, Fit Pay believes that the
following factors add to its competitive strengths and create a barrier to entry in the payments solutions space: (1) it is an
independent platform (i.e. not owned by, developed by, or proprietary to a single OEM) which has completed secure element tokenization
integrations with major card networks and offers a solution that is currently commercially live on 15 devices from two major brands;
(2) it has established relationships with payment networks and issuing banks, globally; establishing such relationships is complex
and deploying technology through these networks requires a level of experience that makes it difficult for new entrants and OEMs
to develop the capability themselves; (3) it maintains the security keys for contactless devices, which limits the ability of its
customers to change providers without a major service disruption; (4) it offers a comprehensive, end-to-end solution as a single
source for all of its cloud-based and IoT applications, including full-featured APIs (application programming interfaces) and SDKs
(software development kits) to simplify implementation; and (5) it offers a scalable platform with direct access to the major card
network and issuing banks.
Strategy
Fit Pay’s primary strategy is to
leverage its proprietary technology, competitive strengths and established relationships with payment networks and payment card
issuing banks to expand its end-to-end, secure contactless payment solutions across various industries. Fit Pay’s position
as an independent tokenization platform provider, with its comprehensive and proprietary platform, positions it to serve the rapidly
expanding wearable and IoT markets and to expand its addressable market to include large and mid-sized ecommerce companies and
other companies conducting credential-on-file transactions. The complex ecosystem needed to support full-function payment capabilities
creates a barrier to entry for competitors and manufacturers that may consider attempting to develop the capability on their own
and it also offers continuity for its existing customer base. It expects to achieve its goals by:
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●
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scaling
its payment platform by adding more customers and forms of payment, such as prepaid and
reloadable payment card accounts, and tokenizing and securing online transactions;
|
|
●
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building
new revenue streams by adding additional OEM customers and devices and by bringing its
proprietary reloadable payment card program to new markets;
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●
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developing
its own proprietary payment devices for business-to-business or business-to-consumer
channels; and
|
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●
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integrating
its TRM Platform with additional conditional access ecosystems such as transit, hotels,
and building access systems as well as adding new capabilities to its TRM Platform, such
as cryptocurrency and blockchain payments.
|
Our Intellectual Property
Our ability to compete effectively depends
to a significant extent on our ability to protect our proprietary information. We currently rely and will continue to rely primarily
on patents and trade secret laws and confidentiality procedures to protect our intellectual property rights. We have filed the
following 39 patent applications, eleven of which have been awarded to date:
METHOD FOR REPLACING TRADITIONAL PAYMENT
AND IDENTITY MANAGEMENT SYSTEMS AND COMPONENTS TO PROVIDE ADDITIONAL SECURITY AND A SYSTEM IMPLEMENTING SAID METHOD
Filed August 31, 2016
Application Number 15/252,468
METHOD FOR REPLACING TRADITIONAL PAYMENT AND IDENTITY MANAGEMENT
SYSTEMS AND COMPONENTS TO PROVIDE ADDITIONAL SECURITY AND A SYSTEM IMPLEMENTING SAID METHOD
Filed June 11, 2018
Application Number 16/005598
THE UN-PASSWORD™: RISK AWARE END-TO-END
MULTI-FACTOR AUTHENTICATION VIA DYNAMIC PAIRING
Patent issued August 2, 2016
Patent Number 9,407,619
UNIVERSAL AUTHENTICATION AND DATA EXCHANGE METHOD, SYSTEM AND
SERVICE
Filed October 26, 2018
Application Number 16/172,667
METHOD TO LOCALLY VALIDATE IDENTITY WITHOUT
PUTTING PRIVACY AT RISK
Application filed September 1, 2015
Application Number 14/842,252
This application has been allowed and
the patent will issue upon payment of the issue fees.
DISTRIBUTED METHOD AND SYSTEM TO IMPROVE
COLLABORATIVE SERVICES ACROSS MULTIPLE DEVICES
Patent issued May 22, 2018
Patent Number 9979724
DISTRIBUTED METHOD AND SYSTEM TO IMPROVE COLLABORATIVE SERVICES
ACROSS MULTIPLE DEVICES
Filed May 21, 2018
Application No. 15/985,483
SOUND-DIRECTED OR BEHAVIOR-DIRECTED METHOD AND SYSTEM FOR AUTHENTICATING
A USER AND EXECUTING A TRANSACTION
Application filed February 10, 2016
Application Number 15/040,984
SYSTEM AND METHOD FOR LOW-POWER CLOSE-PROXIMITY
COMMUNICATIONS AND ENERGY TRANSFER USING A MINIATURE MULTI-PURPOSE ANTENNA
Application filed April 4, 2016
Application Number 15/089,826
SYSTEM AND METHOD FOR LOW-POWER CLOSE-PROXIMITY
COMMUNICATIONS AND ENERGY TRANSFER USING A MINIATURE MULTI-PURPOSE ANTENNA
Application filed November 16, 2016
Application Number 15/353,018
MULTI-INSTANCE SHARED AUTHENTICATION (MISA)
METHOD AND SYSTEM PRIOR TO DATA ACCESS
Application filed June 23, 2016
Application Number 15/191,466
BEHAVIORAL-DIRECTED AUTHENTICATION METHOD
AND SYSTEM
Application filed July 5, 2016
Application Number 15/202,515
PERSONALIZED TOKENIZATION SYSTEM AND METHOD
Application filed July 14, 2016
Application Number 15/210,728
METHODS AND SYSTEMS RELATED TO MULTI-FACTOR,
MULTI-DIMENSIONAL, MATHEMATICAL HIDDEN AND MOTION SECURITY PINS
Filed August 1, 2016
Application Number 15/224,998
ELECTRONIC CRYPTO-CURRENCY MANAGEMENT
METHOD AND SYSTEM
Filed August 1, 2016
Application Number 15/225,780
SYSTEMS AND DEVICES FOR WIRELESS CHARGING
OF A POWERED TRANSACTION CARD AND EMBEDDING ELECTRONICS IN A WEARABLE ACCESSORY
Filed September 2, 2015
Application Number 14/843,925
COMPONENTS FOR ENHANCING OR AUGMENTING
WEARABLE ACCESSORIES BY ADDING ELECTRONICS THERETO
Filed September 2, 2015
Application Number 14/843,930
LOW BANDWIDTH CRYPTO-CURRENCY TRANSACTION
EXECUTION AND SYNCHRONIZATION METHOD AND SYSTEM
Filed September 7, 2016
Application Number 15/259,023
METHOD AND SYSTEM TO ORGANIZE AND MANAGE
TRANSACTIONS
Filed December 2, 2016
Application Number 15/368,546
THE UN-PASSWORD™: RISK AWARE END-TO-END
MULTI-FACTOR AUTHENTICATION VIA DYNAMIC PAIRING
Patent Issued July 3, 2018
Patent Number 10015154
The Un-Password: Risk
Aware End-to-end Multi-factor Authentication via Dynamic PairinG
Filed July 2, 2018
Application Number 16/025,992
SYSTEM AND METHOD TO PERSONALIZE PRODUCTS
AND SERVICES
Filed July 15, 2016
Application number 15/212,184
SYSTEM AND METHOD TO PERSONALIZE PRODUCTS
AND SERVICES
Filed September 6, 2016
Application number 15/257,101
ACCORDION ANTENNA STRUCTURE
Patent Issued September 11, 2018
Patent Number 10074888
ANTENNA WITH MICROPROCESSOR CONTROL AND DRIVE
Filed September 10, 2018
Application Number 16/127,125
ACCORDION ANTENNA STRUCTURE WITH SIMPLIFIED CONSTRUCTION
Filed May 6, 2018
Application Number 15/972,217
SYSTEM AND METHOD TO AUTHENTICATE ELECTRONICS
USING ELECTRONIC-METRICS
Filed July 5, 2016
Application Number 15/202,553
SYSTEM AND METHOD TO DETERMINE USER PREFERENCES
Filed July 15, 2016
Application number 15/212,163
PREFERENCES DRIVEN ADVERTISING SYSTEMS
AND METHODS
Filed July 15, 2016
Application number 15/212,161
AN EVENT DETECTOR FOR ISSUING A NOTIFICATION RESPONSIVE TO
OCCURRENCE OF AN EVENT
Filed July 27, 2018
Application Number 16/048,181
METHOD AND SYSTEM TO IMPROVE ACCURACY OF FALL DETECTION USING
MULTI-SENSOR FUSION
Filed December 17, 2018
Application Number 16/222,359
A SOCIAL NETWORK FOR RESPONDING TO EVENT-DRIVEN NOTIFICATIONS
Filed July 27, 2018
Application Number 16/048,187
WIRELESS, CENTRALIZED EMERGENCY SERVICES
SYSTEM
Patent Issued September 25, 2012
Patent Number 8,275,346
VOICE-EXTENDING EMERGENCY RESPONSE SYSTEM
Patent Issued February 21, 2012
Patent Number 8,121,588
LIST-BASED EMERGENCY CALLING DEVICE
Patent Issued February 5, 2013
Patent Number 8,369,821
ALARM SIGNALING DEVICE AND ALARM SYSTEM
Patent Issued December 25, 2007
Patent Number 7,312,709
FALL DETECTION SYSTEM HAVING A FLOOR HEIGHT
THRESHOLD AND RESIDENT HEIGHT DETECTION DEVICE
Patent Issued February 22, 2011
Patent Number 7,893,844
APPARATUS AND METHOD FOR LOCATING AND
UPDATING LOW-POWER WIRELESS COMMUNICATION DEVICES
Patent Issued October 18, 2016
Patent Number 9472088
APPARATUS AND METHOD FOR LOCATING AND
UPDATING LOW-POWER WIRELESS COMMUNICATION DEVICES
Patent Issued February 20, 2018
Patent Number 9900737
We enter into confidentiality agreements
with our consultants and key employees, and maintain control over access to and distribution of our technology, software and other
proprietary information. The steps that we have taken to protect our technology may be inadequate to prevent others from using
what we regard as our technology to compete with us.
We do not generally conduct exhaustive
patent searches to determine whether the technology used in our products infringes on the patents that are held by third parties.
In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.
We may face claims by third parties that
our products or technology infringe their patents or other intellectual property rights in the future. Any claim of infringement
could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention
of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial
damages. In addition, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue
to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be
successful, which would prevent us from selling our products, and in any case, could substantially increase our costs and have
a material adverse effect on our business, financial condition and results of operations.
Corporate Information
History
We were incorporated in the state of Delaware
on February 8, 2012. We are engaged in the development of proprietary products, services and solutions for security that serve
multiple end markets, including the security, healthcare, finance and IoT markets.
On June 25, 2012, we acquired 100% of the
membership interests in 3D-ID LLC (“3D-ID”), a limited liability company that we formed in Florida in February 2011
and that was previously owned by the Company’s founders. By acquiring 3D-ID, we gained the rights to a portfolio of patented
technology in the field of three-dimensional facial recognition and imaging including 3D facial recognition products for access
control, as well as the law enforcement and travel and immigration sectors. 3D-ID is an early stage company engaged in the design,
research and development, integration, analysis, modeling, system networking, sales and support of intelligent surveillance, three-dimensional
facial recognition and three-dimensional imaging devices and systems primarily for identification and access control in the security
industries. As our acquisition of 3D-ID was a transaction between entities under common control in accordance with Accounting Standards
Codification (“ASC”) 805, “Business Combinations”, we recognized the net assets of 3D-ID at their carrying
amounts in our accounts on the date that 3D-ID was organized, which was February 14, 2011.
On July 25, 2016, we 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 “Interest Purchase Agreement”). Pursuant to the Interest Purchase Agreement, we acquired all of the
membership interests of LogicMark from the LogicMark Sellers for (i) $17.5 million in cash consideration, (ii) $2.5 million
in a secured promissory note (the “LogicMark Note”) issued to LogicMark Investment Partners, LLC, as
representative of the LogicMark Sellers (the “LogicMark Representative”), (iii) 78,740 shares of our common
stock, which were issued upon signing of the Interest Purchase Agreement (the “LogicMark Shares”), and (iv)
warrants (the “LogicMark Warrants”) to purchase an aggregate of 157,480 shares of common stock (the
“LogicMark Warrant Shares”) for no additional consideration. Such warrants were exercised on July 27, 2016.
