Note
2 – Liquidity And Management Plans
The
Company generated operating income from continuing operations of $1,797,645 and incurred a net loss from continuing operations
of $2,871,864 during the nine months ended September 30, 2019. Certain of these factors raise substantial doubt about the Company’s
ability to sustain operations for at least one year from the issuance of these financial statements. However, given the Company’s
cash position at September 30, 2019 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 September 30, 2019, the Company had a working capital deficiency of $2,399,343 and stockholders’ equity of $6,156,142.
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.
Cash
and restricted cash, as presented on the Company’s condensed consolidated statements of cash flows, consists of $1,350,751
and $150,130, as of September 30, 2019, respectively.
During
the nine months ended September 30, 2019, the Company received net proceeds of $1,299,042 from the sale of common stock
in connection with the January 2019 At-the-Market Offering and $1,915,000 from the sale of stock in connection with a
registered direct public offering (See Note 6). However, the Company can give no assurance that any cash raised subsequent to
September 30, 2019 will be sufficient to execute its business plan or meet its obligations. The Company can give no assurance
that additional funds will be available on reasonable terms, or available at all, or that it will generate sufficient revenue
to alleviate these conditions.
The
Company’s ability to execute its business plan is dependent upon its ability to raise additional equity, secure debt financing,
and/or generate revenue. Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue
to fund its operations, the Company would need to curtail certain of its operational activities.
Note
3 – Summary Of Significant Accounting Policies
Use
of estimates in the financial statements
The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. The Company’s management evaluates these significant estimates and assumptions including those related to the fair
value of acquired assets and liabilities, stock based compensation, derivative instruments, income taxes, accounts receivable
and inventories, right-of-use assets and other matters that affect the condensed consolidated financial statements and disclosures.
Actual results could differ from those estimates.
Principles
of consolidation
The
condensed consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation.
Revenue
Recognition
The
Company’s revenues consist of product sales to either end customers or to distributors and its sales are recognized at a
point-in-time under the core principle of recognizing revenue when control of the product transfers to the customer. The Company
recognizes revenue when it ships or delivers the product from its fulfillment center to its customer, when the customer accepts
and has legal title of the product, and the Company has a present right to payment for the product. For the nine months ended
September 30, 2019 and 2018, the Company had no sales recognized over time. The Company invoices its customers at the same time
that the Company’s performance obligation is satisfied. The Company generally receives customer orders with a specified
delivery date and orders typically fluctuate from month-to-month based on customer demand and general business conditions.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company offers standard product warranty coverage which provides assurance that the Company’s products will conform to the
contractually agreed-upon specifications for a limited period from the date of shipment. The Company’s warranty liabilities
and related expense have not been material and were not material in the accompanying condensed consolidated financial statements
as of September 30, 2019 and December 31, 2018, and for the nine months ended September 30, 2019 and 2018.
Accounts
Receivable
Accounts
receivable is stated at net realizable value. The Company regularly reviews accounts receivable balances and adjusts the receivable
reserves as necessary whenever events or circumstances indicate the carrying value may not be recoverable. At September 30, 2019
and December 31, 2018, the Company had an allowance for doubtful accounts of $126,733.
Inventory
The
Company performs regular reviews of inventory quantities on hand and evaluates the realizable value of its inventories. The Company
adjusts the carrying value of the inventory as necessary with estimated valuation reserves for excess, obsolete, and slow-moving
inventory by comparing the individual inventory parts to forecasted product demand or production requirements. As of September
30, 2019, inventory was comprised of $162,279 in raw materials and $1,341,998 in finished goods on hand. Inventory at December
31, 2018 was comprised of $870,513 in finished goods on hand. The Company is required to prepay for certain inventory with certain
vendors until credit terms can be established. As of September 30, 2019 and December 31, 2018, the Company had prepaid inventory
of $132,754 and $317,488, respectively. These prepayments were made primarily for finished goods inventory, and prepaid inventory
is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
Goodwill
Authoritative
accounting guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform the
more detailed two-step quantitative goodwill impairment test. The Company performs the quantitative test if its qualitative assessment
determined it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company may
elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting units or assets. The
quantitative goodwill impairment test, if necessary, is a two-step process. The first step is to identify the existence of a potential
impairment by comparing the fair value of a reporting unit (the estimated fair value of a reporting unit is calculated using a
discounted cash flow model) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying
amount, the reporting unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative
goodwill impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second
step of the quantitative goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any.
The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair
value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined using
the same approach as employed when determining the amount of goodwill that would be recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all of its assets and liabilities as if the reporting unit had been acquired
in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
As part
of the annual evaluation of the LogicMark related goodwill, the Company utilized the option to first assess qualitative factors,
which include but are not limited to, economic, market and industry conditions, as well as the financial performance of LogicMark.
In accordance with applicable guidance, an entity is not required to calculate the fair value of a reporting unit if, after assessing
these qualitative factors, the Company determines that it is more likely than not that its reporting unit’s fair value is
greater than its carrying amount. As of September 30, 2019, 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.
The
goodwill associated with the Company’s acquisition of Fit Pay was $9,119,709 and was included as part of the Company’s
discontinued operations. On September 9, 2019, the Company sold its discontinued operations and the goodwill associated with Fit
Pay was written off and is included as part of the loss on sale of discontinued operations (See Note 4).
