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 30, 2020, the last business day of the second fiscal quarter, was
approximately $14,258,634 based on a total number of shares of our common stock outstanding on that day of 30,496,474 and
a closing price of $0.504. 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 53,311,898 shares of its common
stock outstanding as of April 14, 2021.
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
Item
1. Business
Nxt-ID provides technology products and
services for healthcare applications. We have extensive experience in access control, biometric and behavior-metric identity verification,
security and privacy, encryption and data protection, payments, miniaturization, and sensor technologies and healthcare applications.
During the year ended December 31, 2020,
our wholly-owned subsidiary LogicMark, LLC (“LogicMark”) operated in the mobile market: LogicMark is 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”).
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
four (4) 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; (3) rising healthcare costs
– as healthcare spending continues to outpace the economy, the need to reduce hospital readmissions, increase staffing efficiency
and improve patient engagement remain the highest priorities; and (4) the critical shortage of labor in the home healthcare industry,
creating an increased need for technology to improve communication to home healthcare agencies by their clients. 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. 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, 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.
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,
rising healthcare costs and a severe shortage of workers in the home healthcare market worldwide. It is very beneficial for seniors
who have a history of falling or have been identified as having a high fall risk, older individuals who live alone and people
who have mobility issues. We believe that the aging population will spur the usage of medical alert systems across the globe,
as they offer safety and medical security while being affordable and accessible.
Global PERS Market Growth
Source: Kenneth Research 2020
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 5.8% to $4.5 billion in 2028, benefiting from strong demographic tailwinds. As landline
usage continues to decrease, other technologies such as cellular and WiFi will be used for in-home systems. According to Kenneth
Research, North America, Asia and Europe are the largest markets for PERS, accounting for approximately 37%, 31% and 24% of total
sales, respectively, in 2028. According to Kenneth Research, improvements in healthcare infrastructure and emerging economies will
fuel growth and significantly improve the relative market share of 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 “no monthly fee” products, which only require a one-time
purchase fee, instead of a recurring monthly contract. The “no monthly fee” products contact family, friends or 911
directly, eliminating the monthly fee from a monitoring center. 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 no monthly fee 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 no monthly fee 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
We intend to expand LogicMark’s product
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 institutional/senior living markets, and we intend to take advantage of
this through a new product offering, Notifi911+, 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
to serve the home healthcare and senior living markets with WiFi notification services.
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
Between 2017
and 2019, we also conducted a payment credential management business through our former wholly-owned subsidiary, Fit-Pay, Inc. (“Fit
Pay”). With the approval of our board of directors, and upon similar terms and conditions to those set forth in that loan agreement,
we entered into a non-binding letter of intent for a potential sale of Fit Pay, excluding certain assets on August 6, 2019. In connection
with the letter of intent, the purchaser advanced $500,000 of non-interest bearing working capital for Fit Pay. On September 9, 2019,
we completed the sale of Fit Pay to Garmin International, Inc. for $3.32 million in cash. After the closing of the sale of our Fit Pay
business, we terminated conducting any further business related to payment credential management.
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 patent applications,
nineteen of which have been awarded to date:
THE UN-PASSWORD™: RISK AWARE END-TO-END MULTI-FACTOR AUTHENTICATION
VIA DYNAMIC PAIRING
Filed March 17, 2014
Application Number 14/217,202
Patent Number 9,407,619
METHOD TO LOCALLY VALIDATE IDENTITY WITHOUT PUTTING PRIVACY
AT RISK
Filed September 1, 2015
Application Number 14/842,252
Patent Number 10,282,535
METHOD TO LOCALLY VALIDATE IDENTITY WITHOUT PUTTING PRIVACY
AT RISK
Filed May 6, 2019
Application Number 16/404,044
METHODS AND SYSTEMS RELATED TO MULTI-FACTOR, MULTIDIMENSIONAL,
MATHEMATICAL, HIDDEN AND MOTION SECURITY PINS
Filed August 1, 2016
Application Number 15/224,998
Patent Number 10,565,569
COMPONENTS FOR ENHANCING OR AUGMENTING WEARABLE ACCESSORIES
BY ADDING ELECTRONICS THERETO
Filed September 2, 2015
Application Number 14/843,930
Patent Number 10,395,240
COMPONENTS FOR ENHANCING OR AUGMENTING WEARABLE ACCESSORIES
BY ADDING ELECTRONICS THERETO
Filed August 22, 2019
Application Number 16/550,698
The Un-Password: Risk
Aware End-to-end Multi-factor Authentication via Dynamic PairinG
Filed March 14, 2016
Application Number 15/068,834
Patent Number 10,015,154
The Un-Password: Risk
Aware End-to-end Multi-factor Authentication via Dynamic PairinG
Filed July 2, 2018
Application Number 16/025,992
Patent Number 10,609,014
SYSTEM AND METHOD TO AUTHENTICATE ELECTRONICS USING ELECTRONIC-METRICS
Filed July 5, 2016
Application No. 15/202,553
Patent Number 10,419,428
SYSTEM AND METHOD TO AUTHENTICATE ELECTRONICS USING ELECTRONIC-METRICS
Filed September 15, 2019
Application No. 16/571,171
Patent Number 10,841,301
PREFERENCE DRIVEN ADVERTISING SYSTEM AND METHOD
Filed July 15, 2016
Application Number 15/212161
Patent Number 10,643,245
PREFERENCE DRIVEN ADVERTISING SYSTEM AND METHOD
Filed May 4, 2020
Application Number 16/687,487
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
METHOD AND SYSTEM TO REDUCE INFRASTRUCTURE COSTS WITH SIMPLIFIED
INDOOR LOCATION AND RELIABLE COMMUNICATIONS
Filed November 11, 2019
Application Number 16/679,494
WIRELESS CENTRALIZED EMERGENCY SERVICES SYSTEM
Filed January 15, 2008
Application Number 12/007,740
Patent Number 8,275,346
VOICE-EXTENDING EMERGENCY RESPONSE SYSTEM
Filed September 5, 2008
Application Number 12/230,841
Patent Number 8,121,588
LIST-BASED EMERGENCY CALLING DEVICE
Filed March 11, 2009
Application Number 12/402,304
Patent Number 8,369,821
ALARM SIGNALING DEVICE AND ALARM SYSTEM
Filed February 2, 2005
Application Number 10/523,115
Patent Number 7,312,709
FALL DETECTION SYSTEM HAVING A FLOOR HEIGHT THRESHOLD AND A
RESIDENT HEIGHT DETECTION DEVICE
Filed June 27, 2008
Application Number 12/216,053
Patent Number 7,893,844
APPARATUS AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS
COMMUNICATION DEVICES
Filed August 24, 2014
Application Number 14/467,268
Patent Number 9,472,088
APPARATUS AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS
COMMUNICATION DEVICES
Filed September 8, 2016
Application Number 15/259,247
Patent Number 9,900,737
ALARM SIGNALING DEVICE AND ALARM SYSTEM
Canadian patent
Filed August 1, 2003
Application Number 2,494,166
Patent Number 2,494,166
APPARATUS AND METHOD FOR LOCATING AND UPDATING LOW-POWER WIRELESS
COMMUNICATION DEVICES
Canadian Patent
Filed August 11, 2015
Application Number 2,900,180
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 a security technology company and we currently 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 LLC (“LogicMark”), manufactures and distributes non-monitored and monitored personal
emergency response systems sold through the United States Department of Veterans Affairs, healthcare durable medical equipment
dealers and distributors and monitored security dealers and distributors.