In addition, we were required to pay the LogicMark Sellers earn-out payments of (i) up to $1,500,000 for calendar year 2016
and (ii) up to $5,000,000 for calendar year 2017 if LogicMark met certain gross profit targets set forth in the Interest
Purchase Agreement. The earn-out payment related to 2016 and the remaining balance owed on the LogicMark Note including
accrued interest were both paid in July 2017. Based on LogicMark’s operating results for the year ended December 31,
2017, the 2017 earnout amount owed by the Company was $3,156,088. As a result, we reduced the amount of contingent
consideration due to the LogicMark Sellers by $1,843,912 in 2017. We paid the 2017 earnout amount of $3,156,088 to the LogicMark
Sellers in the second quarter of 2018.
On
May 23, 2017, we 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 “Fit Pay Sellers”). In connection with 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.
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, has a proprietary technology platform that delivers payment,
credential management, authentication and other secure services to the IoT ecosystem. The platform uses tokenization, a payment
security technology that replaces cardholders’ account information with a unique digital identifier, to transact highly
secure contactless payment and authentication services.
On
September 21, 2018, we announced that our board of directors approved a plan to separate the Company’s financial technology
business from its healthcare business into a new, independent publicly traded company. The Company will distribute shares of the
newly created company to the Company’s 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 is comprised of its Fit Pay subsidiary and the intellectual property developed by Nxt-ID, Inc., including the Flye Smartcard
and the Wocket.
In connection with the Fit Pay acquisition,
Mr. Orlando became our Chief Operating Officer, as well as the President of Fit Pay, effective as of May 23, 2017.
Other
Our principal executive offices are located
at 1627 U.S. 1, Unit 206, Sebastian, FL 32958, and our telephone number is (203) 266-2103. Our website address is
www.nxt-id.com
.
The information contained therein or connected thereto shall not be deemed to be incorporated into this Report. The information
on our website is not part of this Report.
As of December 31, 2018, we are no longer
an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Employees
As of December 31, 2018, we had a total
of 34 full-time employees, comprising 3 employees in product engineering, 6 employees in finance and administration, 14 employees
in sales and customer service and 11 employees in product fulfillment. None of our employees are represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Our future success
depends on our continuing ability to attract and retain highly qualified engineers, graphic designers, computer scientists, sales
and marketing and senior management personnel. In addition, we have independent contractors whose services we are using on an
as-needed basis to assist with the engineering and design of our products.
Our business, financial condition and
operating results are subject to a number of risk factors, both those that are known to us and identified below and others that
may arise from time to time. These risk factors could cause our actual results to differ materially from those suggested by forward-looking
statements in this Report and elsewhere, and may adversely affect our business, financial condition or operating results. If any
of these risk factors should occur, moreover, the trading price of our securities could decline, and investors in our securities
could lose all or part of their investment in our securities. These risk factors should be carefully considered in evaluating
our prospects.
Risks Relating to our Business
We are uncertain of our ability
to generate sufficient revenue and profitability in the future.
We continue to develop and refine our
business model, but we can provide no assurance that we will be able to generate a sufficient amount of revenue, from our business
in order to achieve profitability. It is not possible for us to predict at this time the potential success of our business.
The revenue and income potential of our proposed business and operations are currently unknown. If we cannot continue as a viable
entity, you may lose some or all of your investment in our Company.
The Company incurred a net loss from
continuing operations of $1,328,616 for the year ended December 31, 2018. As of December 31, 2018, the Company had cash
and stockholders’ equity of $425,189 and $14,736,758, respectively. At December 31, 2018, the Company had a working
capital deficiency (excluding discontinued operations) of $1,603,466. We cannot provide any assurance that we will be able to
raise additional cash from equity financings, secure debt financing, and/or generate revenue from the sales of our products.
If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and
take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet
our obligations.
We and the businesses we have recently
acquired or propose to acquire have limited operating histories and we cannot offer any assurance as to our future financial results,
and you should not rely on the historical financial date included in this prospectus as an indicator of our future financial performance.
You may lose your entire investment.
We and the businesses we have recently
acquired or propose to acquire have limited operating histories upon which to base any assumption as to the likelihood that we
will be successful in implementing our business plan, and we may not be able to generate significant revenues or achieve profitability.
You should consider our business and prospects in light of the risks and difficulties we face with our limited operating history
and should not rely on our past results or the past results of any of such businesses as an indication of our future performance.
There is no assurance that the growth rate we or they have experienced to date will continue. Even if we generate future revenues
sufficient to expand operations, increased infrastructure costs and cost of goods sold and marketing expenses could impair or
prevent us from generating profitable returns. We recognize that if we are unable to generate significant revenues from our
business development, we will not be able to earn profits or potentially continue operations. If we are unsuccessful in addressing
these risks, our business will most likely fail.
Significant disruptions
of information technology systems or security breaches could adversely affect our business.
We are increasingly
dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary course of business,
we collect, store and transmit large amounts of confidential information (including, among other things, trade secrets or other
intellectual property, proprietary business information and personal information). It is critical that we do so in a secure manner
to maintain the confidentiality and integrity of such confidential information. We also have outsourced elements of our operations
to third parties, and as a result we manage a number of third-party vendors who may or could have access to our confidential information.
Attacks on information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity,
and they are being conducted by increasingly sophisticated and organized groups and individuals with a wide range of motives and
expertise. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract,
and the large amounts of confidential information stored on those systems, make such systems vulnerable to service interruptions
or to security breaches from inadvertent or intentional actions by our employees, third-party vendors, and/or business partners,
or from cyber-attacks by malicious third parties. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service
attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability
of information.
Significant disruptions
of our information technology systems, or those of our third-party vendors, or security breaches could adversely affect our business
operations and/or result in the loss, misappropriation and/or unauthorized access, use or disclosure of, or the prevention of access
to, confidential information, including, among other things, trade secrets or other intellectual property, proprietary business
information and personal information, and could result in financial, legal, business and reputational harm to us.
Any failure or perceived
failure by us or any third-party collaborators, service providers, contractors or consultants to comply with our privacy, confidentiality,
data security or similar obligations to third parties, or any data security incidents or other security breaches that result in
the unauthorized access, release or transfer of sensitive information, including personally identifiable information, may result
in governmental investigations, enforcement actions, regulatory fines, litigation or public statements against us, could cause
third parties to lose trust in us or could result in claims by third parties asserting that we have breached our privacy, confidentiality,
data security or similar obligations, any of which could have a material adverse effect on our reputation, business, financial
condition or results of operations. Moreover, data security incidents and other security breaches can be difficult to detect, and
any delay in identifying them may lead to increased harm. While we have implemented data security measures intended to protect
our information technology systems and infrastructure, there can be no assurance that such measures will successfully prevent service
interruptions or data security incidents.
If we fail to keep pace with changing
industry technology and consumer preferences, we will be at a competitive disadvantage.
The industry segments in which we are
operating are evolving rapidly. They are characterized by changing technology, budding industry standards, frequent new and enhanced
product introductions, rapidly changing end-user/consumer preferences and product obsolescence. In order to continue to compete
effectively in these markets, we need to respond quickly to technological changes and to understand their impact on our customers’
preferences. It may take significant time and resources to respond to these technological changes. If we fail to keep pace with
these changes, our business may suffer. Moreover, developments by others may render our technologies and intended products noncompetitive
or obsolete, or we may be unable to keep pace with technological developments or other market factors. If any of our competitors
implement new technologies before we are able to implement them, those competitors may be able to provide more effective products
than ours. Any delay or failure in the introduction of new or enhanced products could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, our inability to keep pace with changing industry technology and consumer
preferences may cause our inventory to become obsolete at a rate faster than anticipated, which may result in our taking goodwill
impairment charges in past or future acquisitions that negatively impact our results of operations.
We have a limited operating history
upon which you can gauge our ability to obtain profitability.
We have a limited operating history and
our business and prospects must be considered in light of the risks and uncertainties to which emerging growth companies are exposed.
We cannot provide assurances that our business strategy will be successful or that we will successfully address those risks and
the risks described herein. Most importantly, if we are unable to secure future capital, we may be unable to continue our operations.
We may incur losses on a quarterly or annual basis for a number of reasons, some of which may be outside our control.
If we cannot obtain additional capital
required to finance our research and development efforts, our business may suffer and you may lose the value of your investment.
We
may require additional funds to further execute our business plan and expand our business. If we are unable to obtain additional
capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. If this
occurs, you may lose part or all of your investment. We will have ongoing capital needs as we expand our business. If we
raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will
be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that
have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include
restrictive financial and operating covenants that would limit our ability to compete and expand. There can be no assurance that
we will be able to obtain the additional financing we may need to fund our business, or that such financing will be available
on terms acceptable to us.
We face intense competition in our
market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain
or improve our competitive position.
A number of other companies engage in
the business of developing applications for facial recognition for access control. The market for biometric security products
is intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants.
Our current competitors include both emerging or developmental stage companies, such as ourselves, as well as larger companies.
Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such
as:
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greater name recognition
and longer operating histories;
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larger sales and
marketing budgets and resources;
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broader distribution
and established relationships with distribution partners and end-customers;
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greater customer
support resources;
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greater resources
to make acquisitions;
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larger and more
mature intellectual property portfolios; and
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substantially greater
financial, technical, and other resources.
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In addition, some of our larger competitors
have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality
into existing products to gain business in a manner that discourages users from purchasing our products, including through selling
at zero or negative margins, product bundling, or closed technology platforms. Conditions in our market could change rapidly and
significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation. New
start-up companies that innovate and large competitors that are making significant investments in research and development may
invent similar or superior products and technologies that compete with our products and technology. Our current and potential
competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their
resources.
Our markets are subject to technological
change and our success depends on our ability to develop and introduce new products.
Each of the governmental and commercial
markets for our products is characterized by:
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changing technologies;
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changing customer
needs;
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frequent new product
introductions and enhancements;
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increased integration
with other functions; and
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product obsolescence.
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Our success will be dependent in part on
the design and development of new products. To develop new products and designs for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise.
The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully
completed, that necessary regulatory clearances or approvals will be granted on a timely basis, or at all, or that the potential
products will achieve market acceptance. Our failure to develop, obtain necessary regulatory clearances or approvals for, or successfully
market, potential new products could have a material adverse effect on our business, financial condition and results of operations.
Claims by others that we infringe
their intellectual property rights could increase our expenses and delay the development of our business. As a result, our business
and financial condition could be harmed.
Our industries
are characterized by the existence of a large number of patents as well as frequent claims and related litigation regarding patent
and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents
that may be issued in the future, or other intellectual property rights of others.
We do not have
the resources to conduct exhaustive patent searches to determine whether the technology used in our products infringe patents
held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment
in which there may be numerous patent applications pending, many of which are confidential when filed.
We may face claims
by third parties that our products or technology infringe on their patents or other intellectual property rights. Any claim of
infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract
our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial
damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer
our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful,
which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to protect our
intellectual property rights adequately.
Our ability to compete for government
contracts is affected, in part, by our ability to protect our intellectual property rights. We rely on a combination of patents,
trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our
intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information
will be adequate to prevent misappropriation of our technology or protect that proprietary information. The validity and breadth
of claims in technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. Nor can we
assure you that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have
an adverse effect on our ability to do business. In addition, the enforcement of laws protecting intellectual property may be
inadequate to protect our technology and proprietary information.
We may not have the resources to assert
or protect our rights to our patents and other intellectual property. Any litigation or proceedings relating to our intellectual
property, whether or not meritorious, will be costly and may divert the efforts and attention of our management and technical
personnel.
We also rely on other unpatented proprietary
technology, trade secrets and know-how and no assurance can be given that others will not independently develop substantially
equivalent proprietary technology, techniques or processes, that such technology or know-how will not be disclosed or that we
can meaningfully protect our rights to such unpatented proprietary technology, trade secrets, or know-how. Although we intend
to enter into non-disclosure agreements with our employees and consultants, there can be no assurance that such non-disclosure
agreements will provide adequate protection for our trade secrets or other proprietary know-how.
Our success will depend, in part,
on our ability to obtain new patents.
To
date, we have applied for 39 patents in the U.S., 11 of which have been awarded, and our success will depend, in part, on
our ability to obtain patent and trade secret protection for proprietary technology that we currently possess or that we may develop
in the future. No assurance can be given that any pending or future patent applications will issue as patents, that the scope
of any patent protection obtained will be sufficient to exclude competitors or provide competitive advantages to us, that any
of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by us.
Furthermore, there can be no assurance
that our competitors have not or will not independently develop technology, processes or products that are substantially similar
or superior to ours, or that they will not duplicate any of our products or design around any patents issued or that may be issued
in the future to us. In addition, whether or not patents are issued to us, others may hold or receive patents which contain claims
having a scope that covers products or processes developed by us.