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
Intangible Assets
At
September 30, 2019, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,912,381;
trademarks of $1,057,218; and customer relationships of $2,222,697. At December 31, 2018, the other intangible assets relating
to the acquisition of LogicMark are comprised of patents of $3,191,159; trademarks of $1,104,246; and customer relationships of
$2,466,687. The Company will continue amortizing these intangible assets using the straight-line method over their estimated useful
lives which for the patents, trademarks and customer relationships are 11 years; 20 years; and 10 years, respectively. During
the nine and three months ended September 30, 2019, the Company had amortization expense of $569,796 and $192,019, respectively,
related to the LogicMark intangible assets. During the nine and three months ended September 30, 2018, the Company had amortization
expense of $569,796 and $192,019, respectively, related to the LogicMark intangible assets.
As
of September 30, 2019, total amortization expense estimated for the remainder of fiscal year 2019 is approximately $192,000, and
for each of the next five fiscal years, 2020 through 2024, the total amortization expense is estimated to be as follows: 2020
- $762,000; 2021 - $762,000; 2022 - $762,000; 2023 - $762,000; and 2024 - $762,000.
Stock-Based
Compensation
The
Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. The
Company accounts for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of
stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable.
Non-employee stock-based compensation charges are amortized over the vesting period or as earned. Stock-based compensation is
recorded in the same component of operating expenses as if it were paid in cash. The Company generally issues new shares of common
stock to satisfy conversion and warrant exercises.
Net
Loss per Share
Basic
loss per share was computed using the weighted average number of shares of common stock outstanding. Diluted loss per share includes
the effect of diluted common stock equivalents. Potentially dilutive securities from the exercise of warrants to purchase 6,973,221
shares of common stock as of September 30, 2019 were excluded from the computation of diluted net loss per share because the effect
of their inclusion would have been anti-dilutive. As of September 30, 2018, potentially dilutive securities from the exercise
of warrants to purchase 5,090,352 shares of common stock were excluded from the computation of diluted net loss per share because
the effect of their inclusion would have been anti-dilutive.
Reclassifications
Certain
accounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the
presentation of the current period consolidated financial statements. These reclassifications had no effect on the
previously reported net loss.
Recent
Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-13, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s
disclosure framework project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact of this update on its condensed
consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11, “I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, “Distinguishing Liabilities from Equity,” because
of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result
of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an
accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018. This ASU was adopted and did not have a material impact on the Company’s condensed consolidated financial statements.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amended, among other things, the existing
guidance by requiring lessees to recognize lease right-of-use assets (“ROU assets”) and liabilities arising from operating
leases on the balance sheet. Since issuing Topic 842, the FASB has issued various subsequent ASUs, including but not limited to
ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which clarified various aspects of the guidance under
Topic 842, as well as ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which allows entities the option of
recognizing the cumulative effect of applying Topic 842 as an adjustment to the opening balance of retained earnings in the year
of adoption while continuing to present all prior periods under previous lease accounting guidance.
Prior
to the adoption, the Company evaluated Topic 842, including the initial review of any necessary changes to existing processes
and systems that would be required to implement this standard, in order to determine its impact on the Company’s consolidated
financial statements and related disclosures.
The
Company adopted Topic 842 on January 1, 2019 using the updated modified retrospective transition approach allowed under ASU 2018-11
and did not restate prior periods. The Company recognized ROU assets and related lease liabilities on its condensed consolidated
balance sheet as of January 1, 2019 of approximately $267,516 and $269,820, respectively, related to its operating lease commitments,
and there was no cumulative impact on retained earnings as of January 1, 2019. Topic 842 did not have a material impact on the
Company’s condensed consolidated statements of income and condensed consolidated statements of cash flow for the nine months
ended September 30, 2019, nor did it have any impact on the Company’s compliance with debt covenants. The adoption of Topic
842 provided various optional practical expedients in transition, some of which the Company elected. Going forward, the impact
of Topic 842 on the Company’s consolidated financial statements will be dependent upon the Company’s lease portfolio.
The accounting for finance leases (formerly referred to as “capital leases”) remains substantially unchanged. See
Note 7 herein for further details regarding the impact of the adoption of Topic 842 and other information related to the Company’s
lease portfolio.
Other
recent accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements
upon adoption.
Note
4 – Discontinued Operations
On
September 9, 2019 the Company entered into a stock purchase agreement
(the “Purchase Agreement”), by and between Garmin International, Inc., a Kansas corporation (“Garmin”),
the Company and Fit Pay, a Delaware corporation and wholly owned subsidiary of the Company, pursuant
to which the Company sold and transferred all of the issued and outstanding shares of capital stock of Fit Pay, which consisted
of 1,000 shares of common stock, par value $0.0001 per share, of Fit Pay (the “Shares”), to Garmin (the “Sale”).
