Item 1. Financial Statements
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
1,362,384
|
|
|
$
|
1,587,250
|
|
Restricted cash
|
|
|
150,130
|
|
|
|
150,130
|
|
Accounts receivable, net
|
|
|
11,107
|
|
|
|
38,526
|
|
Inventory, net
|
|
|
808,042
|
|
|
|
1,303,279
|
|
Prepaid expenses and other current assets
|
|
|
345,884
|
|
|
|
285,495
|
|
Total Current Assets
|
|
|
2,677,547
|
|
|
|
3,364,680
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
183,044
|
|
|
|
183,044
|
|
Furniture and fixtures
|
|
|
98,839
|
|
|
|
98,839
|
|
Tooling and molds
|
|
|
644,462
|
|
|
|
644,462
|
|
|
|
|
926,345
|
|
|
|
926,345
|
|
Accumulated depreciation
|
|
|
(864,504
|
)
|
|
|
(831,290
|
)
|
Property and equipment, net
|
|
|
61,841
|
|
|
|
95,055
|
|
Right-of-use assets
|
|
|
340,972
|
|
|
|
108,508
|
|
Goodwill
|
|
|
15,479,662
|
|
|
|
15,479,662
|
|
Other intangible assets, net of amortization of $2,982,067 and $2,604,290,
respectively
|
|
|
5,622,500
|
|
|
|
6,000,277
|
|
Total Assets
|
|
$
|
24,182,522
|
|
|
$
|
25,048,182
|
|
Liabilities, Series C Preferred Stock and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,855,026
|
|
|
$
|
2,118,476
|
|
Accrued expenses
|
|
|
1,170,456
|
|
|
|
1,492,111
|
|
Term loan facility - current
|
|
|
2,062,500
|
|
|
|
2,062,500
|
|
Other short-term debt
|
|
|
346,390
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
5,434,372
|
|
|
|
5,673,087
|
|
|
|
|
|
|
|
|
|
|
Term loan facility, net of debt discount of $189,551
and $244,070, respectively, and deferred debt issuance costs of $980,538 and $1,262,565, respectively
|
|
|
8,894,538
|
|
|
|
9,739,242
|
|
Other long-term liabilities
|
|
|
1,354,899
|
|
|
|
1,113,965
|
|
Total Liabilities
|
|
|
15,683,809
|
|
|
|
16,526,294
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Series C Preferred Stock
|
|
|
|
|
|
|
|
|
Series C Preferred Stock, par value $0.0001
per share: 2,000 shares designated; 2,000 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
1,807,300
|
|
|
|
1,807,300
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $0.0001 per share: 10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, par value $0.0001 per share: 3,125,000
shares designated; 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Series B Preferred Stock, par value $0.0001 per share: 4,500,000
shares designated; 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Common Stock, par value $0.0001 per share: 100,000,000 shares authorized;
30,496,474 and 30,048,854 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
|
|
|
3,050
|
|
|
|
3,005
|
|
Additional paid-in capital
|
|
|
68,722,019
|
|
|
|
68,515,674
|
|
Accumulated deficit
|
|
|
(62,033,656
|
)
|
|
|
(61,804,091
|
)
|
Total Stockholders’ Equity
|
|
|
6,691,413
|
|
|
|
6,714,588
|
|
Total Liabilities, Series C Preferred Stock and Stockholders’
Equity
|
|
$
|
24,182,522
|
|
|
$
|
25,048,182
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,227,012
|
|
|
$
|
8,668,521
|
|
Cost of goods sold
|
|
|
1,617,183
|
|
|
|
2,098,967
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
4,609,829
|
|
|
|
6,569,554
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,885,819
|
|
|
|
3,146,589
|
|
Selling and marketing
|
|
|
1,288,541
|
|
|
|
1,743,583
|
|
Research and development
|
|
|
499,389
|
|
|
|
608,280
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
3,673,749
|
|
|
|
5,498,452
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
936,080
|
|
|
|
1,071,102
|
|
|
|
|
|
|
|
|
|
|
Other Income and (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,165,645
|
)
|
|
|
(1,277,468
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(2,343,879
|
)
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
85,111
|
|
Total Other Expense, Net
|
|
|
(1,165,645
|
)
|
|
|
(3,536,236
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
|
(229,565
|
)
|
|
|
(2,465,134
|
)
|
Loss from Discontinued Operations
|
|
|
-
|
|
|
|
(2,190,540
|
)
|
Net Loss
|
|
|
(229,565
|
)
|
|
|
(4,655,674
|
)
|
Preferred stock dividends
|
|
|
(50,000
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(279,565
|
)
|
|
$
|
(4,755,674
|
)
|
Loss Per Share from Continuing Operations – Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
Loss Per Share from Discontinued Operations – Basic and diluted
|
|
$
|
0.00
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share – Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding – Basic and Diluted
|
|
|
30,245,297
|
|
|
|
27,624,003
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,482,983
|
|
|
$
|
4,486,811
|
|
Cost of goods sold
|
|
|
669,059
|
|
|
|
1,079,333
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,813,924
|
|
|
|
3,407,478
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,041,613
|
|
|
|
1,546,630
|
|
Selling and marketing
|
|
|
562,860
|