Our principal executive offices are located at
288 Christian Street, Hangar C 2nd Floor, Oxford, CT 06478, 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.
Employees
As of April 14, 2021, we had a total
of 19 full-time employees, comprising 3 employees in product engineering, 2 employees in finance and administration, 10
employees in sales and customer service and 4 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.
Item 1A.
Risk Factors
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 operations of $2,864,984 for the
year ended December 31, 2020. As of December 31, 2020, the Company had cash and stockholders’ equity of $4,387,416 and $9,159,209,
respectively. At December 31, 2020, the Company had a working capital deficiency of $578,797. 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.
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.
Our supply chains in China subject
us to risks and uncertainties relating to the laws and regulations of China and the changes in relations between the United States
and China.
Under its current leadership, the government of China has been
pursuing economic reform policies, including by encouraging foreign trade and investment. However, there is no assurance that the
Chinese government will continue to pursue such policies, that such policies will be successfully implemented, that such policies
will not be significantly altered, or that such policies will be beneficial to our supply chains in China. China’s system
of laws can be unpredictable, especially with respect to foreign investment and foreign trade. The United States government has
called for substantial changes to foreign trade policy with China and has raised (as well as has proposed to further raise in the
future), tariffs on several Chinese goods. China has retaliated with increased tariffs on United States goods. Moreover, China’s
legislature has recently adopted a national security law to substantially change the way Hong Kong has been governed since the
territory was handed over by the United Kingdom to China in 1997. This law increases the power of the central government in Beijing
over Hong Kong, limits the civil liberties of residents of Hong Kong and could restrict the ability of businesses in Hong Kong
to continue to conduct business or to continue to conduct business as previously conducted. The U.S. State Department has indicated
that the United States no longer considers Hong Kong to have significant autonomy from China and President Trump signed an executive
order and the Hong Kong Autonomy Act to remove Hong Kong’s preferential trade status. The United States may impose the same
tariffs and other trade restrictions on exports from Hong Kong that it places on goods from mainland China. Any further changes
in United States trade policy could trigger retaliatory actions by affected countries, including China, resulting in trade wars.
Any changes in United States and China relations may have a material adverse effect on our supply chains in China which could materially
harm our business and financial condition.
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.
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. 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.
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 business, financial condition and results
of operations has been and may continue to be adversely affected by the coronavirus outbreak or other similar epidemics or adverse public
health developments.
The pandemic resulting from the novel coronavirus
disease 2019 (“COVID-19”) has caused many governments to implement quarantines and significant restrictions on travel, and
to advise that people remain at home where possible and avoid crowds. This has led to many businesses shutting down or limiting operations
as well as greater uncertainty in financial markets. To date, an economic downturn and other adverse impacts resulting from COVID-19 have
resulted in our distributors and/or the VA significantly reducing orders for our products and being unable to pay us in accordance with
the terms of already fulfilled orders. Continuing effects of COVID-19, or other similar epidemics or adverse public health developments,
may, in all likelihood, extend these reduced product orders and continue the inability of our distributors and/or the VA to pay us for
orders, for an undeterminable period of time. Delays and disruptions, such as difficulty obtaining components and temporary suspension
of operations, have resulted in our existing inventory levels not being sufficient, and our business, financial condition and results
of operations have been materially and adversely affected, as a result of a slowdown and suspension in our business. In the event that
this slowdown and/or suspension carries on for a long period of time, this will, in all likelihood, continue to have a material adverse
impact on our business. As a result of the current or future epidemics, we have been and may continue to be impacted by shutdowns, employee
impacts from illness and other community response measures meant to prevent spread of the virus, all of which has and may continue to
negatively impact our business, financial condition and results of operations. Further, if we are regularly unable to meet our obligations
to deliver our products to distributors and/or the VA, they may decide to terminate or reduce their distribution arrangements with us
and our business could be adversely affected. The extent to which COVID-19 will continue to impact our results will depend on future developments,
which are highly uncertain and will include emerging information concerning the severity of COVID-19 and the actions taken by governments
and private businesses to attempt to contain the virus.
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 not entered into employment agreements with most of the key employees
of our LogicMark subsidiary, which we believe presents a greater risk of losing some of these key employees, than if we had employment
agreements with them. The loss of the services of one or more of our senior management or other key employees could adversely affect our
business. 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.
Our business, financial condition
and results of operations may be adversely affected if we are unsuccessful in our current litigation with the certain stockholders
of Fit Pay and Giesecke+Devrient Mobile Security America, Inc. (“GDMSAI”).
On February 24, 2020, Michael J. Orlando, one
of our former directors and our former Chief Operating Officer, as shareholder representative (the “Shareholder Representative”),
and the other stockholders of Fit Pay (collectively, the “Fit Pay Shareholders”), filed a lawsuit in the United States District
Court for the Southern District of New York against the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the “Complaint”).
See Orlando v. Nxt-ID, Inc. No. 20-cv-1604 (S.D.N.Y.). The Complaint alleges that the Company has breached certain contractual obligations
under a merger agreement, dated May 23, 2017, between Fit Pay and the Company, regarding certain future, contingent earnout payments allegedly
that could be owed to the Fit Pay Shareholders from future revenues. The Complaint seeks unspecified monetary damages from the defendants.
While we believe that these claims are without merit and we plan to vigorously defend the action, there is no assurance that we will be
successful in such defense. On May 12, 2020, the Company filed an answer and counterclaims alleging, among other things, fraud and
breach of fiduciary duty of the Shareholder Representative as well as arguing that the Shareholder Representative should be estopped from
pursuing these claims. The Company has moved for summary judgment to have the lawsuit dismissed. In March 2021, following our successful
application to stay all discovery, the court granted CrowdOut’s and Garmin’s separate motions to dismiss. Orlando’s
claim against the Company still remains and the Company’s motion for summary judgment is still pending.