As previously disclosed, the Company conducted its payments business through Fit Pay, and Fit Pay provided technology, platform
and tokenization services to Garmin to power Garmin Pay™, a contactless payment feature included on smartwatches manufactured
by Garmin. In consideration for the Shares, Garmin paid the Company an aggregate amount of approximately $3.32 million in cash
(the “Purchase Price”). A portion of the proceeds received by the Company pursuant to the Purchase Agreement were
used to pay in full a promissory note issued by the Company to one of its directors, as well as to pay down the promissory note
that had been issued pursuant to the Credit Agreement (the “Promissory Note”). Garmin previously paid the Company
$500,000 of the Purchase Price as an advance on August 7, 2019, and paid the remainder of the Purchase Price at the closing of
the Sale. The Company recorded a loss on the sale of its discontinued operations of $5,988,767. The loss on sale of discontinued
operations for the nine and three months ended September 30, 2019 is comprised of the following:
Total sales price
|
|
$
|
3,323,198
|
|
Net book value of discontinued operations(1)
|
|
|
126,062
|
|
Write-off of goodwill related to acquisition of Fit Pay
|
|
|
(9,119,709
|
)
|
Write-off of unamortized other intangibles related to acquisition of Fit Pay
|
|
|
(2,674,607
|
)
|
Write-off of remaining contingent consideration
|
|
|
2,611,169
|
|
Transaction fees incurred
|
|
|
(254,880
|
)
|
Loss on sale of discontinued operations
|
|
$
|
(5,988,767
|
)
|
(1)
|
The net book value of discontinued operations at September 8, 2019 included cash of $113,148.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Also
in connection with the Purchase Agreement, the Company entered into a Manufacturing and Distribution Agreement, dated as of September
9, 2019 (the “Manufacturing Agreement”), with Garmin Switzerland GmbH, a Swiss corporation (“Garmin Switzerland”),
pursuant to which Garmin Switzerland agreed to grant the Company a non-exclusive right to manufacture, distribute and sell Garmin
Switzerland’s proprietary smart wallet (the “Product”) to certain customers in the U.S. designated by Garmin
Switzerland on a royalty-free basis (the “License”), unless otherwise agreed to by the parties thereto. The Company
was also granted a right to sub-license the Product pursuant to the Manufacturing Agreement. The Company’s has been granted
the License for an initial term of three years, which term automatically renews for additional one-year periods unless either
party provides the other with at least ninety days written notice of its election not to renew such term. The Manufacturing Agreement
may be terminated by either party if (i) a party breaches any material provision of such agreement, which breach is not cured
within thirty calendar days after receipt of written notice of such breach, (ii) upon written notice, a party petitions for reorganization
or to be adjudicated to be bankrupt, or if a receiver is appointed for substantially all of either party’s business, or
a party makes a general assignment for the benefit of such party’s creditors, or if any involuntary bankruptcy petition
is brought against such party and has not been discharged within sixty calendar days of the date the petition is brought, or (iii)
in the event of a change of control (as defined in the Manufacturing Agreement).
The
following table presents the assets and liabilities related to the financial technology product line classified as assets and
liabilities associated with discontinued operations (See Note 1) in the condensed consolidated balance sheets as of September
30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
125,318
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
96,909
|
|
Total current assets associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
222,227
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
38,793
|
|
Goodwill
|
|
|
-
|
|
|
|
9,119,709
|
|
Other intangible assets
|
|
|
-
|
|
|
|
3,112,224
|
|
Total non-current assets associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
12,270,726
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
175,982
|
|
Accrued expenses
|
|
|
-
|
|
|
|
185,978
|
|
Customer deposits
|
|
|
-
|
|
|
|
3,333
|
|
Total current liabilities associated with discontinued operations
|
|
$
|
-
|
|
|
$
|
365,293
|
|
The
following table represents the financial results of the discontinued operations for the nine and three months ended September
30, 2019 and 2018:
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
625,771
|
|
|
$
|
1,521,732
|
|
|
$
|
171,709
|
|
|
$
|
122,464
|
|
Cost of sales
|
|
|
194,856
|
|
|
|
794,313
|
|
|
|
72,980
|
|
|
|
66,595
|
|
Gross profit
|
|
|
430,915
|
|
|
|
727,419
|
|
|
|
98,729
|
|
|
|
55,869
|
|
Operating expenses
|
|
|
3,859,222
|
|
|
|
3,706,873
|
|
|
|
1,339,621
|
|
|
|
1,165,999
|
|
Interest expense
|
|
|
3,963
|
|
|
|
1,880
|
|
|
|
838
|
|
|
|
1,153
|
|
Loss from discontinued operations
|
|
$
|
(3,432,270
|
)
|
|
$
|
(2,981,334
|
)
|
|
$
|
(1,241,730
|
)
|
|
$
|
(1,111,283
|
)
|
(1)
|
The
contingent liability associated with the earn-out payment due to certain of the Fit Pay legacy shareholders is not
included in discontinued operations at December 31, 2018.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5 – Debt refinancings
On
May 24, 2018, LogicMark, a wholly owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the “Credit
Agreement”) with the lenders thereto and Sagard Holdings Manager LP, as administrative agent and collateral agent for the
lenders party to the Credit Agreement (collectively, the “Lender”), whereby the Lender extended a term loan (the “Term
Loan”) to LogicMark in the principal amount of $16,000,000. The original maturity date of the Term Loan was May 24, 2023.
The Term Loan Facility with Sagard Holdings Manager LP was repaid on May 3, 2019 with Term Loan proceeds received from CrowdOut
Capital LLC (see below). The outstanding principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted monthly,
plus 9.5% per annum. The Company incurred $1,253,970 in deferred debt issue costs related to the Term Loan. During the nine and
three months ended September 30, 2019, the Company amortized $86,969 and $0, respectively of the deferred debt issue costs which
is included in interest expense in the condensed consolidated statement of operations.
On
May 24, 2018 the Company recorded a debt discount of $705,541. The debt discount is attributable to the aggregate fair value
on the issuance date of both Sagard Warrants. The debt discount is being amortized using the effective interest method over
the five-year term of the Term Loan. During the nine and three months ended September 30, 2019, the Company recorded $48,932
and $0, respectively of debt discount amortization related to the Sagard Warrants. The debt discount amortization is included
as part of interest expense in the condensed consolidated statement of operations.