|
|
|
894,070
|
|
Research and development
|
|
|
312,777
|
|
|
|
403,327
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,917,250
|
|
|
|
2,844,027
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(103,326
|
)
|
|
|
563,451
|
|
|
|
|
|
|
|
|
|
|
Other Income and (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(564,303
|
)
|
|
|
(691,267
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(2,343,879
|
)
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
299,534
|
|
Total Other Expense, Net
|
|
|
(564,303
|
)
|
|
|
(2,735,612
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
|
(667,629
|
)
|
|
|
(2,172,161
|
)
|
Loss from Discontinued Operations
|
|
|
-
|
|
|
|
(1,184,966
|
)
|
Net Loss
|
|
|
(667,629
|
)
|
|
|
(3,357,127
|
)
|
Preferred stock dividends
|
|
|
(25,000
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss applicable to Common Stockholders
|
|
$
|
(692,629
|
)
|
|
$
|
(3,432,127
|
)
|
Loss Per Share from Continuing Operations – Basic and Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
Loss Per Share from Discontinued Operations – Basic and diluted
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share – Basic and Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding – Basic and Diluted
|
|
|
30,337,390
|
|
|
|
29,234,248
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2020
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance – January 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
30,048,854
|
|
|
$
|
3,005
|
|
|
$
|
68,515,674
|
|
|
$
|
(61,804,091
|
)
|
|
$
|
6,714,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options for services
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the management incentive plan for 2017 and 2018
|
|
|
|
|
|
|
|
|
|
|
447,620
|
|
|
|
45
|
|
|
|
200,749
|
|
|
|
-
|
|
|
|
200,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees incurred in connection with equity offerings
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,404
|
)
|
|
|
-
|
|
|
|
(24,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(229,565
|
)
|
|
|
(229,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
(50,000
|
)
|
Balance – June 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
30,496,474
|
|
|
$
|
3,050
|
|
|
$
|
68,722,019
|
|
|
$
|
(62,033,656
|
)
|
|
$
|
6,691,413
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2020
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance – April 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
30,328,141
|
|
|
$
|
3,033
|
|
|
$
|
68,647,274
|
|
|
$
|
(61,366,027
|
)
|
|
$
|
7,284,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options for services
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the management incentive plan for 2017 and 2018
|
|
|
|
|
|
|
|
|
|
|
168,333
|
|
|
|
17
|
|
|
|
84,149
|
|
|
|
-
|
|
|
|
84,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees incurred in connection with equity offerings
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,404
|
)
|
|
|
-
|
|
|
|
(24,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(667,629
|
)
|
|
|
(667,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
(25,000
|
)
|
Balance – June 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
30,496,474
|
|
|
$
|
3,050
|
|
|
$
|
68,722,019
|
|
|
$
|
(62,033,656
|
)
|
|
$
|
6,691,413
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance – January 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
25,228,072
|
|
|
$
|
2,523
|
|
|
$
|
64,748,871
|
|
|
$
|
(50,014,636
|
)
|
|
$
|
14,736,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
609,910
|
|
|
|
61
|
|
|
|
446,929
|
|
|
|
-
|
|
|
|
446,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash, net of fees
|
|
|
|
|
|
|
|
|
|
|
3,553,363
|
|
|
|
355
|
|
|
|
3,197,455
|
|
|
|
-
|
|
|
|
3,197,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the management incentive plan for 2017 and 2018
|
|
|
|
|
|
|
|
|
|
|
289,216
|
|
|
|
29
|
|
|
|
216,238
|
|
|
|
-
|
|
|
|
216,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees incurred in connection with equity offerings
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(106,104
|
)
|
|
|
-
|
|
|
|
(106,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,655,674
|
)
|
|
|
(4,655,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
(100,000
|
)
|
Balance – June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,680,561
|
|
|
$
|
2,968
|
|
|
$
|
68,403,389
|
|
|
$
|
(54,670,310
|
)
|
|
$
|
13,736,047
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2019
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance – April 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
26,564,921
|
|
|
$
|
2,656
|
|
|
$
|
66,138,426
|
|
|
$
|
(51,313,183
|
)
|
|
$
|
14,827,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
397,288
|
|
|
|
40