We may not have the resources to adequately
defend any patent infringement litigation or proceedings. Any such litigation or proceedings, whether or not determined in our
favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel. In addition,
we may be required to obtain licenses to patents or proprietary rights from third parties. There can be no assurance that such
licenses will be available on acceptable terms if at all. If we do not obtain required licenses, we could encounter delays in
product development or find that the development, manufacture or sale of products requiring such licenses could be foreclosed.
Accordingly, challenges to our intellectual property, whether or not ultimately successful, could have a material adverse effect
on our business and results of operations.
Our future success depends on the
continued service of management, engineering and sales personnel and our ability to identify, hire and retain additional personnel.
Our success depends, to a significant
extent, upon the efforts and abilities of members of senior management. We have entered into an employment agreement with our
Chief Executive Officer and President, as well as our Chief Operating Officer, but have not entered into an employment agreement
with our Chief Financial Officer, Chief Technology Officer or Chief Revenue Officer. The loss of the services of one or more of
our senior management or other key employees could adversely affect our business. We currently maintain a key person life insurance
policy on our Chief Executive Officer only.
There is intense competition for qualified
employees in our industry, particularly for highly skilled design, applications, engineering and sales people. We may not be able
to continue to attract and retain developers, managers, or other qualified personnel necessary for the development of our business
or to replace qualified individuals who may leave us at any time in the future. Our anticipated growth is expected to place increased
demands on our resources, and will likely require the addition of new management and engineering staff as well as the development
of additional expertise by existing management employees. If we lose the services of or fail to recruit engineers or other technical
and management personnel, our business could be harmed.
The requirements of being a public
company may strain our resources and divert management’s attention.
As a public company, we are subject to
the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act), the Dodd-Frank
Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. Compliance with these rules
and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or
costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and
current reports with the SEC with respect to our business and operating results.
As a result of disclosure of information
in this Report and in filings required of a public company, our business and financial condition is more visible, which
we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are
successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved
in our favor, these claims, and the time and resources necessary to resolve them, could divert resources of our management and
harm our business and operating results.
Periods of rapid growth and expansion
could place a significant strain on our resources, including our employee base, which could negatively impact our operating results.
We may experience periods of rapid growth
and expansion, which may place significant strain and demands on our management, our operational and financial resources, customer
operations, research and development, marketing and sales, administrative, and other resources. To manage our possible future
growth effectively, we will be required to continue to improve our management, operational and financial systems. Future growth
would also require us to successfully hire, train, motivate and manage our employees. In addition, our continued growth and the
evolution of our business plan will require significant additional management, technical and administrative resources. If we are
unable to manage our growth successfully we may not be able to effectively manage the growth and evolution of our current business
and our operating results could suffer.
We depend on contract manufacturers,
and our production and products could be harmed if it is unable to meet our volume and quality requirements and alternative sources
are not available.
We rely on contract manufacturers to provide
manufacturing services for our products. If these services become unavailable, we would be required to identify and enter into
an agreement with a new contract manufacturer or take the manufacturing in-house. The loss of our contract manufacturers could
significantly disrupt production as well as increase the cost of production, thereby increasing the prices of our products. These
changes could have a material adverse effect on our business and results of operations.
We are presently a small company
with too limited resources and personnel to establish a comprehensive system of internal controls. If we fail to maintain an effective
system of internal controls, we would not be able to accurately report our financial results on a timely basis or prevent fraud.
As a result, current and potential stockholders could lose confidence in our financial
reporting, which would
harm our business and the trading price of our common stock.
Effective internal controls are necessary
for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our brand and operating results would be harmed. We may in the future discover areas of our internal controls that
need improvement. For example, because of size and limited resources, our external auditors may determine that we lack the personnel
and infrastructure necessary to properly carry out an independent audit function. Although we believe that we have adequate
internal controls for a company with our size and resources, we are not certain that the measures that we have in place will ensure
that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their implementation, would harm our operating results or cause
us to fail to meet our reporting obligations. Inferior internal controls would also cause investors to lose confidence in our reported
financial information, which would have a negative effect on our company and the trading price of our common stock.
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual
or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2018, we have
identified certain matters that constituted material weaknesses in our internal controls over financial reporting. See Item
9A. for further discussion on Controls and Procedures.
If we do not effectively manage
changes in our business, these changes could place a significant strain on our management and operations.
Our ability to grow successfully requires
an effective planning and management process. The expansion and growth of our business could place a significant strain on
our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve
and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources
may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes
and growth in our business, including acquisitions, this could have a material adverse effect on our business, financial condition,
results of operations and future prospects.
We may not be able to access the
equity or credit markets.
We face the risk that we may not be able
to access various capital sources including investors, lenders, or suppliers. Failure to access the equity or credit markets from
any of these sources could have a material adverse effect on our business, financial condition, results of operations, and future
prospects.
Persistent global economic trends
could adversely affect our business, liquidity and financial results.
Although improving, persistent global
economic conditions, particularly the scarcity of capital available to smaller businesses, could adversely affect us, primarily
through limiting our access to capital and disrupting our clients’ businesses. In addition, continuation or worsening
of general market conditions in economies important to our businesses may adversely affect our clients’ level of spending
and ability to obtain financing, leading to us being unable to generate the levels of sales that we require. Current and
continued disruption of financial markets could have a material adverse effect on our business, financial condition, results of
operations and future prospects.
We may seek or need to raise
additional funds. Our ability to obtain financing for general corporate and commercial purposes or acquisitions depends on
operating and financial performance, and is also subject to prevailing economic conditions and to financial, business and
other factors beyond our control. The global credit markets and the financial services industry have recently experienced a
period of unprecedented turmoil characterized by the bankruptcy, failure or sale of various financial institutions. An
unprecedented level of intervention from the U.S. and other governments has been seen. As a result of such disruption, our
ability to raise capital may be severely restricted and the cost of raising capital through such markets or privately may
increase significantly at a time when we would like, or need, to do so. Either of these events could have an impact on our
flexibility to fund our business operations, make capital expenditures, pursue additional expansion or acquisition
opportunities, or make another discretionary use of cash and could adversely impact our financial results.
Although recent trends point to continuing
improvements, there is still lingering volatility and uncertainty. A change or disruption in the global financial markets for
any reason may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability
and declining consumer confidence. Accordingly, demand for our products could decrease and differ materially from current expectations.
Further, some of our customers may require substantial financing in order to fund their operations and make purchases from us.
The inability of these customers to obtain sufficient credit to finance purchases of our products and meet their payment obligations
to us or possible insolvencies of our customers could result in decreased customer demand, an impaired ability for us to collect
on outstanding accounts receivable, significant delays in accounts receivable payments, and significant write-offs of accounts
receivable, each of which could adversely impact our financial results.
Rising interest rates could adversely
impact our business.
Changes in interest rates could have an adverse impact on our
business by increasing our cost of capital. For example:
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rising interest
rates would increase our cost of capital; and
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rising interest
rates may negatively impact our ability to secure financing on favorable terms and may impact our ability to provide cost-effective
financing to our end-customers or end-users, where applicable.
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Rising interest rates could generally
harm our business and financial condition.
Risks Related to Our Biometric Recognition
Applications and Related Products
Our biometric products and technologies
may not be accepted by the intended commercial consumers of our products, which could harm our future financial performance.
There can be no assurance that our biometric
systems will achieve wide acceptance by commercial consumers of such security-based products, and/or market acceptance generally.
The degree of market acceptance for products and services based on our technology will also depend upon a number of factors, including
the receipt and timing of regulatory approvals, if any, and the establishment and demonstration of the ability of our proposed
device to provide the level of security in an efficient manner and at a reasonable cost. Our failure to develop a commercial product
to compete successfully with existing security technologies could delay, limit or prevent market acceptance. Moreover, the market
for new biometric-based security systems is largely undeveloped, and we believe that the overall demand for mobile biometric-based
security systems technology will depend significantly upon public perception of the need for such a level of security. There can
be no assurance that the public will believe that our level of security is necessary or that the security industry will actively
pursue our technology as a means to solve their security issues. Long-term market acceptance of our products and services will
depend, in part, on the capabilities, operating features and price of our products and technologies as compared to those of other
available products and services. As a result, there can be no assurance that currently available products, or products under development
for commercialization, will be able to achieve market penetration, revenue growth or profitability.
Our biometric applications may become
obsolete if we do not effectively respond to rapid technological change on a timely basis.
The biometric identification and personal
identification industries are characterized by rapid technological change, frequent new product innovations, changes in customer
requirements and expectations and evolving industry standards. If we are unable to keep pace with these changes, our business
may be harmed. Products using new technologies, or emerging industry standards, could make our technologies less attractive. In
addition, we may face unforeseen problems when developing our products, which could harm our business. Furthermore, our competitors
may have access to technologies not available to us, which may enable them to produce products of greater interest to consumers
or at a more competitive cost.
Our biometric applications are new and
our business model is evolving. Because of the new and evolving nature of biometric technology, it is difficult to predict
the size of this specialized market, the rate at which the market for our biometric applications will grow or be accepted, if
at all, or whether other biometric technologies will render our applications less competitive or obsolete. If the market
for our biometric applications fails to develop or grows slower than anticipated, we would be significantly and materially adversely
affected.
If our products and services do
not achieve market acceptance, we may never have significant revenues or any profits.
If we are unable to operate our business
as contemplated by our business model or if the assumptions underlying our business model prove to be unfounded, we could fail
to achieve our revenue and earnings goals within the time we have projected, or at all, which would have a detrimental effect
on our business. As a result, the value of your investment could be significantly reduced or completely lost.
We may in the future experience
competition from other biometric application developers.
Competition in the development of biometric
recognition is expected to become more intense. Competitors range from university-based research and development graphics
labs to development-stage companies and major domestic and international companies. Many of these entities have financial,
technical, marketing, sales, distribution and other resources significantly greater than those that we have. There can be
no assurance that we can continue to develop our biometric technologies or that present or future competitors will not develop
technologies that render our biometric applications obsolete or less marketable or that we will be able to introduce new products
and product enhancements that are competitive with other products marketed by industry participants.
We may fail to create new applications
for our products and enter new markets, which would have an adverse effect on our operations, financial condition and prospects.
Our future success depends in part on
our ability to develop and market our technology for applications other than those currently intended. If we fail in these goals,
our business strategy and ability to generate revenues and cash flow would be significantly impaired. We intend to expend significant
resources to develop new technology, but the successful development of new technology cannot be predicted and we cannot guarantee
we will succeed in these goals.
Our products may have defects, which
could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue and result in
costly litigation or liability
.
Our products may contain defects for many
reasons, including defective design or manufacture, defective material or software interoperability issues. Products as complex
as those we offer, frequently develop or contain undetected defects or errors. Despite testing defects or errors may arise in
our existing or new products, which could result in loss of revenue, market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation, and increased service and maintenance cost. Defects or errors in our products
and solutions might discourage customers from purchasing future products. Often, these defects are not detected until after the
products have been shipped. If any of our products contain defects or perceived defects or have reliability, quality or compatibility
problems or perceived problems, our reputation might be damaged significantly, we could lose or experience a delay in market acceptance
of the affected product or products and might be unable to retain existing customers or attract new customers. In addition, these
defects could interrupt or delay sales. In the event of an actual or perceived defect or other problem, we may need to invest
significant capital, technical, managerial and other resources to investigate and correct the potential defect or problem and
potentially divert these resources from other development efforts. If we are unable to provide a solution to the potential defect
or problem that is acceptable to our customers, we may be required to incur substantial product recall, repair and replacement
and even litigation costs. These costs could have a material adverse effect on our business and operating results.
We will provide warranties on certain
product sales and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances
requires us to make estimates of product return rates and expected costs to repair or to replace the products under warranty.
We will establish warranty reserves based on our best estimates of warranty costs for each product line combined with liability
estimates based on the prior twelve months’ sales activities. If actual return rates and/or repair and replacement
costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods.
In addition, because our customers rely on secure authentication and identification of cardholders to prevent unauthorized access
to programs, PCs, networks, or facilities, a malfunction of or design defect in its products (or even a perceived defect) could
result in legal or warranty claims against us for damages resulting from security breaches. If such claims are adversely decided
against us, the potential liability could be substantial and have a material adverse effect on our business and operating results.
Furthermore, the possible publicity associated with any such claim, whether or not decided against us, could adversely affect
our reputation. In addition, a well-publicized security breach involving smart card-based or other security systems could adversely
affect the market’s perception of products like ours in general, or our products in particular, regardless of whether the
breach is attributable to our products. Any of the foregoing events could cause demand for our products to decline, which would
cause its business and operating results to suffer.