On
May 3, 2019, LogicMark completed the closing of a $16,500,000 senior secured term loan with the lenders thereto and
CrowdOut Capital LLC, as administrative agent. The Company used the proceeds from the term loan to repay LogicMark’s
existing term loan facility with Sagard Holdings Manager LP and to pay other costs related to the refinancing. The maturity
date of the Term Loan is May 3, 2022 and requires the Company to make minimum principal payments over the three-year term
amortized over 96 months. Since the inception of the refinancing, the Company has made scheduled principal repayments
totaling $687,500 through September 30, 2019. In addition, the Company prepaid an additional $1,988,498 of term loan in
September 2019 with a portion of the proceeds received from the sale of discontinued operations. The
outstanding principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted monthly, plus 11.0% per annum
(approximately 13.05% as of September 30, 2019). The Company incurred $412,500 in original issue discount for closing related
fees charged by the Lender. During the nine and three months ended September 30, 2019, the Company amortized $142,280 and
$121,211, respectively of the original issue discount which is included in interest expense in the condensed consolidated
statement of operations. At September 30, 2019 the unamortized balance of the original issue discount was $270,220. The
Company also incurred $1,831,989 in deferred debt issue costs related to the Term Loan. The deferred debt issue costs
include an exit fee of $1,072,500 which is equivalent to 6.5% of the term loan amount borrowed from CrowdOut Capital. The
exit fee is due to CrowdOut Capital upon the earlier of final repayment of the term loan facility or the maturity date. The
liability for the exit fee is included as part of other long-term liabilities in the Company’s condensed consolidated
balance sheet. During the nine and three months ended September 30, 2019, the Company amortized $434,149 and $337,697,
respectively of the deferred debt issue costs which is included in interest expense in the condensed consolidated statement
of operations. At September 30, 2019 the unamortized balance of deferred debt issue costs was $1,397,840.
In
connection with the Term Loan refinancing on May 3, 2019, the Company incurred a loss on extinguishment of debt of $2,343,879
which included the write off of unamortized deferred debt issuance costs and note discount of $1,015,311 and $571,260, respectively
resulting from the May 24, 2018 Term Loan facility with Sagard Holdings Manager LP and a yield maintenance premium, a prepayment
penalty and legal fees due to Sagard Holdings Manager LP. totaling $757,308.
The
Credit Agreement contains customary financial covenants. As of September 30, 2019, the Company was in compliance with such covenants.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6 – Stockholders’ Equity
January
2019 At-the-Market Offering
On
January 8, 2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“A.G.P.”)
for an at-the-market offering, pursuant to which the Company may sell, at its option, shares of its common stock, par value
$0.0001 per share, having an aggregate offering price of up to $15 million to or through A.G.P., as sales agent. The Company
will pay A.G.P. commissions for its services in acting as the Company’s sales agent in the sale of its common stock
pursuant to the sales agreement. A.G.P. will be entitled to compensation at a fixed commission rate of 3.0% of the gross
proceeds from the sale of the Company’s common stock on the Company’s behalf pursuant to the sales agreement. The
Company also has agreed to reimburse A.G.P. for its reasonable out-of-pocket expenses, including the fees and disbursements
of counsel to A.G.P., incurred in connection with the offering, in an amount not to exceed $35,000. During the nine months
ended September 30, 2019, the Company received $1,299,042 in net proceeds from the sale of 1,113,827 shares of its common
stock under the sales agreement with A.G.P. On April 2, 2019, the Company entered into a Securities Purchase agreement with
an investor in connection with a registered direct public offering of 2,469,136 shares of the Company’s common stock.
The shares of common stock were offered at a price of $0.81 per share and the Company received $1,915,000 in net proceeds from
the sale. The Company also issued to the investor for no additional consideration common stock purchase warrants to purchase
2,469,136 shares of common stock. The warrants are exercisable upon issuance at an exercise price of $1.05 and expire as the
fifth (5th) anniversary of the initial exercise date. The sales agreement with A.G.P. was terminated on October
10, 2019.
2013
Long-Term Stock Incentive Plan
On
January 4, 2013, a majority of the Company’s stockholders approved by written consent the Company’s 2013 Long-Term
Stock Incentive Plan (“LTIP”). The maximum aggregate number of shares of common stock that may be issued under the
LTIP, including stock awards, stock issued to directors for serving on the Company’s board of directors, and stock appreciation
rights, is limited to 10% of the shares of common stock outstanding on the first business or trading day of any fiscal year, which
is 975,886 shares of common stock at January 1, 2019.
During
the nine months ended September 30, 2019, the Company issued an aggregate of 398,749 shares of common stock under the LTIP to
five (5) non-employee directors for serving on the Company’s board. The aggregate fair value of the shares issued to the
directors was $280,000.
2017
Stock Incentive Plan
On
August 24, 2017, a majority of the Company’s stockholders approved at the 2017 Annual Stockholders’ Meeting the 2017
Stock Incentive Plan (“2017 SIP”). The aggregate maximum number of shares of common stock (including shares underlying
options) that may be issued under the 2017 SIP pursuant to awards of restricted shares or options will be limited to 10% of the
outstanding shares of common stock, which calculation shall be made on the first (1st) business day of each new fiscal
year; provided that for fiscal year 2017, 1,500,000 shares of common stock may be delivered to participants under the 2017 SIP.
Thereafter, the 10% provision shall govern the 2017 SIP. The number of shares of common stock that are the subject of awards under
the 2017 SIP which are forfeited or terminated, are settled in cash in lieu of shares of common stock or are settled in a manner
such that all or some of such shares covered by an award are not issued to a participant or are exchanged for awards that do not
involve shares of common stock will again immediately become available to be issued pursuant to awards granted under the 2017
SIP. If shares of common stock are withheld from payment of an award to satisfy tax obligations with respect to the award, those
shares of common stock will be treated as shares that have been issued under the 2017 SIP and will not again be available for
issuance under the 2017 SIP.
In
addition, during the nine months ended September 30, 2019, the Company issued 289,216 shares of common stock with an aggregate
fair value of $216,267 to certain non-executive employees related to the Company’s 2017 and 2018 management incentive plan.