|
|
|
|
261,700
|
|
|
|
-
|
|
|
|
261,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash, net of fees
|
|
|
|
|
|
|
|
|
|
|
2,469,136
|
|
|
|
247
|
|
|
|
1,914,753
|
|
|
|
-
|
|
|
|
1,915,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the management incentive plan for 2017 and 2018
|
|
|
|
|
|
|
|
|
|
|
249,216
|
|
|
|
25
|
|
|
|
169,442
|
|
|
|
-
|
|
|
|
169,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees incurred in connection with equity offerings
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,932
|
)
|
|
|
-
|
|
|
|
(5,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,357,127
|
)
|
|
|
(3,357,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
(75,000
|
)
|
Balance – June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,680,561
|
|
|
$
|
2,968
|
|
|
$
|
68,403,389
|
|
|
$
|
(54,670,310
|
)
|
|
$
|
13,736,047
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(229,565
|
)
|
|
$
|
(4,655,674
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(2,190,540
|
)
|
Loss from continuing operations
|
|
|
(229,565
|
)
|
|
|
(2,465,134
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
33,214
|
|
|
|
36,600
|
|
Stock based compensation
|
|
|
80,000
|
|
|
|
417,667
|
|
Amortization of debt discount
|
|
|
54,519
|
|
|
|
70,001
|
|
Amortization of intangible assets
|
|
|
377,777
|
|
|
|
377,777
|
|
Amortization of deferred debt issuance costs
|
|
|
282,027
|
|
|
|
183,421
|
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
(85,111
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
2,343,879
|
|
Deferred taxes
|
|
|
-
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
27,419
|
|
|
|
160,674
|
|
Inventory
|
|
|
495,237
|
|
|
|
(345,136
|
)
|
Prepaid expenses and other current assets
|
|
|
(60,389
|
)
|
|
|
(72,031
|
)
|
Accounts payable
|
|
|
(283,534
|
)
|
|
|
245,559
|
|
Accrued expenses
|
|
|
(166,711
|
)
|
|
|
(199,505
|
)
|
Total Adjustments
|
|
|
839,559
|
|
|
|
3,133,795
|
|
Net Cash Provided by Operating Activities of Continuing Operations
|
|
|
609,994
|
|
|
|
668,661
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing Activities
|
|
|
|
|
|
|
|
|
Pay down of contingent consideration
|
|
|
-
|
|
|
|
(154,367
|
)
|
Purchase of equipment
|
|
|
-
|
|
|
|
(7,067
|
)
|
Net Cash Used in Investing Activities of Continuing Operations
|
|
|
-
|
|
|
|
(161,434
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Pay down of short-term debt
|
|
|
-
|
|
|
|
(159,720
|
)
|
Proceeds received in connection with issuance of common stock, net
|
|
|
-
|
|
|
|
3,197,810
|
|
Repayment of term debt with Sagard Capital
|
|
|
-
|
|
|
|
(16,000,000
|
)
|
Term loan borrowings, net of deferred debt issue costs
|
|
|
-
|
|
|
|
14,670,579
|
|
Term loan repayment
|
|
|
(1,181,250
|
)
|
|
|
(171,875
|
)
|
Payment of closing related fees
|
|
|
-
|
|
|
|
(47,672
|
)
|
Proceeds from PPP loan
|
|
|
346,390
|
|
|
|
-
|
|
Net Cash (Used in) Provided by Financing Activities of Continuing Operations
|
|
|
(834,860
|
)
|
|
|
1,489,122
|
|
Net (Decrease) Increase in Cash and Restricted Cash from Continuing Operations
|
|
|
(224,866
|
)
|
|
|
1,996,349
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash used by operating activities of discontinued operations
|
|
|
-
|
|
|
|
(2,095,468
|
)
|
Cash used in investing activities of discontinued operations
|
|
|
-
|
|
|
|
(21,849
|
)
|
Net Cash Used by Discontinued Operations
|
|
|
-
|
|
|
|
(2,117,317
|
)
|
Net Decrease in Cash and Restricted Cash
|
|
|
(224,866
|
)
|
|
|
(120,968
|
)
|
Cash and Restricted Cash – Beginning of Period
|
|
|
1,737,380
|
|
|
|
1,614,641
|
|
Cash and Restricted Cash – End of Period
|
|
$
|
1,512,514
|
|
|
$
|
1,493,673
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the periods for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
845,528
|
|
|
$
|
851.256
|
|
Taxes
|
|
$
|
10,014
|
|
|
$
|
11,359
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Accrued fees incurred in connection with equity offerings
|
|
$
|
24,404
|
|
|
$
|
58,432
|
|
Common Stock issued in connection with management incentive plans
|
|
$
|
200,794
|
|
|
$
|
216,267
|
|
Accrued Series C Preferred Stock dividends
|
|
$
|
50,000
|
|
|
$
|
25,000
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 – Organization
and Basis of Presentation
Organization
and Principal Business Activities
Nxt-ID, Inc. (“Nxt-ID” or the
“Company”) was incorporated in the State of Delaware on February 8, 2012. The Company 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 LLC (“LogicMark”), manufactures and distributes non-monitored
and monitored personal emergency response systems sold through the United States Department of Veterans Affairs (the
“VA”), healthcare durable medical equipment dealers and distributors and monitored security dealers and
distributors.