Risks Related to our Securities
The market price for our common
stock is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, and
lack of profits, which could lead to wide fluctuations in the price of our common stock. You may be unable to sell your shares
of common stock at or above your purchase price, which may result in substantial losses to you.
The market for our common stock is characterized
by significant price volatility when compared to the securities of larger, more established companies that trade on a national
securities exchange and have large public floats, and we expect that the price of our common stock will continue to be more volatile
than the securities of such larger, more established companies for the indefinite future. The volatility in the price of our common
stock is attributable to a number of factors. First, as noted above, our common stock is, compared to the securities of such larger,
more established companies, sporadically and thinly traded. The price of our common stock could, for example, decline precipitously
in the event that a large number of shares of our common stock is sold on the market without commensurate demand. Secondly, we
are a speculative or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack
of progress, be more inclined to sell their shares of common stock on the market more quickly and at greater discounts than would
be the case with the securities of a larger, more established company that trades on a national securities exchange and has a
large public float. Many of these factors are beyond our control and may decrease the market price of our common stock regardless
of our operating performance.
If we are not able to comply with
the applicable continued listing requirements or standards of the NASDAQ Capital Market, our common stock could be delisted from
such exchange.
Our common stock is currently listed on
the NASDAQ Capital Market (“NASDAQ”). In order to maintain such listing, we must satisfy minimum financial and other
continued listing requirements and standards, including those regarding director independence and independent committee requirements,
minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances
that we will be able to comply with the applicable listing standards. Although we are currently in compliance with such listing
standards, we have, in the past, fallen out of compliance and may in the future fall out of compliance with such standards. If
we are unable to maintain compliance with these NASDAQ requirements, our common stock will be delisted from NASDAQ.
In the event that our common stock
is delisted from NASDAQ and is not eligible for quotation on another market or exchange, trading of our common stock could be
conducted on the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the
OTC Bulletin Board or the markets operated by the OTC Markets Group Inc. In such event, it could become more difficult
to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in
our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.
Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
In the event that our common stock
is delisted from NASDAQ, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock because
they may be considered penny stocks and thus be subject to the penny stock rules.
The SEC has adopted a number of rules
to regulate “penny stock” that restricts transactions involving stock which is deemed to be penny stock. Such rules
include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Exchange Act. These rules may have
the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price
of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market if current price and volume information with respect to transactions in such securities is provided by the exchange
or system). Our shares of common stock have in the past constituted, and may again in the future constitute, “penny stock”
within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may
discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market
liquidity of such shares of common stock and impede their sale in the secondary market.
A U.S. broker-dealer selling penny stock
to anyone other than an established customer or “accredited investor” (generally, an individual with a net worth in
excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special
suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to
sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny stock” regulations
require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”, a disclosure schedule
prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer or the transaction
is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered
representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements
disclosing recent price information with respect to the “penny stock” held in a customer’s account and information
with respect to the limited market in “penny stocks”.
Stockholders should be aware that, according
to the SEC, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns
include: (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
(ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii)
“boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales
persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping
of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor
losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive
within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
If and when a larger trading market
for our common stock develops, the market price of our common stock is still likely to be highly volatile and subject to wide fluctuations,
and you may be unable to resell your shares of common stock at or above the price at which you acquired them.
The market price of our common stock may
be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including,
but not limited to:
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variations in our
revenues and operating expenses;
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actual or anticipated
changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common
stock, other comparable companies or our industry generally;
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market conditions
in our industry, the industries of our customers and the economy as a whole;
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actual or expected
changes in our growth rates or our competitors’ growth rates;
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developments in
the financial markets and worldwide or regional economies;
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announcements of
innovations or new products or services by us or our competitors;
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announcements by
the government relating to regulations that govern our industry;
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sales of our common
stock or other securities by us or in the open market; and
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changes in the market
valuations of other comparable companies.
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In addition, if the market for technology
stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline
for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also
decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each
of these factors, among others, could harm the value of your investment in our common stock. In the past, following periods of
volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if
instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could
materially and adversely affect our business, operating results and financial condition.
Our stockholders may experience
significant dilution.
Although certain exercise restrictions
are placed upon the holders of our warrants, the issuance of material amounts of common stock by us would cause our existing stockholders
to experience significant dilution in their investment in us. In addition, if we obtain additional financing involving the issuance
of equity securities or securities convertible into equity securities, our existing stockholders’ investment would be further
diluted. Such dilution could cause the market price of our common stock to decline, which could impair our ability to raise additional
financing.
We do not anticipate paying dividends
in the foreseeable future; you should not buy our common stock if you expect dividends.
The payment of dividends on our common
stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board
of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return
on your investment will only occur if our stock price appreciates.
We currently intend to retain our future
earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends on our
common stock in the foreseeable future.
If you make an additional investment
in our common stock, you may experience additional dilution in the future.
We may acquire other technologies or finance
strategic alliances by issuing our equity or equity-linked securities, which may result in additional dilution to our stockholders.
We could issue “blank check”
preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their
voting rights; and provisions in our charter documents could discourage a takeover that stockholders may consider favorable.
Our certificate of incorporation authorizes
the issuance of up to 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences
as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder
approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute
the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could
be used as a method of discouraging, delaying or preventing a change in control of the Company. For example, it would be
possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of the Company.
Financial Industry Regulatory Authority
(“FINRA”) sales practice requirements may limit a stockholder’s ability to buy and sell our common stock.
FINRA has adopted rules that require that
in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative
low-priced securities will not be suitable for certain customers. FINRA requirements will likely make it more difficult for broker-dealers
to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in
our common stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder’s
ability to resell shares of our common stock.
Item
1B.
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Unresolved Staff
Comments.
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None.
Properties
Our principal executive offices are located
in Sebastian, Florida. On May 30, 2018, the Company entered into a lease agreement for this office space. The lease term which
commenced on June 1, 2018 is for three (3) years and the lease is a gross lease in that there shall be no separate charge for the
Company’s share of any operating expenses. The monthly rent including sales tax is $960 in the first year, increasing 3%
annually thereafter.
We also lease an office in Oxford, Connecticut.
On September 12, 2014, the Company entered into a lease agreement for this office space. The lease term commenced on October 1,
2014 and the lease term was for two (2) years. The Company is currently leasing this office space on a month-to-month basis with
a monthly rent of $2,450.
On October 16, 2013, the Company entered
into a lease agreement for office space in Palm Bay, Florida. The term of the lease commenced on May 1, 2014 and was for three
(3) years with a monthly rent of $1,250 in the first year, increasing 3% annually thereafter. The Company is currently leasing
this office space on a month-to-month basis with a monthly rent of $1,865.
As a result of the LogicMark acquisition
on July 25, 2016, we assumed two (2) facility leases. One of the leases was for office space located in Plymouth, Minnesota with
a monthly rent of $1,170. This lease agreement expired in February 2018. In addition, LogicMark subleased office and warehouse
space located in Louisville, Kentucky. The subleasing agreement expired on August 31, 2017. On June 6, 2017, we entered into a
new three-year lease agreement for the same office and warehouse space located in Louisville, Kentucky. The monthly rent for the
space is $7,157 and this lease agreement expires in August 2020.
Item
3.
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Legal Proceedings
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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 our executive officers or the executive officers of any of our subsidiaries, threatened against or affecting
us, or any of our subsidiaries in which an adverse decision could have a material adverse effect upon our business, operating
results, or financial condition.
Item
4.
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Mine Safety Disclosures
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Not applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
- ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITIES
Nxt-ID,
Inc. (“Nxt-ID” or the “Company”) was incorporated in the State of Delaware on February 8, 2012. As of
December 31, 2018, the Company is no longer an “emerging growth company” as defined in the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”). 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.
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 “Interest Purchase Agreement”). Pursuant to the
Interest Purchase Agreement, we acquired all of the membership interests of LogicMark from the LogicMark Sellers for (i)
$17.5 million in cash consideration, (ii) $2.5 million in a secured promissory note (the “LogicMark Note”) issued
to LogicMark Investment Partners, LLC, as representative of the LogicMark Sellers (the “LogicMark
Representative”), (iii) 78,740 shares of our common stock, which were issued upon signing of the Interest Purchase
Agreement (the “LogicMark Shares”), and (iv) warrants (the “LogicMark Warrants”) to purchase an
aggregate of 157,480 shares of common stock (the “LogicMark Warrant Shares”) for no additional consideration.
Such warrants were exercised on July 27, 2016. In addition, the Company was required to pay the LogicMark Sellers earn-out
payments of (i) up to $1,500,000 for calendar year 2016 and (ii) up to $5,000,000 for calendar year 2017 if LogicMark met
certain gross profit targets set forth in the Interest Purchase Agreement. The earn-out payment related to 2016 and the
remaining balance owed on the LogicMark Note including accrued interest were both paid in July 2017. See Note 5. Based on
LogicMark’s operating results for the year ended December 31, 2017, the 2017 earnout amount owed by the Company was
$3,156,088. As a result, the Company reduced the amount of contingent consideration due to the LogicMark Sellers by
$1,843,912 in 2017. The Company paid the 2017 earnout amount of $3,156,088 to the LogicMark Sellers in the second quarter of
2018.
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 “Fit Pay Sellers”). In connection with 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, has a proprietary
technology platform that delivers payment, credential management, authentication and other secure services to the IoT ecosystem.
The platform uses tokenization, a payment security technology that replaces cardholders’ account information with a unique
digital identifier, to transact highly secure contactless payment and authentication services.
On September 21, 2018, the Company announced that its board of directors approved a plan to separate the
Company’s financial technology business from its healthcare business into a new independent publicly traded company. The
Company will distribute shares of common stock of the newly created company to the Company’s 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 is comprised of its Fit Pay subsidiary and the intellectual property
developed by the Company, including the Flye Smartcard and the Wocket. See Note 4.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
- LIQUIDITY AND MANAGEMENT PLANS
The
Company recorded operating income from continuing operations of $587,489 and a net loss from continuing operations of
$1,328,616 during the year ended December 31, 2018. Certain of these factors raise substantial doubt about the
Company’s ability to sustain operations for at least one year from the issuance of these financial statements. However,
given the Company’s cash position at December 31, 2018, proceeds from equity offerings subsequent to year-end and
its projected cash flow from operations, the Company believes that it will have sufficient capital to sustain operations over
the next twelve months following the date of this filing to alleviate such substantial doubt. As of December 31, 2018,
the Company (excluding discontinued operations) had a working capital deficiency of $1,603,466 and stockholders’
equity of $14,736,758. In order to execute the Company’s long-term strategic plan to develop and commercialize its
core products, fulfill its product development commitments and fund its obligations as they come due, the Company may need
to raise additional funds, through public or private equity offerings, debt financings, or other means. Should the Company
not be successful in obtaining the necessary financing, or generate sufficient revenue to fund its operations, the
Company would need to engage in certain cost containment efforts, and/or curtail certain of its operational
activities.
During
the year ended December 31, 2018, the Company received net proceeds of $425,000 from the exercise of common stock warrants. However,
the Company can give no assurance that any cash raised subsequent to December 31, 2018 will be sufficient to execute its business
plan or meet its obligations. The Company can give no assurance that additional funds will be available on reasonable terms, or
available at all, or that it will generate sufficient revenue to alleviate these conditions.
The
Company’s ability to execute its business plan is dependent upon its ability to raise additional equity, secure debt financing,
and/or generate revenue. Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue
to fund its operations, the Company would need to curtail certain of its operational activities.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES IN THE FINANCIAL STATEMENTS
The
preparation of consolidated financial statements in conformity with generally accepted accounting principles in the
United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s
management evaluates these significant estimates and assumptions, including those related to the fair value of acquired
assets and liabilities, stock based compensation, derivative instruments, income taxes, allowance for doubtful accounts,
long-lived assets, and inventories, and other matters that affect the consolidated financial statements and disclosures.
Actual results could differ from those estimates.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
CASH
The
Company considers all highly liquid securities with an original maturity date of three months or less when purchased to be cash
equivalents. Due to their short-term nature, cash equivalents are carried at cost, which approximates fair value. At December
31, 2018 and 2017, the Company had no cash equivalents.