In connection with the sale of Fit Pay, GDMSAI
has identified a disagreement with the Company over calculation of dividends with respect to GDMSAI’s Series C Non-Convertible Voting
Preferred Stock of the Company (the “Series C Preferred Stock”). On August 13, 2020, the Company was sued by GDMSAI seeking,
among other things, $440,000 of dividends that it believes are owed to it pursuant to the terms of the Series C Preferred Stock. The Company
believes that GDMSAI’s claims are not correct and plans to vigorously defend the action. The Company has moved to have the case
removed from Delaware to New York, where the Company claims the forum clause requires the claims to be heard. The Company has opposed
GDMSAI’s motion for summary judgment. In the event that we are unsuccessful in the defense of these actions, we could be required
to pay the Fit Pay Shareholders and GDMSAI substantial damages which would, in all likelihood, have a material adverse effect on our business,
financial condition and results of operations. In March 2021, a Delaware Chancery court rejected our argument that the Fit Pay merger
agreement requires litigation solely in New York and thereafter granted GDMSAI summary judgment on the merits, holding that relevant dividend
language required a perpetually paid dividend once the $50M threshold had been achieved. The Company plans to appeal. There are no assurances
that our appeal will be successful and even if our appeal is successful that a New York court will agree with our interpretation of the
manner in which dividends on the Series C Preferred are to be calculated.
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, 2020, we have identified certain matters
that constituted material weaknesses in our internal controls over financial reporting. See Item 9A of this Report for further
discussion on our internal controls. 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.
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. Recently there has been greater volatility in the financial markets as a result
of uncertainty caused by the outbreak of COVID-19, which originated in China and continues to spread, including in the United States
and Europe. A change or disruption in the global financial markets for any reason, including COVID-19 or other epidemics, 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 any investment in our Company 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.
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.
Because of volatility in the stock market in general, the market
price of our common stock will also likely be volatile.
The stock market in general, and the market for stocks of healthcare
technology companies in particular, has been highly volatile. As a result, the market price of our common stock is likely to be
volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their shares
of common stock or the loss of their entire investment for a number of reasons, including reasons unrelated to our operating performance
or prospects. The market price of our common stock could be subject to wide fluctuations in response to a broad and diverse range
of factors, including those described elsewhere in this Report, including this “Risk Factors” section, and the following:
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recent price volatility and any known risks of investing in
our common stock under these circumstances;
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the market price of our common stock prior to the recent price
volatility;
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any recent change in financial condition or results of operations,
such as in earnings, revenues or other measure of company value that is consistent with the recent change in the prices of our
common stock; and
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risk factors addressing the recent extreme volatility in stock
price, the effects of a potential "short squeeze" due to a sudden increase in demand for our common stock as a result
of current investor exuberance associated with technology-related stocks, to the extent that the Company expects to conduct additional
offerings in the future to fund its operations or provide liquidity, the dilutive impact of those offerings on investors that purchase
such shares in those offerings at a significantly higher price.
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The market price of our common stock has recently
been and 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;
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changes in the market valuations of other comparable companies; and
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other events or factors, many of which are beyond our control, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics, such as the recent outbreak of COVID-19, and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the operations of our suppliers or result in political or economic instability.
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In addition, if the market for technology and/or healthcare
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.
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.
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. In order to maintain that 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 remain in compliance with the
Nasdaq Stock Market LLC’s (“Nasdaq”) listing standards or if we do later fail to comply and subsequently regain compliance
with Nasdaq’s listing standards, that will be able to continue to comply with the applicable listing standards. If we are unable
to maintain compliance with these Nasdaq requirements, our common stock will be delisted from the Nasdaq Capital Market.
Until recently, we had not been in compliance
with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) for the continued listing of our shares of common
stock on the Nasdaq Capital Market. We received a letter from Nasdaq, dated January 4, 2021 (the “Nasdaq Letter”), notifying
us that we had regained compliance with the Minimum Bid Price Requirement, as a result of the closing bid price of our common stock having
closed above $1.00 per share for at least ten consecutive trading days prior to February 1, 2021, and also imposing certain obligations
on us during a monitoring period until July 5, 2021. In the event that we fail to comply with the obligations imposed on us in the Nasdaq
Letter, our shares of common stock will be delisted from the Nasdaq Capital Market.
In the event that our common stock is delisted
from the Nasdaq Capital Market, as a result of our failure to comply with any of the obligations imposed on us in the Nasdaq Letter, or
due to our failure to continue to comply with any other requirement for continued listing on the Nasdaq Capital Market, and is not eligible
for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic
bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more
difficult to dispose of, or obtain accurate price quotations for, our common stock, and it would likely be more difficult to obtain 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 national exchange.
In the event that our common stock is delisted
from the Nasdaq Capital Market, 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 Capital 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 a 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.
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.
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, Inc. (“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. Unresolved Staff Comments.
None.
Item
2. Properties.
Properties
Our principal executive offices are located
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 original 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 $1,925.
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 $1,987.
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 and this lease agreement expired
in August 2020. On June 15, 2020, we entered into a new five-year and two-month lease agreement for a different office and warehouse
space located in Louisville, Kentucky. The current monthly rent for the space is $6,000 and this lease agreement expires in August
2025. In addition, LogicMark also entered into a subleasing agreement for 2,000 square feet of warehouse space in the new leased
facility. LogicMark will receive $1,000 per month for this space and the subleasing agreement expires on December 31, 2021.
Item
3. Legal Proceedings
On February 24, 2020, Michael J. Orlando, as
shareholder representative (the “Shareholder Representative”), and the other stockholders of Fit Pay, Inc.
(collectively, the “Fit Pay Shareholders”), filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the “Complaint”). See
Orlando v. Nxt-ID, Inc. No. 20-cv-1604 (S.D.N.Y.). The Complaint alleges that the Company has breached certain contractual
obligations under a merger agreement, dated May 23, 2017, between Fit Pay, Inc. and the Company, regarding certain future,
contingent earnout payments allegedly that could be owed to the Fit Pay Shareholders from future revenues. The Complaint seeks
unspecified monetary damages from the defendants. The Company believes that these claims are without merit and plans to vigorously
defend the action. On May 12, 2020, the Company filed an answer and counterclaims alleging, among other things, fraud and
breach of fiduciary duty of the Shareholder Representative as well as arguing that the Shareholder Representative should be estopped
from pursuing these claims. The Company has moved for summary judgment to have the lawsuit dismissed. In March 2021, following our successful application to stay all discovery, the court granted CrowdOut’s and Garmin’s separate motions to dismiss. Orlando’s claim against the Company still remains and the
Company’s motion for summary judgment is still pending.