The
Company’s former wholly-owned subsidiary, Fit Pay, Inc., had a proprietary technology platform that delivers payment, credential
management, authentication and other secure services to the IoT ecosystem. The platform uses tokenization, a payment security
technology that replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless
payment and authentication services. On September 21, 2018, the Company announced that its board of directors approved a plan
to separate the Company’s financial technology business from our healthcare business into an independent publicly traded
company. The Company originally planned to distribute shares of PartX, Inc., a newly created company and wholly-owned subsidiary
of the Company (“PartX”), to our stockholders through the execution of a spin-off. As a result, the Company reclassified
its financial technology business to discontinued operations for all periods reported. The Company’s financial technology
business was comprised of its Fit Pay subsidiary and the intellectual property developed by the Company, including the Flye Smartcard
and the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX with the U.S. Securities and Exchange
Commission (the “SEC”) in connection with the planned spin-off of our payments, authentication and credential management
business. On August 19, 2019, the Company’s subsidiary, PartX notified the SEC that it was withdrawing the Registration
Statement on Form 10. 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 the sale of its Fit Pay subsidiary,
excluding certain assets on August 6, 2019. In connection with the letter of intent, the Company was 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.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements as of June 30, 2020, and for the six and three months ended June 30, 2020 and 2019 have been prepared in accordance
with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial
information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC and on the same basis as the
Company prepares its annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of
June 30, 2020 and the condensed consolidated statements of operations and changes in equity for the six and three months ended
June 30, 2020 and June 30, 2019 and the condensed consolidated statements of cash flows for the six months ended June 30, 2020
and June 30, 2019 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The results for the six and three months ended June 30, 2020 are not necessarily indicative of results to be expected for the year
ending December 31, 2020, or for any future interim period. The condensed consolidated balance sheet at December 31, 2019 has been
derived from audited consolidated financial statements. However, it does not include all of the information and notes required
by U.S. GAAP for complete consolidated financial statements. The accompanying condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and the notes thereto included
in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 30, 2020.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
2 – Liquidity
The Company generated operating
income of $936,080 and a net loss of $229,565 during the six months ended June 30, 2020. As of June 30, 2020, the Company had
cash and stockholders’ equity of $1,362,384 and $6,691,413, respectively. At June 30, 2020, the Company had a working
capital deficiency of $2,756,825. On July 14, 2020, the Company, received gross proceeds of $1,864,518 from a registered
direct offering. See Note 8 for details of this transaction.
Given the Company’s cash
position at June 30, 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
additional funds through equity or debt offerings to increase its working capital and to accelerate the execution of its
long-term strategic plan to develop and commercialize its core products and to fulfill its product development
commitments.
As described in Note 7, the coronavirus
could significantly impact the Company’s business, which would require the Company to raise funds to assist with its working
capital needs.
Note
3 – Summary Of Significant Accounting Policies
Use
of estimates in the financial statements
The preparation of condensed consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s management
evaluates these significant estimates and assumptions including those related to the fair value of acquired assets and liabilities,
stock based compensation, derivative instruments, income taxes, accounts receivable, inventories, right-of-use assets and other
matters that affect the condensed consolidated financial statements and disclosures. Actual results could differ from those estimates.
Principles
of consolidation
The condensed consolidated financial statements
include the accounts of Nxt-ID and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.
Revenue
Recognition
The Company’s revenues consist of
product sales to either end customers or to distributors and its sales are recognized at a point-in-time under the core principle
of recognizing revenue when control of the product transfers to the customer. The Company recognizes revenue when it ships or delivers
the product from its fulfillment center to its customer, when the customer accepts and has legal title of the product, and the
Company has a present right to payment for the product. For the six months ended June 30, 2020 and 2019, the Company had no sales
recognized over time. The Company invoices its customers at the same time that the Company’s performance obligation is satisfied.
The Company generally receives customer orders with a specified delivery date and orders typically fluctuate from month-to-month
based on customer demand and general business conditions.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company offers standard product warranty
coverage which provides assurance that the Company’s products will conform to the contractually agreed-upon specifications
for a limited period from the date of shipment. The Company’s warranty liabilities and related expense have not been material
and were not material in the accompanying condensed consolidated financial statements as of June 30, 2020 and December 31, 2019,
and for the six months ended June 30, 2020 and 2019.
Accounts
Receivable
Accounts receivable is stated at net realizable
value. The Company regularly reviews accounts receivable balances and adjusts the receivable reserves as necessary whenever events
or circumstances indicate the carrying value may not be recoverable. At June 30, 2020 and December 31, 2019, the Company had an
allowance for doubtful accounts of $126,733.
Inventory
The Company performs regular reviews of inventory quantities
on hand and evaluates the realizable value of its inventories. The Company adjusts the carrying value of the inventory as necessary
with estimated valuation reserves for excess, obsolete, and slow-moving inventory by comparing the individual inventory parts to
forecasted product demand or production requirements. As of June 30, 2020, inventory was comprised of $202,526 in raw materials
and $605,516 in finished goods on hand. Inventory at December 31, 2019 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 June 30, 2020 and December 31, 2019, the Company had prepaid inventory of $226,333 and $201,496, respectively.
These prepayments were made primarily for finished goods inventory, and prepaid inventory is included in prepaid expenses and other
current assets on the condensed consolidated balance sheets.
Other Intangible
Assets
At June 30, 2020, the other intangible
assets relating to the acquisition of LogicMark are comprised of patents of $2,633,603; trademarks of $1,010,190; and customer
relationships of $1,978,707. 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 six and three months ended June 30, 2020,
the Company had amortization expense of $377,777 and $189,932, respectively, related to the LogicMark intangible assets. During
the six and three months ended June 30, 2019, the Company had amortization expense of $377,777 and $189,932, respectively, related
to the LogicMark intangible assets.
As of June 30, 2020, total amortization
expense estimated for the remainder of fiscal year 2020 is approximately $381,000, and for each of the next five fiscal years,
2020 through 2024, the total amortization expense is estimated to be as follows: 2021 - $762,000; 2022 - $762,000; 2023 - $762,000;
2024 - $762,000; and 2025 - $762,000.
Stock-Based
Compensation
The Company accounts for share-based awards
exchanged for employee services at the estimated grant date fair value of the award. The Company accounts for equity instruments
issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation
charges are amortized over the vesting period or as earned. Stock-based compensation is recorded in the same component of operating
expenses as if it were paid in cash. The Company generally issues new shares of common stock to satisfy conversion and warrant
exercises.