During
the nine months ended September 30, 2019, the Company accrued $150,000 of management and employee bonus expense.
During
the nine months ended September 30, 2019, the Company issued 372,078 shares of common stock with a fair value of $254,490 to non-employees
for services rendered.
Warrants
As
of September 30, 2019, the Company had outstanding warrants to purchase an aggregate of 6,973,221 shares of common stock with
a weighted average exercise price and remaining life of $2.83 and 3.69 years, respectively. At September 30, 2019, the warrants
had no aggregate intrinsic value. During the nine months ended September 30, 2019, warrants to purchase an aggregate of 586,267
shares of common stock with a weighted-average exercise price of $17.83 expired.
Series
C Preferred Stock
On
June 11, 2019, the Company made a retroactive dividend payment adjustment of $50,000 to the Series C Preferred Stockholders pursuant
to the terms and conditions set forth in the Certificate of Designations, Preferences and Rights of the Series C Non-Convertible
Voting Preferred Stock.
Nxt-ID,
Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 – Commitments and Contingencies
Legal
Matters
From
time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of our business.
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened
against or affecting our company, or any of our subsidiaries in which an adverse decision could have a material adverse effect
upon our business, operating results, or financial condition.
Commitments
The
Company leases office space and a fulfillment center in the U.S., which are classified as operating leases expiring at various
dates. The Company determines if an arrangement qualifies as a lease at the lease inception. Operating lease liabilities are recorded
based on the present value of the future lease payments over the lease term, assessed as of the commencement date. The Company’s
real estate leases, which are for office space and a fulfillment center, generally have a lease term between 3 and 5 years. The
Company also leases a copier with a lease term of 5 years. The Company’s leases are comprised of fixed lease payments and
also include executory costs such as common area maintenance, as well as property insurance and property taxes. The Company has
elected to account for the lease and non-lease components as a single lease component for its real estate leases. Lease payments,
which may include lease components and non-lease components, are included in the measurement of the Company’s lease liabilities
to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as
stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.
The
Company’s lease agreements generally do not specify an implicit borrowing rate, and as such, the Company utilizes its incremental
borrowing rate by lease term, in order to calculate the present value of the future lease payments. The discount rate represents
a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease
liability payment streams commensurate with the lease term. On January 1, 2019, the discount rate used on existing leases at adoption
was determined based on the remaining lease term using available data as of that date. The Company did not have new or renewed
leases commencing in 2019.
Certain
of the Company’s lease agreements, primarily related to real estate, include options for the Company to either renew (extend)
or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 3
years. Renewal options are reviewed at lease commencement to determine if such options are reasonably certain of being exercised,
which could impact the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company
considers several factors, including but not limited to, significance of leasehold improvements incurred on the property, whether
the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain
that the Company would exercise such option. In most cases, the Company has concluded that renewal and early termination options
are not reasonably certain of being exercised by the Company (and thus not included in the Company’s ROU asset and lease
liability) unless there is an economic, financial or business reason to do so.
For
the nine months ended September 30, 2019, total operating lease cost was $125,815 and is recorded in cost of sales and selling,
general and administrative expenses, dependent on the nature of the leased asset. The operating lease cost is recognized on a
straight-line basis over the lease term. The following summarizes (i) the future minimum undiscounted lease payments under non-cancelable
lease for the remainder of 2019 as well as each of the next five years and thereafter, incorporating the practical expedient to
account for lease and non-lease components as a single lease component for our existing real estate leases, (ii) a reconciliation
of the undiscounted lease payments to the present value of the lease liabilities recognized, and (iii) the lease-related account
balances on the Company’s condensed consolidated balance sheet, as of September 30, 2019:
Year Ending December 31,
|
|
|
|
|
|
|
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
42,557
|
|
2020
|
|
|
88,827
|
|
2021
|
|
|
23,279
|
|
2022
|
|
|
18,186
|
|
2023
|
|
|
12,124
|
|
Total future minimum lease payments
|
|
$
|
184,973
|
|
Less imputed interest
|
|
|
(21,074
|
)
|
Total present value of future minimum lease payments
|
|
$
|
163,899
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2019
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
161,396
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
111,365
|
|
Other long-term liabilities
|
|
$
|
52,534
|
|
|
|
$
|
163,899
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
1.1 years
|
|
Weighted Average Discount Rate
|
|
|
11.74
|
%
|
Prior
to January 1, 2019, the Company accounted for its leases in accordance with Topic 842, “Leases.” At December 31, 2018,
the Company was committed under operating leases for office space and a fulfillment center, which expired at various dates. As
previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and under previous
lease accounting guidance, future minimum lease payments under non-cancelable operating leases as of December 31, 2018 totaled
$173,062, comprised of $97,597 for 2019, $70,309 for 2020, and $5,156 for 2021.
Debt
Maturity
The
maturity of the Company’s debt is as follows:
2019 (remainder)
|
|
$
|
515,625
|
|
2020
|
|
|
2,062,500
|
|
2021
|
|
|
2,062,500
|
|
2022
|
|
|
9,183,377
|
|
Total debt
|
|
$
|
13,824,002
|
|
Note
8 – Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
Effective
October 10, 2019, the Company and A.G.P. terminated the Sales Agreement and the related ATM Program.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations for the nine and three months ended September 30, 2019 should be read together
with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion
contains forward-looking statements and information relating to our business that reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the
date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws
of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the
forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual
results.