In connection with the sale of Fit-Pay, GDMSAI
has identified a disagreement with the Company over calculation of dividends with respect to the Series C Preferred Stock. On August
13, 2020, the Company was sued by GDMSAI seeking, among other things, $440,000 of dividends that it believes are owed to it pursuant
to the terms of the Series C. The Company believes that GDMSAI’s claims are not correct and plans to vigorously defend the action.
The Company has moved to have the case removed from Delaware to New York, where the Company claims the forum clause requires the claims
to be heard. The Company has opposed GDMSAI’s motion for summary judgment. In March
2021, a Delaware Chancery court rejected our argument that the Fit Pay merger agreement requires litigation solely in New York and thereafter
granted GDMSAI summary judgment on the merits, holding that relevant dividend language required a perpetually paid dividend once the
$50M threshold had been achieved. The Company plans to appeal. There are no assurances that our appeal will be successful and even if
our appeal is successful that a New York court will agree with our interpretation of the manner in which dividends on the Series C Preferred
are to be calculated. The Company is not yet able to evaluate the likelihood of an unfavorable outcome or estimate the amount
or range of potential loss beyond the amount stated in the action.
From time to time, the Company may be involved
in various claims and legal actions arising in the ordinary course of our business. Other than the above, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting
our company, or any of our subsidiaries in which an adverse decision could have a material adverse effect upon our business, operating
results, or financial condition.
Item
4. Mine Safety Disclosures
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. The Company
is a security technology company and operates its business in one segment – hardware and software security systems and applications.
The Company is engaged in the development of proprietary products and solutions that serve multiple end markets, including the
security, healthcare, financial technology and the Internet of Things (“IoT”) markets. The Company evaluates the performance
of its business on, among other things, profit and loss from operations. With extensive experience in access control, biometric
and behavior-metric identity verification, security and privacy, encryption and data protection, payments, miniaturization, and
sensor technologies, the Company develops and markets solutions for payment, IoT and healthcare applications.
The
Company’s wholly-owned subsidiary, LogicMark, 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.
Between
2017 and 2019, the Company also operated a payment credential management business through its Fit-Pay subsidiary. With the approval
of the Company’s board of directors, and upon similar terms and conditions to those set forth in that loan agreement, the
Company entered into a non-binding letter of intent for a potential sale of its Fit Pay subsidiary, excluding certain assets on
August 6, 2019. In connection with the letter of intent, the purchaser advanced $500,000 of non-interest bearing working capital
for Fit Pay. On September 9, 2019, the Company completed the sale of its Fit Pay subsidiary to Garmin International, Inc. for $3.32
million in cash (See Note 4).
NOTE
2 - LIQUIDITY AND MANAGEMENT PLANS
The
Company generated an operating loss of $586,078 and a net loss of $2,864,984 for the year ended December 31, 2020. As of December
31, 2020, the Company had cash and stockholders’ equity of $4,387,416 and $9,159,209, respectively. At December 31, 2020,
the Company had a working capital deficiency of $578,797. During the year ended December 31, 2020, the Company received net proceeds
of $5,144,387 from the issuance of common stock and warrants, the issuance of Series D preferred stock and warrants and the exercise
of common stock purchase warrants.
Given
the Company’s cash position at December 31, 2020 and its projected cash flow from operations, the Company believes that
it will have sufficient capital to sustain operations for a period of one year following the date of this filing. The Company
may also raise funds through equity or debt offerings to accelerate the execution of its long-term strategic plan to develop and
commercialize its core products and to fulfill its product development commitments.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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, 2020 and 2019, the Company had no cash equivalents.
RESTRICTED
CASH
At
December 31, 2020 and 2019, the Company had restricted cash of $150,130 and $150,130, respectively. Restricted cash includes amounts
held back by the Company’s third party credit card processor for potential customer refunds, claims and disputes. Cash and
restricted cash, as presented on the consolidated statements of cash flows, consists of $4,387,416 and $150,130 as of December
31, 2020, respectively, and $1,587,250 and $150,130 as of December 31, 2019.
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.
REVENUE
RECOGNITION
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 years ended December 31, 2020 and 2019, none of our sales were recognized over time.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2020 and 2019.
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 $524,481 and $658,889, respectively, for the years ended December 31, 2020
and 2019.
Accounts
Receivable
For
the years ended December 31, 2020 and 2019, 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, 2020
and 2019, the Company had an allowance for doubtful accounts of $126,733 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, 2020, inventory was comprised of $199,523 in raw materials and $567,828 in finished goods on hand. As of December 31,
2019 inventory was comprised of $167,357 in raw materials and $1,135,922 in finished goods on hand. The Company is required to
prepay for certain inventory with certain vendors until credit terms can be established. As of December 31, 2020 and 2019, $332,475
and $201,496, respectively, of prepayments made for inventory is included in prepaid expenses and other current assets on the
consolidated balance sheet.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
|
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. During the year ended December 31, 2020, the Company determined that it was more likely than
not that the fair value of LogicMark exceeded its respective carrying amount and therefore, a quantitative assessment was not
required.
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).
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, 2020 and 2019.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INTANGIBLE ASSETS (CONTINUED)
At
December 31, 2020, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $2,445,709;
trademarks of $978,494; and customer relationships of $1,814,259. At December 31, 2019, the other intangible assets relating to
the acquisition of LogicMark are comprised of patents of $2,818,434; trademarks of $1,041,370; and customer relationships of $2,140,473.
The Company will continue amortizing these intangible assets using the straight line method over their estimated useful lives
which for the patents, trademarks and customer relationships are 11 years; 20 years; and 10 years, respectively. During the years
ended December 31, 2020 and 2019, the Company had amortization expense of $761,815 and $761,815, respectively, related to the
LogicMark intangible assets.
Amortization
expense estimated for each of the next five fiscal years, 2021 through 2025, is expected to 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.
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 consolidated 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2019.
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 stock options to purchase 335,272
shares of common stock and warrants to purchase 15,690,077 shares of common stock as of December 31, 2020 were excluded from the
computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive. As of December
31, 2019, potentially dilutive securities from the exercise of warrants to purchase 6,973,221 shares of common stock were excluded
from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
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.
RECENT
ACCOUNTING PRONOUNCEMENTS
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
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 year ended December 31, 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.
|
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 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).