Net
Loss per Share
Basic loss per share was computed using
the weighted average number of shares of common stock outstanding. Diluted loss per share includes the effect of diluted common
stock equivalents. Potentially dilutive securities from the exercise of stock options to purchase 193,652 shares of common stock
and warrants to purchase 6,973,221 shares of common stock as of June 30, 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 June 30, 2019, potentially dilutive securities
from the exercise of warrants to purchase 7,206,584 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.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Recent Accounting
Pronouncements
In August 2018, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-13, which eliminates,
adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework
project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years, beginning after
December 15, 2019. This ASU was adopted and did not have a material impact on the Company’s condensed consolidated financial
statements.
Other recent accounting standards that
have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
Note
4 – Discontinued Operations
The
following table represents the financial results of the discontinued operations for the six and three months ended June 30, 2019:
|
|
For the Six
Months Ended
June 30,
|
|
|
For the Three
Months Ended
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
454,062
|
|
|
$
|
232,586
|
|
Cost of sales
|
|
|
121,876
|
|
|
|
58,895
|
|
Gross profit
|
|
|
332,186
|
|
|
|
173,691
|
|
Operating expenses
|
|
|
2,519,601
|
|
|
|
1,357,243
|
|
Interest expense
|
|
|
3,125
|
|
|
|
1,414
|
|
Loss from discontinued operations
|
|
$
|
(2,190,540
|
)
|
|
$
|
(1,184,966
|
)
|
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
5 – Debt refinancings
On May 24, 2018, LogicMark,
a wholly owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the “Credit Agreement”) with
the lenders thereto and Sagard Holdings Manager LP, as administrative agent and collateral agent for the lenders party to the
Credit Agreement (collectively, the “Lender”), whereby the Lender extended a term loan (the “Term Loan”)
to LogicMark in the principal amount of $16,000,000. The original maturity date of the Term Loan was May 24, 2023. The Term Loan
Facility with Sagard Holdings Manager LP was repaid on May 3, 2019 with Term Loan proceeds received from CrowdOut Capital LLC
(See below). The outstanding principal amount of the Term Loan base interest at a rate of LIBOR, adjusted monthly, plus 9.5%
per annum (approximately 11.99% as of April 30, 2019). The Company incurred $1,253,970 in deferred debt issue costs related to
the Term Loan. During the six and three months ended June 30, 2019, the Company
amortized $86,969 and $24,270, respectively, of the deferred debt issue costs which is included in interest expense in the condensed
consolidated statement of operations.
On May 24, 2018,
the Company recorded a debt discount of $705,541. The debt discount is attributable to the aggregate fair value on the issuance
date of both Sagard Warrants. The debt discount was amortized using the effective interest method over the five-year term
of the Term Loan. During the six and three months ended June 30, 2019, the Company recorded $48,933 of debt discount amortization
related to the Sagard Warrants. The debt discount amortization is included as part of interest expense in the condensed consolidated
statement of operations.
On May 3, 2019, LogicMark, completed the
closing of a $16,500,000 senior secured term loan with the lenders thereto and CrowdOut Capital, LLC, as administrative agent.
The Company used the proceeds from the term loan to repay LogicMark’s existing term loan facility with Sagard Holdings Manager
LP and to pay other costs related to the refinancing. The maturity date of the term loan is May 3, 2022 and requires the Company
to make minimum principal payments over the three-year term amortized over 96 months. During the six months ended June 30, 2020,
the Company has made scheduled principal repayments totaling $1,031,250. In addition, the Company prepaid an additional $150,000
of the term loan with CrowdOut Capital LLC during the six months ended June 30, 2020 with cash flow generated from 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 June 30, 2020). The Company incurred $412,500 in original issue discount
for closing related fees charged by the Lender. During the six and three months ended June 30, 2020, the Company amortized $54,519
and $25,847, respectively of the original issue discount which is included in interest expense in the condensed consolidated statement
of operations. At June 30, 2020 the unamortized balance of the original issue discount was $189,551. 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 due to CrowdOut
Capital upon the earlier of final repayment of the term loan facility or the maturity date. The liability for the exit fee is
included as part of other long-term liabilities in the Company’s condensed consolidated balance sheet. During the six and
three months ended June 30, 2020, the Company amortized $282,027 and $133,711, respectively of the deferred debt issue costs which
is included in interest expense in the condensed consolidated statement of operations. At June 30, 2020 the unamortized balance
of deferred debt issuance costs were $980,538.
Debt Maturity
The maturity of the Company’s term
debt is as follows:
2020 (remainder)
|
|
$
|
1,031,250
|
|
2021
|
|
|
2,062,500
|
|
2022
|
|
|
9,033,377
|
|
Total term debt
|
|
$
|
12,127,127
|
|
The
Credit Agreement contains customary financial covenants. As of June 30, 2020, the Company was in compliance with such covenants.
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 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.
In August 2020, the Company intends
to apply for forgiveness of these loans and as such has treated the loans as other short-term debt on the Company’s
condensed consolidated balance sheet.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note
6 – Stockholders’ Equity
January 2019 At-the-Market Offering
On January 8,
2019, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“A.G.P.”) for an at-the-market
offering, pursuant to which the Company 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 three months ended March 31, 2019, the Company received $1,282,810 in net proceeds
from the sale of 1,084,227 shares of its common stock under the sales agreement with A.G.P. 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,
2020.