RESTRICTED
CASH
At
December 31, 2018 and 2017, the Company had restricted cash of $1,189,452 and $40,371, respectively. Restricted cash
includes amounts held back by the Company’s third party credit card processor for potential customer refunds, claims
and disputes. Pursuant to the terms and conditions of the Credit Agreement with Sagard Holdings Manager LP, the Company
is required to transfer 50% of the excess Cash Flow generated by LogicMark into a restricted bank account controlled by
Sagard Holdings Manager LP (See Note 9). At December 31, 2018, the Company’s restricted cash balance included $998,950
related to LogicMark’s excess cash flow generated. Cash and restricted cash, as presented on the consolidated
statements of cash flows, consists of $425,189 and $1,189,452 as of December 31, 2018, respectively, and $5,636,415 and
$40,371 as of December 31, 2017.
CONCENTRATIONS
OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains
its cash balances in large well-established financial institutions located in the United States. At times, the Company’s
cash balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE
RECOGNITION
Adoption
of Topic 606
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”, and collectively with its related
subsequent amendments, “Topic 606”). Topic 606 supersedes previous revenue recognition guidance and requires entities
to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for such goods or services. The Company adopted Topic 606 as of January
1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1,
2018. Under this transition method, the Company’s results in the consolidated statements of operations for the year ended
December 31, 2018 are presented under Topic 606, while the comparative results for the year ended December 31, 2017 were not retrospectively
adjusted. Results for the year ended December 31, 2017 were recognized in accordance with the Company’s revenue recognition
policy then in effect under ASC Topic 605, Revenue Recognition (“Topic 605”) discussed below. The adoption of Topic
606 resulted in accounting policy changes surrounding revenue recognition which replaced the related previous policies under Topic
605. The following is a summary of the Company’s revenue recognition and related accounting policies and disclosures resulting
from the adoption of Topic 606.
The Company’s revenues consist of
product sales to either end customers or to distributors. The Company’s revenues are derived from contracts with customers,
which are in most cases customer purchase orders. For each contract, the promise to transfer the control of the products, each
of which is individually distinct, is considered to be the identified performance obligation. As part of the consideration promised
in each contract, the Company evaluates the customer’s credit risk. Our contracts do not have any financing components, as
payment terms are generally due net 30 days after delivery. The Company’s products are almost always sold at fixed prices.
In determining the transaction price, we evaluate whether the price is subject to any refunds, due to product returns or adjustments
due to volume discounts, rebates or price concessions to determine the net consideration we expect to be entitled to. The Company’s sales are recognized
at a point-in-time under the core principle of recognizing revenue when control transfers to the customer, which generally occurs
when the Company ships or delivers the product from its fulfillment center to our customers, when our customer accepts and has
legal title of the goods, and the Company has a present right to payment for such goods. Based on the respective contract terms,
most of our contracts revenues are recognized either (i) upon shipment based on free on board (“FOB”) shipping point,
or (ii) when the product arrives at its destination. For the year ended December 31, 2018, none of our sales were recognized over
time.
Sales
to Distributors and Resellers
Sales
to certain distributors and resellers are made under terms allowing limited rights of return of
the Company’s products held in their inventory or upon sale to their end customers. The Company maintains a reserve for
unprocessed and estimated future price adjustments claims and returns as a refund liability. The reserve is recorded as a reduction
to revenue in the same period that the related revenue is recorded and is calculated based on an analysis of historical claims
and returns over a period of time to appropriately account for current pricing and business trends. Similarly, sales returns and
allowances are recorded based on historical return rates, as a reduction to revenue with a corresponding reduction to cost of
sales for the estimated cost of inventory that is expected to be returned. These reserves were not material upon the adoption
of Topic 606 on January 1, 2018, nor were they material in the consolidated balance sheet at December 31, 2018.
For
the year ended December 31, 2017, revenue from sales of the Company’s products was recognized at the time the goods
were delivered, title passed and the risks and rewards of ownership passed to the end customer, provided the earnings process
was complete and revenue was measurable. Such recognition generally occurred when the products reached the destination point,
the sales price was fixed and determinable, and collection was reasonably assured. Delivery was determined by the
Company’s shipping terms, which was primarily freight on board shipping point. Revenue was recorded at the net amount
to be received after deductions for estimated discounts, allowances and returns. These estimates and reserves were determined
and adjusted as needed based upon historical experience, contract terms and other related factors.
SHIPPING
AND HANDLING
Amounts
billed to customers for shipping and handling are included in revenues. The related freight charges incurred by the Company are
included in selling and marketing expenses and were $605,067 and $541,371, respectively, for the years ended December 31, 2018
and 2017.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
For
the years ended December 31, 2018 and 2017, the Company’s revenues primarily included shipments of the LogicMark products.
The terms and conditions of these sales provide certain customers with trade credit terms. In addition, these sales were made
to the retailers with no rights of return and are subject to the normal warranties offered to the ultimate consumer for product
defects.
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 December 31, 2018
and 2017, the Company had an allowance for doubtful accounts of $132,383 and $126,733, respectively.
INVENTORY
The
Company measures inventory at the lower of cost or net realizable value, defined as estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal and transportation.
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. The inventory is valued at the lower of cost or net realizable value with cost determined using the first-in,
first-out method. As of December 31, 2018, inventory was comprised of $870,513 in finished goods on hand. As of December
31, 2017 inventory was comprised of $706,322 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 December 31, 2018 and 2017, $317,488 and
$326,651, respectively, of prepayments made for inventory is included in prepaid expenses and other
current assets on the consolidated balance sheet.
LONG-LIVED
ASSETS
Long-lived
assets, such as property and equipment, and other intangibles are evaluated for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable. When indicators exist, the Company tests for
the impairment of the definite-lived assets based on the undiscounted future cash flow the assets are expected to generate
over their remaining useful lives, compared to the carrying value of the assets. If the carrying amount of the assets
is determined not to be recoverable, a write-down to fair value is recorded. Management estimates future cash flows
using assumptions about expected future operating performance. Management’s estimates of future cash flows may differ
from actual cash flow due to, among other things, technological changes, economic conditions or changes to
the Company’s business operations.
PROPERTY
AND EQUIPMENT
Property
and equipment consisting of furniture, fixtures and tooling is stated at cost. The costs of additions and improvements are generally
capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment
are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included
in income. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful life
of the respective asset as follows:
Equipment
|
5
years
|
Furniture
and fixtures
|
3
to 5 years
|
Tooling
and molds
|
2
to 3 years
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The
Company’s goodwill relates to the acquisitions of LogicMark and Fit Pay. Fit Pay is included in the Company’s discontinued
operations (See Note 4). The Company began testing goodwill for impairment in the third quarter of 2017 as it relates to the acquisition
of LogicMark. 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. During the year ended December 31, 2018, 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.
As
part of the evaluation of Fit Pay, 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 Fit Pay. In accordance with
the applicable guidance, an entity is not required to calculate the fair value of a reporting unit if, after assessing these
qualitative factors, it is determined that it is more likely than not that the reporting unit’s fair value is greater
than its carrying amount. Based on its assessment of the qualitative factors which included Fit Pay’s
financial performance thus far, a quantitative analysis was performed, and as of September 30, 2018, the Company determined
that based in part on a goodwill impairment analysis prepared with the assistance of a third party valuation firm, the fair
value of Fit Pay exceeded its respective carrying amount. Therefore, the Company has not recognized any goodwill impairment
in 2018 as it relates to Fit Pay.
OTHER
INTANGIBLE ASSETS
The
Company’s intangible assets are related to the acquisition of LogicMark and are included in other intangible assets in the
Company’s consolidated balance sheet at December 31, 2018 and 2017.
At
December 31, 2018, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of
$3,191,159; trademarks of $1,104,246; and customer relationships of $2,466,687. At December 31, 2017, the other intangible
assets relating to the acquisition of LogicMark are comprised of patents of $3,563,885; trademarks of $1,167,122; and
customer relationships of $2,792,900. 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 years ended December 31, 2018 and 2017, the Company had amortization expense of
$761,815 and $761,818, respectively, related to the LogicMark intangible assets.
Amortization
expense estimated for each of the next five fiscal years, 2019 through 2023, will be approximately $762,000 per year.
CONVERTIBLE
INSTRUMENTS
The
Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting
for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options
from their host instruments and account for them as free standing derivative financial instruments according to certain criteria.
The criteria include circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are
not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that
embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently
marked to market at each reporting date based on current fair value, with the changes in fair value reported in the results of
operations.
Conversion
options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances
of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result
in their bifurcation from the host instrument.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE
INSTRUMENTS
(CONTINUED)
The Company records, when necessary, discounts
to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between
the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. The debt discounts under these arrangements are amortized over the earlier of (i) the term of the related
debt using the straight line method which approximates the interest rate method or (ii) conversion of the debt. The amortization
of debt discount is included as a component of interest expense included in other income and expenses in the accompanying statements
of operations. See Note 7.
DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates
all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated
statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes or binomial option
valuation model to value the derivative instruments at inception and on subsequent valuation dates. The Company accounts for conversion
features that are embedded within the Company’s convertible notes payable that do not have fixed settlement provisions as
a separate derivative instrument. In addition, warrants issued by the Company that do not have fixed settlement provisions are
also treated as derivative instruments. The classification of derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date. See Note 8.
INCOME
TAXES
The
Company uses the asset and liability method of accounting for income taxes. Income tax expense is recognized for the amount of:
(i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from
matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred
tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion
or all of the deferred tax assets will not be realized.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company will classify as income tax expense
any interest and penalties. The Company has no material uncertain tax positions for any of the reporting periods presented. Generally,
the tax authorities may examine tax returns for three years from the date of filing. The Company has
filed all of its tax returns for all prior periods through December 31, 2017.
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 common shares outstanding. Diluted loss per share includes the
effect of diluted common stock equivalents. Potentially dilutive securities from the exercise of 5,090,352 and 5,777,650 warrants
as of December 31, 2018 and 2017, respectively, were excluded from the computation of diluted net loss per share because the effect
of their inclusion would have been anti-dilutive.
RESEARCH
AND DEVELOPMENT
Research
and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the discovery
of new knowledge, which will be useful in developing new products or processes. The Company expenses all research and development
costs as incurred.
RECLASSIFICATIONS
Certain accounts in
the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the presentation
of the current period consolidated financial statements. These reclassifications had no effect on the previously reported
net loss.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued ASU 2018-13,
which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure
framework project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years, beginning
after December 15, 2019. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial
statements.
In July 2017, the FASB issued ASU 2017-11,
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception". Part I of this update addresses the complexity of accounting for certain financial instruments with down
round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the
strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and
complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features
that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty
of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the
FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements
about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2018. The Company is in the process of evaluating the impact
of adoption of this update on its 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 ASU 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 ASU 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 was adopted and did not have a material impact on the
Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU
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 ASU 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 ASU are effective
for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. This
ASU was adopted and did not have a material impact on the Company’s consolidated financial statements.
In November 2016,
the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU No. 2016-18”). This ASU addresses
the diversity in practice that exists in the classification and presentation of changes in restricted cash and requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. This ASU is effective retrospectively for fiscal years and interim periods
within those years beginning after December 15, 2017. This ASU was adopted and did not have a material impact on the Company’s
consolidated financial statements.
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 adoption of ASU 2016-09 did
not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases.
A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and
a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the
earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU
2016-02 for fiscal years beginning after December 15, 2019. Early application is permitted for all public business entities and
all nonpublic business entities upon issuance. The Company is in the process of evaluating the impact of adoption of this update
on its consolidated financial statements.