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
4 - DISCONTINUED OPERATIONS (CONTINUED)
The
following table represents the financial results of the discontinued operations for the years ended December 31, 2020 and 2019:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
|
|
|
Net sales
|
|
$
|
625,771
|
|
Cost of sales
|
|
|
194,856
|
|
Gross profit (loss)
|
|
|
430,915
|
|
Operating expenses
|
|
|
3,859,222
|
|
Interest expense
|
|
|
3,963
|
|
Income tax expense (benefit)
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(3,432,270
|
)
|
NOTE
5 - ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Salaries, payroll taxes and vacation
|
|
$
|
130,093
|
|
|
$
|
92,334
|
|
Consulting fees
|
|
|
-
|
|
|
|
53,563
|
|
Merchant bank fees
|
|
|
19,754
|
|
|
|
26,589
|
|
State income taxes
|
|
|
38,672
|
|
|
|
23,800
|
|
Professional fees
|
|
|
226,794
|
|
|
|
119,016
|
|
Management incentives
|
|
|
500,419
|
|
|
|
758,907
|
|
Interest expense
|
|
|
128,187
|
|
|
|
148,980
|
|
Lease liability
|
|
|
54,476
|
|
|
|
68,576
|
|
Dividends – Series C Preferred Stock
|
|
|
25,000
|
|
|
|
22,182
|
|
Other
|
|
|
191,867
|
|
|
|
178,164
|
|
Totals
|
|
$
|
1,315,262
|
|
|
$
|
1,492,111
|
|
NOTE
6 - 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - FAIR VALUE MEASUREMENTS (CONTINUED)
The
Company did not have any liabilities carried at fair value measured on a recurring basis as of December 31, 2020 and 2019.
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 Valuation Techniques
Level
3 financial liabilities consist of the conversion feature liability and common stock purchase warrants for which there are no
current markets 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, 2020 and 2019, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
NOTE
7 - 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 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 year ended
December 31, 2019, the Company amortized $86,969 of the deferred debt issue costs which is included in interest expense in the
consolidated statement of operations.
On
May 24, 2018, the Company recorded a debt discount of $705,541. The debt discount was attributable to the aggregate fair value
on the issuance date of both Sagard Warrants. The debt discount was amortized using the effective interest method over the five-year
term of the Term Loan. During the year ended December 31, 2019 the Company recorded $48,932 of debt discount amortization related
to the Sagard Warrants. The debt discount amortization is included as part of interest expense in the consolidated statements
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 with
CrowdOut Capital LLC is May 3, 2022 and required the Company to make minimum principal payments over the three-year term amortized
over 96 months. On February 8, 2021, the Company and CrowdOut Capital LLC agreed to an extension of the maturity date of the Term
Loan to May 22, 2023. See Note 11. Since the inception of the refinancing, the Company has made scheduled principal repayments and
term loan prepayments totaling $3,415,625 through December 31, 2020. In addition, the Company prepaid an additional $1,988,498 of
the term loan with CrowdOut Capital LLC 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 13.0% as of December 31, 2020). The Company incurred $412,500 in
original issue discount for closing related fees charged by the Lender. During the years ended December 31, 2020 and December 31,
2019, the Company amortized $106,215 and $168,430, respectively of the original issue discount which is included in interest expense
in the consolidated statement of operations. At December 31, 2020 the unamortized balance of the original issue discount was
$137,855. 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 consolidated balance sheet. During the years
ended December 31, 2020 and December 31, 2019, the Company amortized $549,446 and $569,424, respectively of the deferred debt issue
costs which is included in interest expense in the consolidated statements of operations. At December 31, 2020 the unamortized
balance of deferred debt issue costs was $713,119.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - DEBT REFINANCING (CONTINUED)
Debt
Maturity
The
maturity of the Company’s term debt is as follows:
2021
|
|
$
|
2,062,500
|
|
2022
|
|
|
9,033,377
|
|
Total term debt
|
|
$
|
11,095,877
|
|
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.
On
November 16, 2020, the Company and CrowdOut Capital LLC, as administrative agent, entered into the first amendment to the senior
secured term loan. In connection with the first amendment, CrowdOut Capital LLC, as administrative agent, agreed to modify the
financial ratios contained in the senior secured term retroactively and prospectively. Based on the senior secured term loan,
as amended, the Company was in compliance with such covenants at December 31, 2020.
Paycheck Protection Program
On each of May 6 and May 8, 2020, Nxt-ID
Inc. and LogicMark, LLC, a wholly owned subsidiary of the Company (the “Borrowers”), respectively, received loans (the
“Loans”) from Bank of America, NA in the aggregate amount of $346,390, pursuant to the Paycheck Protection Program
(the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act, which was enacted
on March 27, 2020.
The Loans, which are in the form of PPP
promissory notes and agreements, dated May 1, 2020 (the “Note Agreements”), mature on May 6 and May 8, 2022, respectively,
and bear interest at a rate of 1.00% fixed per annum, payable monthly commencing on November 6 and November 8, 2020, respectively.
The Loans may be prepaid by the Borrowers at any time prior to maturity with no prepayment penalties. The Borrowers used the proceeds
from the Loans for payroll, payroll taxes, and group healthcare benefits. Under the terms of the Note Agreements, certain amounts
of the Loans may be forgiven if they are used for qualifying expenses, as described in the Note Agreements.
The Company has applied for
forgiveness of the Loans and as such has treated the Loans as other short-term debt on the Company’s consolidated
balance sheet. See Note 11 for update on Loans.
NOTE
8 - STOCKHOLDERS’ EQUITY
December
2020 Offerings
On
December 18, 2020, the Company closed a registered direct offering pursuant to which the Company issued (i) an aggregate of
1,515,151 shares of Series D preferred stock, convertible into an aggregate of up to 3,030,304 shares of common stock, (ii) common
stock purchase warrants to purchase up to an aggregate of 1,000,000 shares of common stock at an exercise price of $0.49 per share,
subject to customary adjustments thereunder, which were exercisable immediately upon issuance and have a term of five years, and
(iii) common stock purchase warrants to purchase up to an aggregate of 5,060,606 shares of common stock at an exercise price of
$0.49 per share with a term of five and one-half (5.5) years first exercisable six (6) months after issuance, subject to customary
adjustments thereunder, for gross proceeds of $2,000,000, before deducting any offering expenses. The Company will use the net
proceeds from this offering for working capital, new product initiatives and other general corporate purposes. On December 21, 2020,
1,515,151 shares of Series D preferred stock were converted into 3,030,304 shares of common stock. During the year ended December
31, 2020, the Company recorded a deemed dividend of $758,922 from the beneficial conversion feature associated with the issuance of
the Series D convertible preferred stock and warrants.