During the six months ended June 30, 2020,
the Company issued an aggregate of 193,652 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
$0.41 and stock options were fully vested at the issuance date. The aggregate fair value of the stock options issued to the directors
was $80,000.
2017 Stock Incentive Plan
On August 24, 2017, a majority of the Company’s
stockholders approved at the 2017 Annual Stockholders’ Meeting the 2017 Stock Incentive Plan (“2017 SIP”). The
aggregate maximum number of shares of common stock (including shares underlying options) that may be issued under the 2017 SIP
pursuant to awards of restricted shares or options will be limited to 10% of the outstanding shares of common stock, which calculation
shall be made on the first (1st) business day of each new fiscal year; provided that for fiscal year 2017, 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 six months ended
June 30, 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 and 2018 management incentive plans.
During the six months ended June 30,
2020, the Company accrued $80,000 of management and employee bonus expense. The Company has typically paid a substantial
portion of the bonus accrual with shares of common stock.
Warrants
As of June 30, 2020, the Company had
outstanding warrants to purchase an aggregate of 6,973,221 shares of common stock with a weighted average exercise price and
remaining life of $2.83 and 3.03 years, respectively. At June 30, 2020, all of the warrants were exercisable and had no
aggregate intrinsic value.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7 – 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. The Company
waived service of the summons and received an automatic extension of time to answer the Complaint. 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. Since the litigation is still
in its early stages, the Company is not yet able to evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss.
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. The Company adopted Topic 842 effective January 1, 2019. Operating lease liabilities
are recorded based on the present value of the future lease payments over the lease term, assessed as of the commencement date.
The Company’s real estate leases, which are for office space and a fulfillment center, generally have a lease term between
3 and 5 years. The Company also leases a copier with a lease term of 5 years. The Company’s leases are comprised of fixed
lease payments and also include executory costs such as common area maintenance, as well as property insurance and property taxes.
As a practical expedient under Topic 842, the Company has elected to account for the lease and non-lease components as a single
lease component for its real estate leases. Lease payments, which may include lease components, non-lease components and non-components,
are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts
or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs in excess
of such amounts are expensed as incurred as variable lease cost.
The Company’s lease agreements generally
do not specify an implicit borrowing rate, and as such, the Company utilizes its incremental borrowing rate by lease term, in order
to calculate the present value of the future lease payments. The discount rate represents a risk-adjusted rate on a secured basis,
and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with
the lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining
lease term using available data as of that date. The Company’s current lease agreement for its warehouse space located in
Louisville, Kentucky will be expiring 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 commences in September 2020 is
$6,000 per month and increases approximately 3% annually thereafter. The ROU asset value added as a result
of this new lease agreement was $279,024. The Company’s ROU asset and lease liability accounts
reflect the inclusion of this new lease agreement on the Company’s condensed consolidated balance sheet as of June 30, 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.
Nxt-ID, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended June 30, 2020,
total operating lease cost was $76,279 and is recorded in cost of sales and selling, general and administrative expenses, dependent
on the nature of the leased asset. The operating lease cost is recognized on a straight-line basis over the lease term. The following
summarizes (i) the future minimum undiscounted lease payments under non-cancelable lease for the remainder of 2020 as well as each
of the next five years and thereafter, incorporating the practical expedient to account for lease and non-lease components as a
single lease component for our existing real estate leases, (ii) a reconciliation of the undiscounted lease payments to the present
value of the lease liabilities recognized, and (iii) the lease-related account balances on the Company’s condensed consolidated
balance sheet, as of June 30, 2020:
Year Ended December 31,
|
|
|
|
|
|
|
|
2020 (excluding the six months ended June 30, 2020)
|
|
$
|
47,734
|
|
2021
|
|
|
90,986
|
|
2022
|
|
|
93,385
|
|
2023
|
|
|
89,724
|
|
2024
|
|
|
80,000
|
|
2025
|
|
|
54,400
|
|
Total future minimum lease payments
|
|
$
|
456,229
|
|
Less imputed interest
|
|
|
(114,874
|
)
|
Total present value of future minimum lease payments
|
|
$
|
341,355
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
340,972
|
|
|
|
|
|
|
Other accrued expenses
|
|
$
|
58,956
|
|
Other long-term liabilities
|
|
$
|
282,399
|
|
|
|
$
|
341,355
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
4.61 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
8 – Subsequent Events
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued.
On July 14, 2020, the Company closed a registered direct offering
(the “Offering”) of (i) an aggregate of 3,778,513 shares of the Company’s common stock, par value $0.0001 per
share (the “Common Stock”); (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 $1,864,518,
before deducting any offering expenses. The Company intends 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.
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. Since the litigation is still in its early stages, 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.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations for the six and three months ended June 30, 2020 should be read together with
our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion
contains forward-looking statements and information relating to our business that reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These forward-looking statements speak only as of the
date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws
of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the
forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual
results.