Overview
We were incorporated in the State of Delaware
on February 8, 2012. As of December 31, 2018, we are no longer an “emerging growth company” as defined in the Jumpstart
Our Business Startups Act of 2012 (the “JOBS Act”). We are a security technology company and we operate our business
in one segment – hardware and software security systems and applications. We are engaged in the development of proprietary
products and solutions that serve multiple end markets, including the security, healthcare, financial technology and the Internet
of Things (“IoT”) markets. We evaluate the performance of our business on, among other things, profit and loss from
operations. With extensive experience in access control, biometric and behavior-metric identity verification, security and privacy,
encryption and data protection, payments, miniaturization, and sensor technologies, we develop and market solutions for payment,
IoT and healthcare applications.
Our
wholly-owned subsidiary, LogicMark, manufactures and distributes non-monitored and monitored personal emergency response systems
sold through the United States Department of Veterans Affairs (the “VA”), healthcare durable medical equipment dealers
and distributors and monitored security dealers and distributors.
Our
former wholly-owned subsidiary, Fit Pay, had a proprietary technology platform that delivers payment, credential management,
authentication and other secure services to the IoT ecosystem. The platform uses tokenization, a payment security technology
that replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless
payment and authentication services. On September 21, 2018, we announced that our board of directors approved a plan
to separate our financial technology business from our healthcare business into an independent publicly traded company. We
originally planned to distribute shares of PartX, Inc., a newly created company and wholly-owned subsidiary of the Company
(“PartX”), to our stockholders through the execution of a spin-off. As a result, we reclassified our financial
technology business to discontinued operations for all periods reported (See Note 4). Our financial technology business was
comprised of our Fit Pay subsidiary and the intellectual property developed by the Company, including the Flye Smartcard and
the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX with the SEC in connection with the
planned spin-off of our payments, authentication and credential management business. On
August 19, 2019, our subsidiary, PartX notified the SEC that it was withdrawing the Registration Statement on Form 10 as
PartX was unable to secure sufficient investment within the time period specified in the term loan agreement with CrowdOut
Capital to separately fund the spinoff. With the approval of the our board of directors, and in accordance with the terms and
conditions set forth in the term loan facility from CrowdOut Capital, we entered into a non-binding letter of intent
for a potential sale of our Fit Pay subsidiary, excluding certain assets on August 6, 2019. In connection with the letter of
intent, the prospective purchaser advanced $500,000 of non-interest bearing working capital for Fit Pay. On
September 9, 2019, we completed the sale of our Fit Pay subsidiary to Garmin International, Inc. for $3.32 million in
cash.
Healthcare
With respect to the healthcare
market, our business initiatives are driven by our LogicMark subsidiary, which serves a market that enables two-way communication,
medical device connectivity and patient data tracking of key vitals through sensors, biometrics, and security to make home
health care a reality. There are three (3) major trends driving this market: (1) an increased desire for connectivity;
specifically, a greater desire for connected devices by people over 60 years of age who now represent the fastest growing
demographic for social media; (2) the growth of “TeleHealth”, which is the means by which telecommunications
technologies are meeting the increased need for health systems to better distribute doctor care across a wider range of
health facilities, making it easier to treat and diagnose patients; and (3) rising healthcare costs – as health
spending continues to outpace the economy, representing between 6% and 7% of the overall economy, the need to reduce hospital
readmissions, increase staffing efficiency and improve patient engagement remain the highest priorities. Together, these
trends have produced a large and growing market for us to serve. LogicMark has built a successful business on emergency
communications in healthcare. We have a strong business relationship with the VA today, serving veterans who suffer from
chronic conditions that often require emergency assistance. This business is steady and growing, producing the highest annual
revenue in its operational history in 2018. Our strategic plan calls for expanding LogicMark’s business into other
healthcare verticals as well as retail and enterprise channels in order to better serve the expanding demand for connected
and remote healthcare solutions.
Home healthcare, which includes health
monitoring and management using IoT and cloud-based processing, is an emerging area for LogicMark. The long-term trend toward more
home-based healthcare is a massive shift that is being driven by demographics (an aging population) and basic economics. People
also value autonomy and privacy which are important factors in determining which solutions will suit the market. Consumers are
beginning to enjoy the benefits of smart home technologies and online digital assistants. We believe one of the promising applications
of our VoiceMatch™ technology is enabling secure commands for restricted medical access. This solution, when coupled with
Nxt-ID BioCloud™, combines biometrics with encryption and distributed access control.
PERS devices are used to call for help
and medical care during an emergency. These devices are also used by a wide patient pool, as well as the general population, to
ensure safety and security when living or traveling alone. The global medical alert systems market caters to different end-users
across the healthcare industry, including individual users, hospitals and clinics, assisted living facilities and senior living
facilities. The growing demand for home healthcare devices is mainly driven by an aging population and rising healthcare costs
worldwide. We believe that these trends will lead to an increase in the usage of medical alert systems across the globe, as they
offer safety and medical security while being affordable and accessible.
Payments and Financial Technology
During
substantially most of the quarter ended September 30, 2019, we conducted our payments business through Fit Pay, a wholly
owned subsidiary of Nxt-ID, which was acquired in May 2017. Fit Pay’s core technology is a proprietary platform that
enables contactless payment capabilities, allowing its customers, which include manufacturers of “smart devices,”
to add payment capabilities to their products. Fit Pay connects its customers to leading payment card networks, including
Visa, Mastercard, Maestro and Discover, and to credit card issuing banks, globally. It successfully commercialized its
third-party token service provider platform with the launch of the Garmin Pay™, which is powered by Fit Pay’s platform.
Fit Pay’s technology and tokenization service enables the contactless payment feature that is included in
smartwatches manufactured by Garmin International, Inc. (“Garmin”). The payment feature, which went live in the
fall of 2017, is now included in 11 of Garmin’s smartwatches. On September 9,
2019, we completed the sale of our Fit Pay subsidiary to Garmin International, Inc. for $3.32 million in cash.