July
2020 Offerings
On
July 14, 2020, the Company closed a registered direct offering of (i) an aggregate of 3,778,513 shares of the Company’s
common stock, par value $0.0001 per share; (ii) pre-funded warrants to purchase up to an aggregate of 734,965 shares of Common
Stock at an exercise price of $0.01 per share, subject to customary adjustments thereunder; (iii) registered warrants, with a
term of five (5) years exercisable immediately upon issuance, to purchase an aggregate of up to 1,579,718 shares of Common Stock
(at an exercise price of $0.50 per share, subject to customary adjustments thereunder; and (iv) unregistered warrants, with a
term of five and one-half (5.5) years first exercisable six (6) months after issuance, to purchase an aggregate of up to 3,750,000
shares of Common Stock at an exercise price of $0.65 per share, subject to customary adjustments thereunder, for gross proceeds
of $1,864,528, before deducting any offering expenses. The Company will continue to use the net proceeds from this Offering for
working capital, new product initiatives and other general corporate purposes.
On
July 28, 2020, the Company received proceeds of $7,350 in connection with the exercise of 734,965 pre-funded warrants to purchase
common stock at an exercise price of $0.01.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY (CONTINUED)
January
2019 At-the-Market Offering
On
January 8, 2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“A.G.P.”)
for an at-the-market offering, pursuant to which the Company could sell, at its option, shares of its common stock, par value
$0.0001 per share, having an aggregate offering price of up to $15 million to or through A.G.P., as sales agent. The Company was
obligated to pay A.G.P. commissions for its services in acting as the Company’s sales agent in the sale of its common stock
pursuant to the sales agreement. A.G.P. was entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds
from the sale of the Company’s common stock on the Company’s behalf pursuant to the sales agreement. The Company also
agreed to reimburse A.G.P. for its reasonable out-of-pocket expenses, including the fees and disbursements of counsel to A.G.P.,
incurred in connection with the offering, in an amount not to exceed $35,000. During the year ended December 31, 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 on 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 592,223 shares of common stock at January 1, 2021.
During
the year ended December 31, 2020, the Company issued an aggregate of 335,272 stock options to purchase shares of common stock
under the LTIP to four (4) non-employee directors for serving on the Company’s board. The weighted average exercise price
of these stock options is approximately $0.48 and the stock options were fully vested at the issuance date. The aggregate fair
value of the shares issued to the directors was $160,000.
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 year ended December 31, 2020, the Company issued 447,620 shares of common stock with an aggregate fair value
of $200,794 to certain employees related to the Company’s 2017, 2018 and 2019 management incentive plan.
During
the years ended December 31, 2020 and 2019, the Company accrued $200,000 and $200,000, respectively of management and employee
bonus expense.
During
the year ended December 31, 2019, the Company issued 372,078 shares of common stock with a fair value of $254,490 to non-employees
for services rendered.
In
addition, during the year ended December 31, 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.
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:
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCKHOLDERS’ EQUITY (CONTINUED)
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, 2020 and 2019, the Company recorded Series C Preferred Stock dividends
of $100,000 and $150,000, respectively.
Redemption
Provisions of Series C Preferred Stock
The
Series C Preferred Stock may be redeemed by the Company 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. 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 shall be immediately redeemed and repaid from 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 upon the determination that such events are probable, the equity security
would be classified as a liability. Given the Series C Preferred Stock contains a fundamental change provision, the security is
considered conditionally redeemable. Therefore, the Company classified the Series C Preferred Stock as temporary equity in the
consolidated balance sheets at December 31, 2020 and 2019 until such time that events occur that indicate otherwise.
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.
Warrants
The
following table summarizes the Company’s warrants outstanding and exercisable at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at January 1, 2019
|
|
|
5,090,352
|
|
|
$
|
5.42
|
|
|
|
3.32
|
|
|
$
|
6,672,902
|
|
Issued
|
|
|
2,469,136
|
|
|
|
1.05
|
|
|
|
5.00
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(586,267
|
)
|
|
|
17.87
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2019
|
|
|
6,973,221
|
|
|
$
|
2.83
|
|
|
|
3.53
|
|
|
$
|
-
|
|
Issued
|
|
|
11,390,324
|
|
|
|
.54
|
|
|
|
5.00
|
|
|
|
-
|
|
Exercised(1)
|
|
|
(2,579,718
|
)
|
|
|
.50
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(93,750
|
)
|
|
|
40.10
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable at December 31, 2020
|
|
|
15,690,077
|
|
|
$
|
1.33
|
|
|
|
4.10
|
|
|
$
|
10,850,158
|
|
(1)
|
During
the year ended December 31, 2020, the Company received proceeds of $1,279,859 in connection with the exercise of warrants into 2,579,718
shares of Common Stock at an average exercise price of approximately $0.50 per share.
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES
As
of December 31, 2020, the Company had US federal and state net operating loss (“NOLs”) carryovers of $43,520,967 and
$24,126,647 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, 2018 are available
to offset future taxable income indefinitely. State NOL’s generated for years starting after December 31, 2018 that are
available to offset future taxable income indefinitely vary by state. The Company has Federal Capital loss carryovers of $11,779,190
at December 31, 2020, which expire in 2024. The Company also has state Capital loss carryovers of $4,621,480 at December 31, 2020,
which begin to expire in 2024, and have no carryback period. In addition, the Company had tax credit carryforwards of $205,028
at December 31, 2020 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, 2020 with respect to the Nxt-ID NOLs and therefore no limitation under Section 382 has been computed. Management
will review for such limitations before any of the Nxt-ID NOLs are utilized against future taxable income.
The
Company has no material uncertain tax positions for any of the reporting periods presented. No interest or penalty expense was
recorded during the year or has been accrued as of December 31, 2019 or 2020. The Company does not expect any material changes
to any uncertain tax positions in the next twelve months. The Company has filed all of its tax returns for all prior periods through
December 31, 2019 and intends to timely file the income tax returns for the period ending December 31, 2020. 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, 2020, the Company’s tax years
post 2016 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2020 the Company is no longer
subject to U.S. federal or state examinations by tax authorities for years before December 31, 2017. 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,
|
|
|
|
2020
|
|
|
2019
|
|
Current income tax provision
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
24,886
|
|
|
|
32,826
|
|
|
|
|
24,886
|
|
|
|
32,826
|
|
Deferred income tax (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(682,378
|
)
|
|
|
(3,589,359
|
)
|
State
|
|
|
67,828
|
|
|
|
(542,836
|
)
|
Change in valuation allowance
|
|
|
614,550
|
|
|
|
3,766,798
|
|
|
|
|
-
|
|
|
|
(365,397
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
24,886
|
|
|
$
|
(332,571
|
)
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES (CONTINUED)
A
reconciliation of the effective income tax rate and the statutory federal income tax rate from continuing operations is as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
U.S. federal statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State income tax rate, net of federal benefit
|
|
|
(2.63
|
)
|
|
|
7.83
|
|
Other permanent differences
|
|
|
2.39
|
|
|
|
(4.59
|
)
|
Loss on sale of Fit Pay
|
|
|
-
|
|
|
|
45.02
|
|
Less: valuation allowance
|
|
|
(21.64
|
)
|
|
|
(56.95
|
)
|
Provision for income taxes
|
|
|
(0.88
|
)%
|
|
|
(12.31
|
)%
|
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 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 become 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 uncertainty
exists with respect to future realization of all of the deferred tax assets and has therefore established a full valuation allowance.