Overview
We were incorporated in the State of Delaware
on February 8, 2012. As of December 31, 2018, we are no longer an “emerging growth company” as defined in the Jumpstart
Our Business Startups Act of 2012 (the “JOBS Act”). We are a security technology company and we operate our business
in one segment – hardware and software security systems and applications. We are engaged in the development of proprietary
products and solutions that serve multiple end markets, including the security, healthcare, financial technology and the Internet
of Things (“IoT”) markets. We evaluate the performance of our business on, among other things, profit and loss from
operations. With extensive experience in access control, biometric and behavior-metric identity verification, security and privacy,
encryption and data protection, payments, miniaturization, and sensor technologies, we develop and market solutions for payment,
IoT and healthcare applications.
Our
wholly-owned subsidiary, LogicMark, manufactures and distributes non-monitored and monitored personal emergency response systems
sold through the United States Department of Veterans Affairs (the “VA”), healthcare durable medical equipment dealers
and distributors and monitored security dealers and distributors.
Our
former wholly-owned subsidiary, Fit Pay, Inc., had a proprietary technology platform that delivers payment, credential management,
authentication and other secure services to the IoT ecosystem. The platform uses tokenization, a payment security technology that
replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless payment
and authentication services. On September 21, 2018, we announced that our board of directors approved a plan to separate
our financial technology business from our healthcare business into an independent publicly traded company. We originally planned
to distribute shares of PartX, Inc., a newly created company and wholly-owned subsidiary of the Company (“PartX”),
to our stockholders through the execution of a spin-off. As a result, we reclassified our financial technology business to discontinued
operations for all periods reported. Our financial technology business was comprised of our Fit Pay subsidiary and the intellectual
property developed by the Company, including the Flye Smartcard and the Wocket. On April 29, 2019, a Registration Statement on
Form 10 was filed by PartX with the SEC in connection with the planned spin-off of our payments, authentication and credential
management business. On August 19, 2019, our subsidiary, PartX notified the SEC that it was
withdrawing the Registration Statement on Form 10. 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 the sale of our Fit Pay subsidiary,
excluding certain assets on August 6, 2019. In connection with the letter of intent, we were advanced $500,000 of non-interest
bearing working capital for Fit Pay. On September 9, 2019, we completed the sale of our Fit Pay subsidiary to Garmin International,
Inc. for $3.32 million in cash.
Healthcare
With respect to the healthcare market,
our business initiatives are driven by 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. This business is steady and growing, producing the highest annual revenue in its operational
history in 2019. 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.
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.
Payments and Financial Technology
Our
former wholly-owned subsidiary, Fit Pay, Inc., had a proprietary technology platform that delivered payment, credential management,
authentication and other secure services to the IoT ecosystem. The platform used tokenization, a payment security technology that
replaces cardholders’ account information with a unique digital identifier, to transact highly secure contactless payment
and authentication services. Fit Pay connected its customers to leading payment card networks, including VISA, Mastercard, Maestro
and Discover, and to credit card issuing banks globally. Fit Pay also commercialized its third-party token service provider platform
with the launch of Garmin Pay, which was powered by Fit Pay’s platform. Fit Pay’s technology and tokenization service
enabled the contactless payment feature that is included in smart watches manufactured by Garmin.
On September 21, 2018, we announced that
our board of directors approved a plan to separate our financial technology business from our healthcare business into an independent
publicly traded company. We originally planned to distribute shares representing our financial technology business into a newly
created company and wholly-owned subsidiary of the Company (which we named “PartX”), to our stockholders through the
execution of a spin-off. As a result, we reclassified our financial technology business to discontinued operations for all periods
reported. Our financial technology business was comprised of our Fit Pay subsidiary and the intellectual property developed by
the Company, including the Flye Smartcard and the Wocket. On April 29, 2019, a Registration Statement on Form 10 was filed by PartX
with the SEC in connection with the planned spin-off of our payments, authentication and credential management business. On
August 19, 2019, our subsidiary, PartX notified the SEC that it was withdrawing the Registration Statement on Form 10 as PartX
was unable to secure sufficient investment within the time period specified in a term loan agreement to separately fund the spinoff.
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 our 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, we completed the sale of our Fit Pay subsidiary to Garmin International, Inc. for $3.32 million in cash.
Results of Operations
Comparison of six and three months ended June 30, 2020
and June 30, 2019
Revenue. Our revenues for the six
and three months ended June 30, 2020 were $6,227,012 and $2,482,983, respectively, compared to $8,668,521 and $4,486,811, respectively
for the six and three months ended June 30, 2019. The decrease in our revenues for the six and three months ended June 30, 2020
as compared to the six and three months ended June 30, 2019 is primarily attributable to LogicMark’s decreased sales volume
resulting from the COVID-19 pandemic.
Cost of Revenue and Gross Profit.
Our gross profit for the six and three months ended June 30, 2020 was $4,609,829 and $1,813,924, respectively, compared to a gross
profit of $6,569,554 and $3,407,478, respectively for the six and three months ended June 30, 2019. The decrease in gross profit
in the six and three months ended June 30, 2020 as compared to the six and three months ended June 30, 2019 is primarily attributable
to LogicMark’s decreased sales volume resulting from the COVID-19 pandemic.