Results of Operations
Comparison of nine and three months ended September 30,
2019 and September 30, 2018
Revenue. Our revenues from continuing
operations for the nine and three months ended September 30, 2019 were $13,112,952 and $4,444,431, respectively, compared to $13,082,764
and $4,367,719, respectively for the nine and three months ended September 30, 2018. Our revenues are essentially flat for the
nine and three months ended September 30, 2019 as compared to the nine and three months ended September 30, 2018; however we are
experiencing decreased sales volume in LogicMark’s commercial sales which was partially offset by a favorable shift in product
sales mix from land-based products to mobile products which typically have a higher sales price on a per-unit basis.
Cost of Revenue and Gross Profit.
Our gross profit from continuing operations for the nine and three months ended September 30, 2019 was $9,906,612 and $3,337,058,
respectively, compared to a gross profit of $9,507,464 and $3,195,310, respectively for the nine and three months ended September
30, 2018. The increase in gross profit in the nine and three months ended September 30, 2019 as compared to the nine and three
months ended September 30, 2018 is primarily attributable to the higher gross profit resulting from the favorable shift in product
sales mix discussed above which was partially offset by the decreased volume in LogicMark’s commercial product sales.
Operating Expenses. Operating expenses
for the nine months ended September 30, 2019 totaled $8,108,967 and consisted of research and development expenses of $962,537,
selling and marketing expenses of $2,503,594 and general and administrative expenses of $4,642,836. The research and development
expenses related primarily to salaries and consulting services of $750,984. Selling and marketing expenses consisted primarily
of salaries and consulting services of $528,473, amortization of intangibles of $569,796, freight charges of $489,234, merchant
processing fees of $317,925, and sales commissions of $223,782. General and administrative expenses consisted of salaries and consulting
services of $1,363,703, accrued management and employee incentives of $234,785 and legal, audit and accounting fees of $647,298.
Also included in general and administrative expenses is $266,780 in non-cash stock compensation to consultants and board members.
Operating expenses for the nine months
ended September 30, 2018 totaled $8,638,025 and consisted of research and development expenses of $522,043, selling and marketing
expenses of $3,026,108 and general and administrative expenses of $5,089,874. The research and development expenses relate primarily
to salaries and consulting services of $434,118. Selling and marketing expenses consisted primarily of salaries and consulting
services of $932,067, amortization of intangibles of $569,796, freight charges of $451,476, merchant processing fees of $297,694,
and sales commissions of $217,502. General and administrative expenses consisted of salaries and consulting services of $1,423,742,
accrued management and employee incentives of $575,000, legal, audit and accounting fees of $684,367. Also included in general
and administrative expenses is $540,315 in non-cash stock compensation to consultants and board members.
Operating expenses for the three months
ended September 30, 2019 totaled $2,610,515 and consisted of research and development expenses of $354,257, selling and marketing
expenses of $760,011 and general and administrative expenses of $1,496,247. The research and development expenses related primarily
to salaries and consulting services of $231,520. Selling and marketing expenses consisted primarily of salaries and consulting
services of $167,785, amortization of intangibles of $192,018, freight charges of $164,352, merchant processing fees of $106,659,
and sales commissions of $74,861. General and administrative expenses consisted of salaries and consulting services of $420,293,
accrued management and employee incentives of $50,000 and legal, audit and accounting fees of $224,572. Also included in general
and administrative expenses is $95,024 in non-cash stock compensation to consultants and board members.
Operating expenses for the three months
ended September 30, 2018 totaled $2,966,861 and consisted of research and development expenses of $200,519, selling and marketing
expenses of $1,067,448 and general and administrative expenses of $1,698,894. The research and development expenses relate primarily
to salaries and consulting services of $185,084. Selling and marketing expenses consisted primarily of salaries and consulting
services of $369,980, amortization of intangibles of $192,019, freight charges of $146,591, merchant processing fees of $98,298,
and sales commissions of $72,307. General and administrative expenses consisted of salaries and consulting services of $486,999,
accrued management and employee incentives of $150,000, legal, audit and accounting fees of $280,774. Also included in general
and administrative expenses is $115,000 in non-cash stock compensation to consultants and board members.
Operating Profit. The operating
profit from continuing operations for the nine and three months ended September 30, 2019 was $1,797,645 and $726,543, respectively,
compared with operating profit of $869,439 and $228,449, respectively for the nine and three months ended September 30, 2018. The
increase in operating profit for the nine and three months ended September 30, 2019 as compared to the nine and three months ended
September 30, 2018 is primarily attributable to the higher gross profit discussed above and lower operating expenses incurred in
the nine and three months ended September 30, 2019 as compared to the nine and three months ended September 30, 2018.
Net Loss from Continuing Operations.
The net loss from continuing operations for the nine months ended September 30, 2019 was $2,871,864 compared to a net loss
of $892,791 for the nine months ended September 30, 2018. The net loss for the nine months ended September 30, 2019 was primarily
attributable to the operating profit discussed above of $1,797,645 and a favorable change in fair value of contingent consideration
of $85,111, all of which was offset by interest expense incurred of $2,410,741 and a loss on the extinguishment of debt of $2,343,879.
The net loss from continuing operations for the nine months ended September 30, 2018 was $892,791 and was primarily attributable
to operating profit of $869,439 offset by interest expense incurred of $2,378,519, a loss on extinguishment of debt of $68,213,
warrant modification expense of $345,280 all of which was partially offset by a favorable change in fair value of contingent consideration
related to the acquisition of Fit Pay of $778,234 and an income tax benefit of $251,548.