Other recent accounting standards that
have been issued or proposed by 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 CONSOLIDATED FINANCIAL STATEMENTS
Note
4 - DISCONTINUED OPERATIONS
The
following table presents the assets and liabilities related to the financial technology product line classified as assets
and liabilities associated with discontinued operations (See Note 1) in the consolidated balance sheets as of
December 31, 2018 and 2017:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
125,318
|
|
|
$
|
1,424,503
|
|
Inventory, net
|
|
|
-
|
|
|
|
2,353,195
|
|
Prepaid expenses and other assets
|
|
|
96,909
|
|
|
|
651,246
|
|
Total current assets associated with discontinued operations
|
|
$
|
222,227
|
|
|
$
|
4,428,944
|
|
Property and equipment, net
|
|
|
38,793
|
|
|
|
30,386
|
|
Goodwill
|
|
|
9,119,709
|
|
|
|
9,119,709
|
|
Other intangible assets
|
|
|
3,112,224
|
|
|
|
3,802,649
|
|
Total non-current assets associated with discontinued operations
|
|
$
|
12,270,726
|
|
|
$
|
12,952,744
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
175,982
|
|
|
$
|
563,328
|
|
Accrued expenses
|
|
|
185,978
|
|
|
|
16,910
|
|
Customer deposits
|
|
|
3,333
|
|
|
|
2,828,605
|
|
Total liabilities associated with discontinued operations
|
|
$
|
365,293
|
|
|
$
|
3,408,843
|
|
The
following table represents the financial results of the discontinued operations for the years ended December 31, 2018
and 2017:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,696,414
|
|
|
$
|
7,273,909
|
|
Cost of sales
|
|
|
2,484,157
|
|
|
|
6,621,255
|
|
Gross profit (loss)
|
|
|
(787,743
|
)
|
|
|
652,654
|
|
Operating expenses
|
|
|
4,969,140
|
|
|
|
2,139,888
|
|
Interest expense
|
|
|
3,663
|
|
|
|
2,249
|
|
Income tax expense (benefit)
|
|
|
800
|
|
|
|
(1,773,739
|
)
|
(Loss) income from discontinued operations
|
|
$
|
(5,761,346
|
)
|
|
$
|
284,256
|
|
|
(1)
|
The contingent liability associated with the earn-out
payment due to the Fit Pay Sellers is not included in discontinued operations.
|
|
(2)
|
During the years ended December 31, 2018 and December
31, 2017, we recognized revenue of $737,993 and $7,065,755, respectively from WorldVentures Holdings, LLC (“WVH”),
a related party. Dr. D’Almada-Remedios, a director of the Company, was the former Chief Executive Officer of Flye Inc.,
a payment technology company owned by WVH. In addition, our accounts receivable, net balance at December 31, 2018 and December
31, 2017 included $0 and $1,364,405, respectively, due from WVH. The business with WVH is included as part of our discontinued
operations for the years ended December 31, 2018 and 2017.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO 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 these gross profit targets as they relate to the contingent considerations would be achieved and any fair
value adjustment of the earnout was due to time value of the payout. Based on LogicMark’s operating results for the year
ended December 31, 2017, the Company reduced the amount of contingent consideration due to the LogicMark Sellers by $1,843,912.
The
Company paid the 2017 earnout amount of $3,156,088 to the
LogicMark Sellers in the second quarter of 2018.
On
July 25, 2016, in order to fund part of the LogicMark acquisition, 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
Loan Agreement contained customary covenants, including an EBITDA requirement and a fixed charge ratio, as defined in the
agreement. As of December 31, 2017, the Company was in compliance with such covenants. The interest rate on the Revolving
Loan is 15% per annum and the Revolving Loan was scheduled to mature in July 2018. During the year ended December 31, 2017,
the Company paid down $3,000,000 of the Revolving Loan. The Company originally incurred $1,357,356 in deferred debt issue
costs related to the Revolving Loan. In addition, the Company incurred an additional $450,000 in deferred debt issue costs as
a result of extending the revolving loan facility for one additional year. At December 31, 2018 and 2017, the unamortized
balance of deferred debt issue costs was $0 and $200,744, respectively.
In
April 2018, the Company borrowed $1,500,000 against the Revolving Loan and on May 24, 2018, the Company repaid the entire outstanding
revolver balance of $13,500,000 due to the Lenders with funds received as a result of the refinancing with Sagard Holdings Manager
LP. See Note 9. In addition, the Company also paid $1,179,375 in accrued interest due to the Lenders. In connection with the pay
down and termination of the revolving loan facility, the Company recorded a loss from the extinguishment of debt totaling $68,213
which was comprised of $60,713 of unamortized deferred debt issue costs related to the extension of the revolving loan facility
for one additional year and the Company also paid $7,500 in legal fees incurred by the Lenders of the Revolving Loan for the refinancing
and termination of the revolving credit facility.
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; (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. At December 31, 2018, the remaining balance owed on the Fit Pay Seller note was $678,881.
The operating results of Fit Pay have been included in the 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 $1,774,539 as part of its purchase
price allocation.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5 - acquisitions (CONTINUED)
Allocation
of Purchase Price of Fit Pay
The
purchase price to acquire Fit Pay was $10,104,184 of which $100,000 was paid by the Company in cash and $10,004,184 in non-cash
consideration.
The
non-cash consideration was comprised of $851,842 in a seller note, $3,289,161 of common stock issued to the sellers, Series C
Preferred Stock issued to sellers of $1,807,300 and $4,055,881 in an earn-out provision. At the date of acquisition,
the earn-out provision was discounted using a prime borrowing rate of 3.5%.
For the year ended December 31, 2018,
the Company reduced the amount of contingent consideration due to the Fit Pay Sellers by $1,498,922. For the year ended
December 31, 2017, the Company increased the amount of contingent due to the Fit Pay Sellers by $346,759.
The
Merger Agreement was accounted for under the acquisition method of accounting. The purchase price was 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 completed 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. The following table summarizes the 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
|
|
|
92,629
|
|
Other current assets
|
|
|
53,966
|
|
Property and equipment
|
|
|
31,968
|
|
Goodwill
|
|
|
9,119,709
|
|
Intangible assets
|
|
|
4,137,400
|
|
Assets acquired
|
|
|
13,446,561
|
|
|
|
|
|
|
Accounts payable
|
|
|
165,650
|
|
Accrued liabilities
|
|
|
1,139,774
|
|
Customer deposits
|
|
|
262,414
|
|
Deferred taxes
|
|
|
1,774,539
|
|
Liabilities assumed
|
|
|
3,342,377
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
10,104,184
|
|
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 in 2017 with Michael Orlando, the
former Chief Executive Officer of Fit Pay. Mr. Orlando is now the Chief Operating Officer of the Company and President of
the wholly-owned subsidiary, Fit Pay. The term of the employment agreement is for one (1) 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.
NOTE 6
- ACCRUED EXPENSES
Accrued expenses
consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salaries and payroll taxes
|
|
$
|
89,065
|
|
|
$
|
88,964
|
|
Consulting fees
|
|
|
236,000
|
|
|
|
70,000
|
|
Merchant bank fees
|
|
|
28,108
|
|
|
|
28,075
|
|
State income taxes
|
|
|
1,533
|
|
|
|
11,049
|
|
Professional fees
|
|
|
84,704
|
|
|
|
31,781
|
|
Management incentives
|
|
|
868,082
|
|
|
|
891,667
|
|
Interest expense
|
|
|
16,342
|
|
|
|
639,030
|
|
Amount due to LogicMark Sellers
|
|
|
-
|
|
|
|
421,606
|
|
Dividends – Series C Preferred Stock
|
|
|
25,000
|
|
|
|
25,000
|
|
Agent and loan amendment fees
|
|
|
235,000
|
|
|
|
-
|
|
Other
|
|
|
117,727
|
|
|
|
240,985
|
|
Totals
|
|
$
|
1,701,561
|
|
|
$
|
2,448,157
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
- CONVERTIBLE NOTES PAYABLE
July
2017 Exchange
In
order to consummate a registered direct offering and concurrent private placement on July 13, 2017 (See Note 8), 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 (
i.e.
, the LogicMark Note), and amended on November
29, 2016 (the “November Notes”), and (ii) certain common stock purchase warrants (the “November Warrants”)
that were 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
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
December 19, 2017, and effective as of November 29, 2017, the Company entered into an agreement (the
“Amendment Agreement”) with the holders of the convertible notes and common stock purchase warrants issued
pursuant to that certain Exchange Agreement, dated November 29, 2016, by and among the Company and such holders. Pursuant to
the Amendment Agreement, the parties agreed (i) to amend the maturity dates of the convertible notes by one (1) year, or
November 29, 2018, and (ii) that the holders would forbear the exercise of any remedies due to the passing of the original
maturity date. In consideration thereof, the Company issued to the holders an aggregate of 370,000 shares of restricted
common stock with a fair value of $673,400. This amount was expensed and is included in interest expense for the year ended
December 31, 2017.
In
connection with the reduction in conversion price of the November Notes from $3.00 to $2.00, the Company incurred a non-cash charge
for modification of convertible exchange note terms of $191,630 for the year ended December 31, 2017. In addition, the Company
expensed the remaining unamortized note discount and deferred debt issue costs related to the November Notes of $491,667 and $35,949,
respectively. As a result of lowering the conversion price of the November Warrants from $3.00 to $2.00, the Company also incurred
a non-cash charge for modification of terms related to the November Warrants of $37,000 for the year ended December 31, 2017.
In December 2017, the November Notes and the related accrued interest balance were converted into 868,970 shares of the Company’s
common stock.
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 $594,408 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. The exercise and the amount of shares of common stock issuable upon exercise of the July 2017
Warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions.
reclassifications, mergers or other corporate changes and dilutive issuances.
The
conversion option embedded in the convertible exchange notes was determined to contain beneficial conversion features, resulting
in a debt discount at issuance. After allocating the gross proceeds to the warrants (discussed above) and beneficial conversion
feature, the total debt discount recognized was $432,917. The entire debt discount was fully amortized during the year ended December
31, 2017 as a result of all the July 2017 Notes and the related accrued interest balance being fully converted into 328,897 shares
of the Company’s common stock in December 2017. As of December 31, 2017, there was no remaining outstanding principal balance
on the July 2017 Notes.
November
2016 Exchange
On
November 29, 2016, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with certain
holders of a portion of the Original LogicMark Notes (the “Holders”) pursuant to which the Company exchanged with
the Holders of $1,500,000 of Original Notes held by the Holders in exchange for: (i) an aggregate principal amount of $1,500,000
of new secured subordinated promissory notes (the “Exchange Notes”) and (ii) warrants (the “Warrants”,
and together with the Exchange Notes, the “Exchange Securities”) convertible into 500,000 shares of common stock of
the Company. The Holders purchased the $1,500,000 of Original Notes from LogicMark Investment prior to this transaction. The Exchange
Notes will mature on November 29, 2017 and accrue interest at a rate of 15.0% per annum. The Exchange Notes are convertible at
any time, in whole or in part, at the option of the Investors into shares of common stock at a conversion price of $3.00 per share
(the “Conversion Price”). The Conversion Price is subject to adjustment for stock dividends, stock splits, combinations
or similar events.
The
conversion option embedded in the convertible exchange notes was determined to contain beneficial conversion features, resulting
in the bifurcation of those features as an equity instrument (resulting in a debt discount) at issuance. After allocation of the
gross proceeds to the warrants (discussed below) and beneficial conversion feature, the total debt discount recognized was equal
to the face of the convertible exchange notes. The debt discount was amortized over the term of the debt and the Company amortized
$1,366,667 of the debt discount for the year ended December 31, 2017. As of December
31, 2017, there was no remaining outstanding principal balance on the November 2016 Exchange Notes.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - FAIR VALUE MEASUREMENTS
Fair
value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of
judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability.
Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely,
financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured
at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation
and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the
asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level
hierarchy.
Valuation
Hierarchy
ASC
820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs
are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs
based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The
Company did not have any liabilities carried at fair value measured as a recurring basis as of December 31, 2018 and 2017.
The
carrying amounts of cash and accounts payable approximate their fair value due to their short maturities. The Company’s
other financial instruments include its convertible notes payable obligations. The carrying value of these instruments approximate
fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities. The Company
measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the derivative liabilities.
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the conversion feature liability and common stock purchase warrants for which there are no
current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes
in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in
estimates or assumptions and recorded as appropriate. A significant decrease in the volatility or a significant decrease in the
Company’s stock price, in isolation, would result in a significantly lower fair value measurement.
During
the years ended December 31, 2018 and 2017, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
Other Fair
Value Measurements
During
the years ended December 31, 2018 and 2017, the Company recorded $0 and $171,530, respectively, of interest expense related to
the amortization of the discount of the contingent consideration. The fair value measurements were based on significant inputs
not observed in the market and thus represented a Level 3 measurement.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9
- DEBT REFINANCING
On
May 24, 2018, LogicMark, a wholly owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the “Credit
Agreement”) with the lenders thereto and Sagard Holdings Manager LP, as administrative agent and collateral agent for the
lenders party to the Credit Agreement (collectively, the “Lender”), whereby the Lender extended a term loan (the “Term
Loan”) to LogicMark in the principal amount of $16,000,000. The maturity date of the Term Loan is May 24, 2023. The outstanding
principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted monthly, plus 9.5% per annum (approximately 11.85%
as of December 31, 2018). The Company incurred $1,253,970 in deferred debt issue costs related to the Term Loan. During the twelve
months ended December 31, 2018, the Company amortized $151,690 of the deferred debt issue costs which is included in interest
expense in the consolidated statement of operations. At December 31, 2018 the unamortized
balance
of deferred debt issue costs was $1,102,280. Pursuant to the terms and conditions of the Credit Agreement, LogicMark is required
to deposit 50% of its excess cash flow generated into a restricted bank account for a maximum period of one (1) year. Excess cash
flow is defined as LogicMark’s adjusted earnings before interest, taxes, depreciation and amortization less any debt service,
debt prepayments and capital expenditures. At the end of the one (1) year period, the restricted cash may be used either to pay
down the Term Loan or LogicMark will have the ability to transfer the restricted cash balance to an operating bank account and
use the cash for operational purposes. This determination will be made solely at the discretion of the Lender. On December 10,
2018, LogicMark entered into a Consent to the Credit Agreement with Sagard Holdings Manager LP whereby LogicMark temporarily withdrew
$500,000 from the restricted cash balance. In accordance with the Consent, the repayment of the temporary withdrawal was to be
made no later than January 31, 2019. As a result of the Consent, the Company incurred a usage fee of $75,000 from the Lender.