For the periods ended December 31, 2019 and December 31, 2020, sufficient net operating losses with indefinite carryforward periods
have been generated, such that the deferred tax liabilities related to indefinite lived intangibles now represent a source of
future taxable income with respect to the utilization of these deferred tax assets.
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
10,290,985
|
|
|
$
|
9,362,936
|
|
Tax credits
|
|
|
205,028
|
|
|
|
205,028
|
|
Lease liabilities
|
|
|
68,596
|
|
|
|
25,768
|
|
Accruals and reserves
|
|
|
213,627
|
|
|
|
278,648
|
|
Capital loss carryforwards
|
|
|
2,619,921
|
|
|
|
2,820,405
|
|
Tangible and intangible assets
|
|
|
336,067
|
|
|
|
325,754
|
|
Charitable donations
|
|
|
2,836
|
|
|
|
5,874
|
|
Total deferred tax assets before valuation allowance:
|
|
|
13,737,060
|
|
|
|
13,024,413
|
|
Valuation allowance
|
|
|
(12,744,883
|
)
|
|
|
(12,212,147
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
992,177
|
|
|
|
812,266
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
(68,240
|
)
|
|
|
(25,409
|
)
|
Tangible and intangible assets
|
|
|
(923,937
|
)
|
|
$
|
(786,857
|
)
|
Total deferred tax liabilities
|
|
$
|
(992,177
|
)
|
|
$
|
(812,266
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
-
|
|
|
$
|
-
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
On
February 24, 2020, Michael J. Orlando, as shareholder representative (the “Shareholder Representative”), and the other
stockholders of Fit Pay, Inc. (collectively, the “Fit Pay Shareholders”), filed a lawsuit in the United States District
Court for the Southern District of New York against the Company, CrowdOut Capital, LLC, and Garmin International, Inc. (the
“Complaint”). See Orlando v. Nxt-ID, Inc. No. 20-cv-1604 (S.D.N.Y.). The Complaint alleges that the Company has breached
certain contractual obligations under a merger agreement, dated May 23, 2017, between Fit Pay, Inc. and the Company, regarding
certain future, contingent earnout payments allegedly that could be owed to the Fit Pay Shareholders from future revenues. The
Complaint seeks unspecified monetary damages from the defendants. The Company believes that these claims are without merit and plans
to vigorously defend the action. On May 12, 2020, the Company filed an answer and counterclaims alleging, among other things, fraud
and breach of fiduciary duty of the Shareholder Representative as well as arguing that the Shareholder Representative should be
estopped from pursuing these claims. The Company has moved for summary judgment to have the lawsuit dismissed. The Company has been
able to successfully stay discovery pending the court’s ruling on motions to dismiss by Garmin International, Inc. and
CrowdOut Capital, LLC. In March 2021, following our successful application to stay all discovery, the court granted CrowdOut’s and Garmin’s separate motions to dismiss. Orlando’s claim against the Company still remains and the
Company’s motion for summary judgment is still pending.
In
connection with the sale of Fit-Pay, Inc., Giesecke+Devrient Mobile Security America, Inc. (“GDMSAI”) has identified a
disagreement with the Company over calculation of dividends with respect to GDMSAI’s Series C Non-Convertible Voting Preferred
Stock (the “Series C”) of the Company. On August 13, 2020, the Company was sued by GDMSAI seeking, among other things,
$440,000 of dividends that it believes are owed to it pursuant to the terms of the Series C. The Company believes that
GDMSAI’s claims are not correct and plans to vigorously defend the action. The Company has moved to have the case removed from
Delaware to New York, where the Company claims the forum clause requires the claims to be heard. The Company has opposed
GDMSAI’s motion for summary judgment. In March 2021, a Delaware Chancery court rejected our argument that the Fit Pay
merger agreement requires litigation solely in New York and thereafter granted GDMSAI summary judgment on the merits, holding that
relevant dividend language required a perpetually paid dividend once the $50M threshold had been achieved. The Company plans to
appeal. There are no assurances that our appeal will be successful and even if our appeal is successful that a New York court will
agree with our interpretation of the manner in which dividends on the Series C Preferred are to be calculated.
From
time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of our business.
Other than the above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our
subsidiaries, threatened against or affecting our company, or any of our subsidiaries in which an adverse decision could have
a material adverse effect upon our business, operating results, or financial condition.
COMMITMENTS
The
Company leases office space and a fulfillment center in the U.S., which are classified as operating leases expiring at various
dates. The Company determines if an arrangement qualifies as a lease at the lease inception. 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.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The
Company’s lease agreements generally do not specify an implicit borrowing rate, and as such, the Company utilizes its incremental
borrowing rate by lease term, in order to calculate the present value of the future lease payments. The discount rate represents
a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease
liability payment streams commensurate with the lease term. On January 1, 2019, the discount rate used on existing leases at adoption
was determined based on the remaining lease term using available data as of that date. The Company’s lease agreement for
its warehouse space located in Louisville, Kentucky expired on August 31, 2020. As a result, the Company entered into a new five-year
lease agreement in June 2020 for new warehouse space also located in Louisville, Kentucky. The monthly rent which commenced in
September 2020 is $6,000 per month and increases approximately 3% annually thereafter. The ROU asset value added as a result of
this new lease agreement was $279,024. The Company’s ROU asset and lease liability accounts reflect the inclusion of this
new lease agreement on the Company’s consolidated balance sheet as of December 31, 2020.
Certain
of the Company’s lease agreements, primarily related to real estate, include options for the Company to either renew (extend)
or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 3
years. Renewal options are reviewed at lease commencement to determine if such options are reasonably certain of being exercised,
which could impact the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company
considers several factors, including but not limited to, significance of leasehold improvements incurred on the property, whether
the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain
that the Company would exercise such option. In most cases, the Company has concluded that renewal and early termination options
are not reasonably certain of being exercised by the Company (and thus not included in the Company’s ROU asset and lease
liability) unless there is an economic, financial or business reason to do so.