The net loss from continuing operations
for the three months ended September 30, 2019 was $406,730 compared to a net loss of $151,217 for the three months ended September
30, 2018. The net loss for the three months ended September 30, 2019 was primarily attributable to the operating profit discussed
above of $726,543 all of which was offset by interest expense incurred of $1,133,273. The net loss from continuing operations for
the nine months ended September 30, 2018 was $151,217 and was primarily attributable to interest expense incurred of $580,152,
warrant modification expense of $345,280, all of which was partially offset by operating profit of $228,449, a favorable change
in fair value of contingent consideration related to the acquisition of Fit Pay of $461,916 and an income tax benefit of $83,850.
Liquidity and Capital Resources
We generated operating income from
continuing operations of $1,797,645 and incurred a loss from continuing operations of $2,871,864 for the nine months ended
September 30, 2019.
Cash and Working Capital. As of
September 30, 2019, the Company had cash and stockholders’ equity of $1,350,751 and $6,156,142, respectively. At September
30, 2019, the Company’s continuing operations had a working capital deficiency of $2,399,343.
Cash Generated by Operating Activities.
Our primary ongoing uses of operating cash relate to payments to subcontractors and vendors for product, research and development,
salaries and related expenses and professional fees. Our vendors and subcontractors generally provide us with normal trade payment
terms. During the nine months ended September 30, 2019, net cash provided by operating activities totaled $1,480,123, which was
comprised of a net loss of $2,871,864, positive non-cash adjustments to reconcile net loss to net cash used in operating activities
of $4,116,928, and changes in operating assets and liabilities of positive $235,059, as compared to net cash used in operating
activities of $803,082 for the nine months ended September 30, 2018, which was comprised of a net loss of $892,791, positive non-cash
adjustments to reconcile net loss to net cash used in operating activities of $1,132,436, and changes in operating assets and liabilities
of negative $1,042,727.
Cash Used in Investing Activities. During
the nine months ended September 30, 2019 net cash provided by investing activities totaled $2,750,314 and was primarily related
to the net proceeds received from the sale of our discontinued operations of $2,955,170 offset in part by earn out payments to
the Fit Pay Sellers totaling $181,065 and the purchase of equipment of $23,791. During the nine months ended September 30, 2018
net cash used in investing activities totaled $3,166,854 and was primarily related to an earn out payment of $3,156,088 to the
LogicMark Sellers and the purchase of equipment of $10,766.
Cash Provided by Financing
Activities. During the nine months ended September 30, 2019, net cash used in financing activities totaled $1,477,929 and
was primarily related to the pay down of $16,000,000 related to the term loan facility with Sagard Holdings Manager, LP, pay
downs in both the short and long-term Seller debt totaling $638,881, scheduled term loan repayments of $687,500 and fees paid
in connection with equity offerings totaling $47,671. In addition, we also prepaid $1,988,498 of the term loan facility with
a portion of the net proceeds received from the sale of our discontinued operations. These financing disbursements were
funded in part with net proceeds received of $1,299,042 from the sale of stock from our January 2019 At-the-Market Offering,
$1,915,000 from the sale of stock in connection with a registered direct public offering and $14,670,579 in net proceeds
received from the refinancing with CrowdOut Capital, which closed on May 3, 2019. During the nine months ended September 30,
2018, net cash provided by financing activities totaled $3,072,830 and was primarily related to the proceeds received from
the exercising of warrants into common stock of $425,000 and $14,906,030 in net proceeds received from the refinancing with
Sagard Holdings Manager, LP, which closed on May 24, 2018 all of which was partially offset by the net pay down of
$12,000,000 related to the revolver facility with ExWorks Capital Fund I, LP, pay downs in short-term debt of $212,961 and
fees paid in connection with equity offerings of $45,239.
Sources of Liquidity. We have generated
operating income from continuing operations of $1,797,645 and incurred a net loss from continuing operations of $2,871,864 during
the nine months ended September 30, 2019. As of September 30, 2019, the Company had a working capital deficiency of $2,399,343
and stockholders’ equity of $6,156,142. Certain of these factors raise substantial doubt about the Company’s ability
to sustain operations and to continue as a going concern for at least one year from the issuance of these financial statements.
As of September 30, 2019, the Company had cash of $1,350,751.
Given our cash position at September 30,
2019 and our projected cash flow from operations over the next twelve months, we believe that we will have sufficient capital to
sustain operations and to continue as a going concern over the next twelve months following the date of this report to alleviate
such substantial doubt. In order to execute our long-term strategic plan to develop and commercialize our core products, fulfill
our product development commitments and fund our obligations as they come due, we may need to raise additional funds, through public
or private equity offerings, debt financings, or other means. Should we not be successful in obtaining the necessary financing,
or generating sufficient revenue to fund our operations, we would need to curtail certain of our operational activities.
The Company can give no assurance that
any cash raised subsequent to September 30, 2019 will be sufficient to execute its business plan or meet its obligations. The Company
can give no assurance that additional funds will be available on reasonable terms, or available at all, or that it will generate
sufficient revenue to fund its operations.
Impact of Inflation
We believe that our business has not been
affected to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the
worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost
of certain raw materials, component parts and labor used in the production of our products. It also may increase our operating
expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets. We have generally been able to maintain
or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent,
price increases, and we expect to be able to do the same during the remainder of fiscal year 2019. As such, we do not believe that
inflation will have a significant impact on our business during the remainder of fiscal year 2019.
Off Balance Sheet Arrangements
We do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
such relationships.
Recent Accounting Pronouncements
See Note 3 to our condensed consolidated
financial statements for the nine months ended September 30, 2019, included elsewhere in this document.