The usage fee is included in accrued liabilities on the Company’s consolidated balance sheet at December 31, 2018. The Company’s
restricted cash balance at December 31, 2018 included $998,950 related to LogicMark’s excess cash flow generated.
The
Credit Agreement contains customary covenants, including
a covenant that (a) LogicMark shall not permit the
Fixed Charge Coverage Ratio (as defined in the Credit Agreement) as of the last day of any fiscal quarter, beginning with
June 30, 2018, to be less than the correlative ratio indicated, which correlative ratio is initially 3.00 : 1.00 for the
fiscal quarter beginning June 30, 2018 and increasing by annual increments of 0.25 for each fiscal quarter until March 31,
2021, and thereafter, the correlative ratio is 4.00 : 1.00, and (b) LogicMark shall not permit the Leverage Ratio (as defined
in the Credit Agreement) as of the last day of any fiscal quarter, beginning with June 30, 2018, to exceed the correlative
ratio indicated which correlative ratio is initially 2.60 : 1.00 for the fiscal quarter beginning June 30, 2018 and
decreasing by various annual increments for each fiscal quarter until March 31, 2021 and thereafter, the correlative ratio is
2.00 : 1.00.
As of December 31, 2018, the Company was in compliance with such covenants.
The performance of LogicMark under the
Credit Agreement is secured by: (a) a senior lien granted pursuant to a Security Agreement on all of the assets of LogicMark,
the Company, 3D-ID, LLC (one of the Company’s wholly-owned subsidiaries) and Fit Pay (one of the Company’s wholly-owned
subsidiaries); (b) a senior lien granted pursuant to an Intellectual Property Security Agreement on all of the intellectual property
assets of the foregoing companies; and (c) a pledge of certain pledged securities of the foregoing companies pursuant to a Securities
Pledge Agreement. The performance of LogicMark is guaranteed pursuant to a Guaranty Agreement by the Company, 3D-ID, LLC and Fit
Pay.
Warrants
and Registration Rights
In
addition to entering into the Credit Agreement, the Company issued two (2) common stock purchase warrants (each, a “Sagard
Warrant”) to Sagard Credit Partners, LP. Each Sagard Warrant is exercisable for 244,081 shares of the Company’s common
stock (collectively, the “Sagard Warrant Shares”). Each Sagard Warrant will be exercisable beginning on May 24, 2018,
for a period of five (5) years. The exercise price per share is $3.90 for the first Sagard Warrant and $4.88 for the second Sagard
Warrant. The exercise price and the amount of shares of the Company’s common stock issuable upon exercise of each Sagard
Warrant are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications,
mergers or other corporate changes or dilutive issuances.
On
May 24, 2018 the Company recorded a debt discount of $705,541. The debt discount is attributable to the aggregate fair value on
the issuance date of both Sagard Warrants. The debt discount is being amortized using the effective interest method over the five-year
term of the Term Loan. During the year ended December 31, 2018, the Company recorded $85,348 of debt discount amortization
related to the Sagard Warrants. The debt discount amortization is included as part of interest expense in the consolidated statement
of operations.
Each
Sagard Warrant contains a covenant of the Company that within ninety (90) days of May 24, 2018, at the Company’s sole cost
and expense, it will file or cause to be filed a registration statement covering the resale of the Sagard Warrant Shares, and
will promptly provide confirmation of such registration to the holder. The registration statement covering the resale of the Sagard
Warrant Shares was filed and became effective in July 2018.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
- STOCKHOLDERS’ EQUITY
April
2016 Offering
For the year ended December 31, 2017,
the Company recorded Series A Preferred Stock dividends relating to previously issued Series A Convertible Preferred Stock of
$34,884. During the year ended December 31, 2017, holders of 211,424 shares of Series A Preferred Stock converted $338,749 of
Series A Preferred Stock and dividends into 159,219 shares of common stock. As of December 31, 2017, there was no remaining
outstanding principal balance on the Series A Preferred Stock.
July
2016 Offering
For the year ended December 31, 2017, the
Company recorded Series B Preferred Stock dividends relating to previously issued Series B Convertible Preferred Stock of
$634,375. During the year ended December 31, 2017, holders of 4,500,000 shares of Series B Preferred Stock converted
$6,075,000 of Series B Preferred Stock, dividends and liquidated damages into 3,106,802 shares of common stock. As of
December 31, 2017, there was no remaining outstanding principal balance on the Series B Preferred Stock.
July
2017 Offerings
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 net proceeds from the offering, after deducting placement
agent fees and other offering related expenses payable by the Company, of approximately $3,017,932. The pre-funded warrants were
converted into shares of common stock on September 23, 2017 and as a result were included in the common stock outstanding balance
for purposes of computing earnings per share.
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. The warrants will be exercisable beginning on the six (6) month anniversary
of the date of issuance, at an exercise price of $2.00 per share and will expire on the fifth anniversary of the initial exercise
date.
November
2017 Offerings
On
November 13, 2017, the Company closed a registered direct offering of an aggregate of 2,941,177 shares (the “November Shares”)
of Common Stock. The Company sold the November Shares at a price of $1.36 per share. The Company received net proceeds from the
offering, after deducting placement agent fees and other offering related expenses of approximately $3,620,115.
On
November 13, 2017, the Company also closed a previously announced concurrent private placement for no additional consideration,
of the November Investor Warrants to purchase 2,500,000 shares of Common Stock.
On
December 19, 2017, and effective as of November 29, 2017, we entered into an agreement (the “Amendment Agreement”)
with the holders of the convertible notes and common stock purchase warrants issued pursuant to that certain Exchange Agreement,
dated November 29, 2016, by and among the Company and such holders. Pursuant to the Amendment Agreement, the parties agreed to
(i) amend the maturity dates of the convertible notes by one (1) year, or November 29, 2018, and (ii) that the holders would forbear
the exercise of any remedies due to the passing of the original maturity date. In consideration thereof, the Company issued to
the holders an aggregate of 370,000 shares of restricted Common Stock with a fair value of $673,400. This amount was expensed
and is included in interest expense for the year ended December 31, 2017.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - STOCKHOLDERS’ EQUITY (CONTINUED)
December
2017 Offering
On
December 26, 2017, we closed a registered direct offering of an aggregate of 1,750,000 shares (the “December Shares”)
of Common Stock. We sold the December Shares at a price of $4.00 per share. We received net proceeds from the offering, after
deducting placement agent fees and other offering related expenses of $6,392,341.
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:
Dividends
on Series C Preferred Stock
Holders
of Series C Preferred Stock are entitled to receive 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 are payable in cash. For the years ended December 31, 2018 and 2017, the Company recorded Series C Preferred
Stock dividends of $100,000 and $60,556, respectively.
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 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
fifty percent (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
are 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
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
December 31, 2018 and 2017. Therefore, the Company classified the Series C Preferred Stock as temporary equity in the
consolidated balance sheets at December 31, 2018 and 2017.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - STOCKHOLDERS’ EQUITY (CONTINUED)
Warrants
The following
table summarizes the Company’s warrants outstanding and exercisable at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
1,829,049
|
|
|
$
|
12.00
|
|
|
|
3.92
|
|
|
$
|
-
|
|
Issued
|
|
|
4,827,202
|
|
|
|
2.00
|
|
|
|
4.76
|
|
|
|
-
|
|
Exercised (1)
|
|
|
(878,601
|
)
|
|
|
2.00
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2017
|
|
|
5,777,650
|
|
|
$
|
5.08
|
|
|
|
4.26
|
|
|
$
|
6,672,902
|
|
Issued
|
|
|
638,162
|
|
|
|
3.83
|
|
|
|
4.45
|
|
|
|
-
|
|
Exercised (2)
|
|
|
(1,325,000
|
)
|
|
|
1.94
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(460
|
)
|
|
|
10.00
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2018
|
|
|
5,090,352
|
|
|
$
|
5.42
|
|
|
|
3.32
|
|
|
$
|
-
|
|
(1)
|
During
the year ended December 31, 2017, 648,601 warrants were exercised on a cashless basis and were converted into 429,656 shares
of common stock.
|
(2)
|
During
the year ended December 31, 2018, 1,075,000 warrants were exercised on a cashless basis and were converted into 437,018
shares of common stock. In addition, the Company received proceeds of $425,000 in connection with the exercise of
warrants into 250,000 shares of common stock at an average exercise price of $1.70 per share.
|
On
September 14, 2018, the Company entered into a Warrant Amendment and Exercise Agreement with certain holders (collectively, the
“Investors”) of previously issued Common Stock Purchase Warrants (the “Old Warrants”). In connection with
those certain Common Stock Purchase Warrants between the Company and the Investors dated July 13, 2017, July 19, 2017 and November
13, 2017 (the “Warrant Agreements”), the Company agreed to issue to the Investors warrants to purchase up to 3,273,601
shares of common stock at an exercise price of $2.00 per share, (the “New Warrants”), under certain circumstances.
Under the terms of the Amendment Agreement, in consideration of the Investors’ exercising up to 3,273,601 of the Old Warrants,
the exercise price per share of the Old Warrants was reduced to $1.50 per share. The Investors may continue to exercise the Old
Warrants after December 31, 2018, but will not receive any New Warrants for any warrants exercised after that date. The exercise
price per share of the New Warrants represented a 30% premium to the closing price for the Company’s common stock on September
14, 2018.
The
New Warrants, if issued, are exercisable for up to the original expiration dates of the Old Warrants, or July 19, 2022, January
23, 2023, or May 13, 2023, as applicable. The exercise price and number of shares issuable upon exercise of the New Warrants are
subject to traditional adjustments 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 issuable upon exercise of the New Warrants, then the New Warrants may be exercised on a cashless (net exercise) basis.
As
a result of this Warrant Amendment and Exercise Agreement, the Company recorded a warrant modification expense of $165,640 for
the year ended December 31, 2018 related to the reduction in the exercise price of the Old Warrants from $2.00 to $1.50.
In addition, the Company also recorded a warrant modification expense of $179,640 for the year ended December 31, 2018
resulting from the issuance of 150,000 replacement warrants with an exercise price of $2.00 for warrants that were exercised during 2018.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
- STOCKHOLDERS’ EQUITY (CONTINUED)
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
975,886 shares at December 31, 2018.
2017
Stock Incentive Plan
On August 24, 2017, a majority of the Company’s
stockholders approved at the 2017 Annual Stockholders’ Meeting the 2017 Stock Incentive Plan (“2017 SIP”). The
aggregate maximum number of shares of common stock (including shares underlying options) that may be issued under the 2017 SIP
pursuant to awards of restricted shares or options will be limited to 10% of the outstanding shares of common stock, which calculation
shall be made on the first (1
st
) business day of each new fiscal year; provided that for fiscal year 2017, 1,500,000
shares of common stock may be delivered to participants under the 2017 SIP. Thereafter, the 10% provision shall govern
the 2017 SIP. The number of shares of common stock that are the subject of awards under the 2017 SIP which are forfeited or terminated,
are settled in cash in lieu of shares of common stock or in a manner such that all or some of the shares covered by an award are
not issued to a participant or are exchanged for awards that do not involve shares 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.
During the year ended December
31, 2018, the Company issued 317,700 shares of common stock under both the LTIP and the 2017 SIP to five (5)
non-executive directors for serving on the Company’s board. The aggregate fair value of the shares issued to the
directors was $375,111. Also during the year ended December 31, 2018, the Company issued 322,185 shares of common stock with
an aggregate fair value of $546,694 to executive and certain non-executive employees related to the Company’s 2017
management incentive plan.
During the year ended December 31, 2017, the Company issued 159,933 shares of common stock
under the plan to five (5) non-executive directors for serving on the Company’s board. The aggregate fair value of the
shares issued to the directors was $360,000. Also during the year ended December 31, 2017, the Company issued 232,559 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, which was previously accrued. In 2017, the Company also granted 1,095,895
restricted shares of common stock with an aggregate value of $1,864,253 to certain executive and non-executive employees. The
vesting period for these restricted shares of common stock is twelve months and the Company expensed $1,629,049 related to
these restricted stock awards.