For
the year ended December 31, 2020, total operating lease cost was $147,841 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 each of the next four 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 consolidated
balance sheet, as of December 31, 2020:
Year Ending December 31,
|
|
|
|
|
|
|
|
2021
|
|
$
|
90,986
|
|
2022
|
|
|
93,385
|
|
2023
|
|
|
89,724
|
|
2024
|
|
|
80,000
|
|
2025
|
|
|
54,400
|
|
Total future minimum lease payments
|
|
$
|
408,495
|
|
Less imputed interest
|
|
|
(100,110
|
)
|
Total present value of future minimum lease payments
|
|
$
|
308,385
|
|
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 2020
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
306,786
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
54,476
|
|
Other long-term liabilities
|
|
$
|
253,909
|
|
|
|
$
|
308,385
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
4.3 years
|
|
Weighted Average Discount Rate
|
|
|
12.80
|
%
|
Coronavirus
– COVID-19
In
early 2020, the coronavirus that causes COVID-19 was reported to have surfaced in China. The Company’s primary supply chain
is located in China and other Asian-based locations. To date, the Company’s supply chain has not experienced any significant
disruptions. The global spread of this virus has caused significant business disruption around the world including the United
States, the primary area in which the Company operates and sells its products. The business disruption is currently expected to
be temporary, however there is considerable uncertainty around the duration of the business disruption. Therefore, while the Company
expects this matter to negatively impact the Company’s financial condition, results of operations, or cash flows, the extent
of the financial impact and duration cannot be reasonably estimated at this time.
NOTE
11 - SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
On
January 8, 2021, the Company entered into a Warrant Amendment and Exercise Agreement (the “Amendment Agreement”) with
holders (the “Holder”) of a common stock purchase warrant, dated April 4, 2019, previously issued by the Company to
the Holder (the “Original Warrant”).
In
consideration for each exercise of the Original Warrant that occurs within 45 calendar days of the date of the Amendment Agreement,
in addition to the issuance of the Warrant Shares (as defined in the Original Warrant) on or prior to the Warrant Share Delivery
Date (as defined in the Original Warrant), the Company has agreed to deliver to the Investor a new warrant to purchase a number
of shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), equal to the number
of Original Warrants that the Holder has exercised pursuant to the terms of the Original Warrant, at an exercise price of $1.525
per share, which represents the average Nasdaq Official Closing Price of the Common Stock (as reflected on Nasdaq.com) for the
five trading days immediately preceding the date of the Amendment Agreement (the “New Warrants”). The Investor currently
holds Original Warrants exercisable for up to 2,469,136 shares of Common Stock, and, therefore, may receive up to an equivalent
number of New Warrants. The Investor may continue to exercise the Original Warrants after 45 calendar days of the date of the
Amendment Agreement, but the Investor will not receive any New Warrants in consideration for the exercise of any Original Warrants
exercised thereafter.
Nxt-ID,
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)
The
Amendment Agreement contains customary representations, warranties and covenants by each of the Company and the Investor.
The
New Warrants, if issued, are exercisable for up to the original expiration dates of the Original Warrants, which is April 4, 2024.
The exercise price and number of shares issuable upon exercise of the New Warrants are subject to traditional adjustment for stock
splits, combinations, recapitalization events and certain dilutive issuances. The New Warrants are required to be exercised for
cash; however, if during the term of the New Warrants there is not an effective registration statement under the Securities Act
of 1933, as amended (the “Securities Act”), covering the resale of the shares of Common Stock issuable upon exercise
of the New Warrants, then the New Warrants may be exercised on a cashless (net exercise) basis pursuant to the formula provided
in the New Warrants.
The
Company intends to use the proceeds of any exercise of the Original Warrants for working capital purposes, the launch of new products
and to reduce its debt outstanding.
On
January 14, 2021, the Company issued 2,073,687 shares of common stock in connection with the cashless exercise of 3,749,000 warrants.
On
January 21, 2021, the Company and LogicMark, LLC, a wholly-owned subsidiary of the Company filed their respective applications
for forgiveness of the loans pursuant to the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief,
and Economic Security Act.
On
January 29, 2021, the Company received proceeds of $525,000 in connection with the exercise of 500,000 warrants to purchase common
stock at an exercise price of $1.05.
On
February 1, 2021, the Company received proceeds of $4,000,004 in connection with the issuance 1,476,016 shares of Series E preferred
stock.
On
February 1, 2021, 738,008 shares of Series E Preferred stock were converted into 1,476,016 shares of common stock.
On
February 4, 2021, the Company issued 132,826 shares of common stock to certain employees under the 2018 and 2019 management incentive
plans.
On
February 8, 2021, the Company received proceeds of $2,067,593 in connection with the exercise of 1,969,136 warrants to purchase
common stock at an exercise price of $1.05.
On
February 8, 2021, 450,000 shares of Series E Preferred stock were converted into 900,000 shares of common stock.
On February 8, 2021, the Company’s
wholly-owned subsidiary, LogicMark, LLC, entered into a second amendment (the “Second Amendment”) to the senior Secured
Credit Agreement, dated as of May 3, 2019, as amended (the “Credit Agreement”), with each financial institution from
time to time party thereto as lender (the “Lenders”), and a senior secured lender, as administrative agent and collateral
agent for the Lenders (the “Agent”). Pursuant to the Second Amendment, LogicMark made a $5,000,000 voluntary prepayment
(the “Prepayment”) on its $16,500,000 aggregate principal amount term loan originally made by the Lenders to LogicMark
pursuant to the Credit Agreement (the “Term Loan”) and the Agent agreed to accept (i) LogicMark’s payment of
a prepayment premium in the amount of $125,000, which is equal to 2.5% of the Prepayment, rather than 5% of the Prepayment as required
by the Credit Agreement, and (ii) an extension of the maturity date of the Term Loan to May 22, 2023.
On
February 9, 2021, 288,008 shares of Series E Preferred stock were converted into 576,016 shares of common stock.
On
February 17, 2021, the Company received proceeds $1,230,000 in connection with the exercise of 1,000,000 warrants to purchase
common stock at an exercise price of $1.23.
On
February 17, 2021, the Company received proceeds $2,847,902 in connection with the exercise of 1,898,601 warrants to purchase
common stock at an exercise price of $1.50.
On February 17, 2021, the Company issued 2,165,642 shares of common
stock in connection with the cashless exercise of 2,530,303 warrants.
On March 2, 2021, the Company’s wholly-owned
subsidiary, LogicMark, LLC received notification from the Small Business Administration that its loan under the Paycheck Protection Program
in the amount of $301,390 plus accrued interest of $2,320 has been forgiven.
F-24