During the years ended December 31,
2018 and 2017, the Company accrued $909,364 and $925,000, respectively of discretionary management and employee bonus
expense.
During
the year ended December 31, 2018, the Company issued 317,576 fully-vested shares of common stock with a fair value
of $534,163 to non-employees for services rendered. In addition, the Company issued 26,509 shares of
common stock
with a fair value of $59,380 as payment of interest expense. During the year ended December 31, 2017, the Company issued
448,258 fully-vested shares of common stock with a fair value of $816,955 to non-employees for services rendered.
NOTE
11 - INCOME TAXES
On
December 22, 2017, the President signed into law new legislation, known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”),
that resulted in significant changes to the Internal Revenue Code of 1986, as amended. These changes include a federal statutory
rate reduction from 34% to 21%, limitation of the deduction for net operating losses to 80% of taxable income while providing
that the net operating loss carryovers for years after 2017 will not expire, limitation on the amount of research and development
expenses deductible per year beginning in years after 2021, increased limitations on certain executive compensation, elimination
of the Corporate Alternative Minimum Tax, and modifying or repealing other business deductions and credits.
The
Company has incorporated the impact of the Tax Act in the results from operations for the tax effects of the Tax Act. As
a result of the Tax Act being signed into law, the Company recognized a provisional charge of $4,295,052, equal to (43.48%)
of Operating Income Before Income Tax, in the fourth quarter of 2017 related to the re-measurement of its U.S. deferred
tax assets at the lower enacted corporate tax rate. Due to the history of net operating losses, the Company is in a
valuation allowance position. As a result, the additional tax expense for the year ended December 31, 2017 due to the Tax Act
was offset by an equal reduction to the valuation allowance, resulting in no net tax impact from the Tax Act to the
overall financial condition and results of operations of the Company. Pursuant to SEC SAB No. 118, the Company
was
allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the
related tax accounting effects. As of December 31, 2018, the Company has completed its accounting for the effects of the Tax
Act and no measurement period adjustments were recorded.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11
- INCOME TAXES (CONTINUED)
As
of December 31, 2018, the Company had US federal and state net operating loss (“NOLs”) carryovers of $39,386,864 and
$32,519,993, respectively. Federal and state NOL’s generated through December 31, 2017 are available to offset future taxable
income, which expire beginning in 2033. Federal NOL’s generated for years starting after December 31, 2017 are available
to offset future taxable income indefinitely. In addition, the Company had tax credit carryforwards of $333,673 at December 31,
2018 that will be available to reduce future tax liabilities. The tax credit carryforwards will begin to expire beginning in 2033.
In
accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an
annual limitation in the event of a change of control. The Company has not determined whether a change of control has
occurred as of December 31, 2018 with respect to the Nxt-ID NOLs and therefore no limitation under Section 382 has been
computed related to the Nxt-ID NOLs, including NOL’s generated by Fit Pay following its acquisition in 2017. Management will
review for such limitations before any of the Nxt-ID NOLs against future taxable income. Management has determined
the acquisition of Fit Pay during the 2017 year is a change of control event under Section 382 of the Internal Revenue Code
with respect to the Fit Pay pre-acquisition NOLs. Management determined that the sum of Section 382 annual limitations on
the Fit Pay pre-acquisition NOLs during the corresponding carryforward period is in excess of the total amount of Fit Pay
NOL carryforward available at the time of change of control. Consequently, no adjustment has been made to the amount of Fit
Pay NOL available following the change in control.
Section
384 of the Internal Revenue Code Section further limits Nxt-ID’s ability to off-set pre-acquisition NOLs of Nxt-ID against
future taxable income which may be created by the realization of Fit Pay built in gains during the five-year recognition period
following the Fit Pay acquisition. However, tax losses of the consolidated group generated from operations occurring after the
Fit Pay acquisition are eligible to offset any taxable income resulting from realization of Fit Pay built in gain following the
transaction.
The
Company has no material uncertain tax positions for any of the reporting periods presented. The Company has filed all of its tax
returns for all prior periods through December 31, 2017 and intends to timely file the income tax returns for the period ending
December 31, 2018. As a result, the Company’s net operating loss carryovers will now be available to offset any future taxable
income.
The
Company is subject to taxation in the United States and various states. As of December 31, 2018, the Company’s tax years
post 2013 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2018 the Company is no longer
subject to U.S. federal or state examinations by tax authorities for years before December 31, 2014. The Company has not been
examined or received notice of pending examination by the federal or any state and local tax authority. To the extent a tax authority
examines an open tax year and makes an assessment, the results from operations could be affected through additional tax liabilities
or adjustments to the amount of NOL carryforward or tax basis of other components of deferred tax.
The income
tax (benefit) provision consists of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current income tax provision from continuing operations
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
4,327
|
|
|
|
15,289
|
|
|
|
|
4,327
|
|
|
|
15,289
|
|
Deferred income tax (benefit) from continuing operations
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,418,827
|
)
|
|
|
1,550,056
|
|
State
|
|
|
(439,301
|
)
|
|
|
(188,060
|
)
|
Change in valuation allowance from continuing operations
|
|
|
1,888,124
|
|
|
|
(1,216,881
|
)
|
|
|
|
29,996
|
|
|
|
145,115
|
|
|
|
|
|
|
|
|
|
|
Income tax provision from continuing operations
|
|
|
34,323
|
|
|
|
160,404
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) from discontinued operations
|
|
|
800
|
|
|
|
(1,773,739
|
)
|
Total income tax provision (benefit)
|
|
$
|
35,123
|
|
|
$
|
(1,613,335
|
)
|
A
reconciliation of the effective income tax rate and the statutory federal income tax rate from continuing operations is as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. federal statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State income tax rate, net of federal benefit
|
|
|
12.89
|
|
|
|
1.36
|
|
Other permanent differences
|
|
|
(5.63
|
)
|
|
|
(2.68
|
)
|
Effect of rate change under Tax Act
|
|
|
-
|
|
|
|
(51.20
|
)
|
Less: valuation allowance
|
|
|
(30.91
|
)
|
|
|
16.61
|
|
Provision for income taxes
|
|
|
(2.65
|
)%
|
|
|
(1.91
|
)%
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11
- INCOME TAXES (CONTINUED)
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences representing net future deductible amounts became deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. After consideration of all of the information available, Management believes that significant uncertainties
exists with respect to future realization of the deferred tax assets and has therefore established a valuation allowance. Nxt-ID
considered the deferred tax liabilities related to indefinite lived intangibles not allowable as a source of future taxable income
in determining the amount of valuation allowance at December 31, 2018 and 2017, resulting in net deferred tax liabilities in each
period after applying valuation allowance. For the year ended December 31, 2018, the increase in valuation allowance of $1,888,124
related to the change in valuation allowance included in the income tax provision. For the year ended December 31, 2017, the net
change in valuation allowance of $841,402 was comprised of an increase of $1,626,369 related to the Fit Pay purchase accounting
offset by a reduction of $2,467,771 related to a change in valuation allowance included in the income tax provision.
The tax effects
of temporary differences that give rise to deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
9,819,344
|
|
|
$
|
8,829,607
|
|
Tax credits
|
|
|
333,673
|
|
|
|
315,492
|
|
Accruals and reserves
|
|
|
1,616,359
|
|
|
|
856,675
|
|
Restricted stock
|
|
|
-
|
|
|
|
-
|
|
Tangible and intangible assets
|
|
|
315,493
|
|
|
|
225,711
|
|
Charitable donations
|
|
|
3,036
|
|
|
|
2,903
|
|
Total deferred tax assets before valuation allowance:
|
|
|
12,087,905
|
|
|
|
10,230,388
|
|
Valuation allowance
|
|
|
(10,967,136
|
)
|
|
|
(9,079,012
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
1,120,769
|
|
|
|
1,151,376
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Tangible and intangible assets
|
|
$
|
(1,486,166
|
)
|
|
$
|
(1,486,777
|
)
|
Total deferred tax liabilities
|
|
$
|
(1,486,166
|
)
|
|
$
|
(1,486,777
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(365,397
|
)
|
|
$
|
(335,401
|
)
|
NOTE
12 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
From
time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its
business. Other than as described above, there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or governmental body pending or, to the knowledge of the
executive officers of the company or any of its subsidiaries, threatened against or affecting the company, or any of its
subsidiaries in which an adverse decision could have a material adverse effect upon its business, operating results, or
financial condition.
COMMITMENTS
The
Company is party to certain leases for office space and warehouse facilities, with monthly payments ranging from $961 to $7,157,
expiring on various dates through May 2021. The Company incurred rent expense of $157,122 and $181,282 for the years ended December
31, 2018 and 2017, respectively. Minimum lease payments for non-cancelable operating leases are as follows:
Future Lease Obligations
|
|
|
|
|
|
|
|
2019
|
|
$
|
97,597
|
|
2020
|
|
|
70,309
|
|
2021
|
|
|
5,156
|
|
Total future lease obligations
|
|
$
|
173,062
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS
(CONTINUED)
The
maturity of the Company’s debt is as follows:
2019
|
|
$
|
1,265,151
|
|
2020
|
|
|
212,961
|
|
2021
|
|
|
159,719
|
|
2022
|
|
|
-
|
|
2023
|
|
|
15,001,050
|
|
Total debt
|
|
$
|
16,638,881
|
|
Effective
October 1, 2018, we extended the employment agreement with Gino M. Pereira, our Chief Executive Officer. The term of the employment
agreement is for three years and the term began on October 1, 2018. Effective January 1, 2018, Mr. Pereira’s base salary
increased to $420,000 from $381,150. The employment agreement also provides for:
|
●
|
Eligibility
to participate in bonus or incentive compensation plans that may be established by the board of directors from time to time
applicable to the executive’s services.
|
|
●
|
Eligibility
to receive equity awards as determined by the board of directors, or a committee of the board of directors, composed in compliance
with the corporate governance standards of any applicable listing exchange.
|
Effective
May 23, 2017, we entered into an employment agreement with Michael J. Orlando, our Chief Operating Officer. The term of
the employment agreement is one (1) year and commenced on May 23, 2017, which term shall be automatically extended for
successive one (1) - year periods unless terminated by either party upon ninety (90) days’ written notice. Mr.
Orlando’s base salary is $150,000, plus an initial stock grant of 250,000 shares of common stock from the
Company’s 2013 LTIP. Effective January 1, 2018, Mr. Orlando’s base salary increased to $350,000 from $150,000.
The employment agreement also provides for:
|
●
|
Eligibility
to participate in bonus or incentive compensation plans that may be established by the Board from time to time applicable
to Mr. Orlando’s services.
|
|
●
|
Eligibility
to receive equity awards as determined by the Board, or a committee of the Board, composed in compliance with the corporate
governance standards of any applicable listing exchange.
|
NOTE
13 - SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
January 2, 2019, the Company issued 63,889 shares of its common stock for the payment of services with a grant date fair value
of $44,000.
On January 8, 2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners
(“A.G.P.”) pursuant to which the Company may sell, at its option, shares of its common stock, par value $0.0001 per
share, having an aggregate offering price of up to $15 million to or through A.G.P., as sales agent. The Company will pay A.G.P.
commissions for its services in acting as the Company’s sales agent in the sale of its common stock pursuant to the sales
agreement. A.G.P. will be entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the
Company’s common stock on the Company’s behalf pursuant to the sales agreement. The Company also has agreed to reimburse
A.G.P. for its reasonable out-of-pocket expenses, including the fees and disbursements of counsel to A.G.P., incurred in connection
with the offering, in an amount not to exceed $35,000. During the period January 15, 2019 through February 21, 2019, the Company
received $1,322,484 in gross proceeds from the sale of 1,084,227 shares of its common stock under the sales agreement with A.G.P.
On
January 22, 2019, the Company issued 25,000 shares of its common stock for the payment of services with a grant date fair value
of $31,250.
On
February 8, 2019, the Company issued 40,000 shares of its common stock to certain employees under the 2018 management incentive
plan.
On
February 28, 2019, LogicMark entered into a Second Amendment to Consent to the Credit Agreement with Sagard Holdings
Manager LP whereby LogicMark temporarily withdrew $500,000 from the restricted cash balance. In accordance with the Second
Amendment to Consent, the repayment date of the temporary withdrawal was extended from January 31, 2019 to no later than
April 7, 2019. As a result of the Second Amendment to Consent, the Company incurred an additional usage fee of $131,250 from
the Lender.