Operating Expenses. Operating expenses
for the six months ended June 30, 2020 totaled $3,673,749 and consisted of research and development expenses of $499,389, selling
and marketing expenses of $1,288,541 and general and administrative expenses of $1,885,819. The research and development expenses
related primarily to salaries and consulting services of $436,405. Selling and marketing expenses consisted primarily of salaries
and consulting services of $289,516, amortization of intangibles of $377,777, freight charges of $271,361, merchant processing
fees of $135,342, and sales commissions of $124,266. General and administrative expenses consisted of salaries and consulting services
of $455,957, accrued management and employee incentives of $80,000, legal, audit and accounting fees of $565,389 and insurance
of $225,915.
Operating expenses for the six months ended
June 30, 2019 totaled $5,498,452 and consisted of research and development expenses of $608,280, selling and marketing expenses
of $1,743,583 and general and administrative expenses of $3,146,589. The research and development expenses related primarily to
salaries and consulting services of $519,464. Selling and marketing expenses consisted primarily of salaries and consulting services
of $302,974, amortization of intangibles of $377,777, freight charges of $324,882, merchant processing fees of $211,465, and sales
commissions of $148,921. General and administrative expenses consisted of salaries and consulting services of $943,410, accrued
management and employee incentives of $185,000 and legal, audit and accounting fees of $422,726. Also included in general and administrative
expenses is $266,780 in non-cash stock compensation to consultants and board members.
Operating expenses for the three months
ended June 30, 2020 totaled $1,917,250 and consisted of research and development expenses of $312,777, selling and marketing expenses
of $562,860 and general and administrative expenses of $1,041,613. The research and development expenses related primarily to salaries
and consulting services of $286,960. Selling and marketing expenses consisted primarily of salaries and consulting services of
$121,699, amortization of intangibles of $189,932, freight charges of $101,234, merchant processing fees of $53,999, and sales
commissions of $56,410. General and administrative expenses consisted of salaries and consulting services of $218,564, accrued
management and employee incentives of $40,000, legal, audit and accounting fees of $408,873 and insurance of $112,678.
Operating expenses for the three months
ended June 30, 2019 totaled $2,844,027 and consisted of research and development expenses of $403,327, selling and marketing expenses
of $894,070 and general and administrative expenses of $1,546,630. The research and development expenses related primarily to salaries
and consulting services of $346,679. Selling and marketing expenses consisted primarily of salaries and consulting services of
$117,828, amortization of intangibles of $189,932, freight charges of $169,040, merchant processing fees of $107,640, and sales
commissions of $75,795. General and administrative expenses consisted of salaries and consulting services of $466,547, accrued
management and employee incentives of $74,785 and legal, audit and accounting fees of $176,845. Also included in general and administrative
expenses is $125,530 in non-cash stock compensation to consultants and board members.
Operating Profit. The operating
profit (loss) for the six and three months ended June 30, 2020 was $936,080 and $(103,326), respectively, compared with operating
profit of $1,071,102 and $563,451, respectively for the six and three months ended June 30, 2019. The decrease in operating profit
for the six and three months ended June 30, 2020 as compared to the six and three months ended June 30, 2019 is primarily attributable
to the lower gross profit discussed above which was offset in part by lower operating expenses incurred in the six and three months
ended June 30, 2020 as compared to the six and three months ended June 30, 2019.
Net Loss. The net loss for the six
months ended June 30, 2020 was $229,565 compared to a net loss of $2,465,134 for the six months ended June 30, 2019. The net loss
for the six months ended June 30, 2020 was primarily attributable to the operating profit discussed above of $936,080 which was
offset by interest expense incurred of $1,165,645. The net loss for the six months ended June 30, 2019 was $2,465,134 and was primarily
attributable to the operating profit discussed above of $1,071,102 and a favorable change in fair value of contingent consideration
of $85,111, all of which was offset by interest expense incurred of $1,277,468 and a loss on the extinguishment of debt of $2,343,879.
The net loss for the three months ended
June 30, 2020 was $667,629 compared to a net loss of $2,172,161 for the three months ended June 30, 2019. The net loss for the
three months ended June 30, 2020 was primarily attributable to the operating loss discussed above of $103,326 and interest expense
incurred of $564,303. The net loss for the three months ended June 30, 2019 was $2,172,161 and was primarily attributable to the
operating profit discussed above of $563,451 and a favorable change in fair value of contingent consideration of $299,534, all
of which was offset by interest expense incurred of $691,267 and a loss on the extinguishment of debt of $2,343,879.
Liquidity and Capital Resources
Sources of Liquidity
We generated operating income of $936,080
and incurred a net loss of $229,565 for the six months ended June 30, 2020. As of June 30, 2020, we had cash and stockholders’
equity of $1,362,384 and $6,691,413, respectively. At June 30, 2020, we had a working capital deficiency of $2,756,825.
Given our cash position at June 30, 2020
and our projected cash flow from operations, we believe that we will have sufficient capital to sustain operations for a period
of one year following the date of this filing. We may also raise funds through equity or debt offerings to increase our working
capital and to accelerate the execution of our long-term strategic plan to develop and commercialize our core products and to fulfill
our product development commitments.
On July 14, 2020, we 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 (the “Common Stock”);
(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 $1,864,518, before deducting any offering expenses.
Cash Generated by Operating Activities.
Our primary ongoing uses of operating cash relate to payments to subcontractors and vendors for product, research and development,
salaries and related expenses and professional fees. Our vendors and subcontractors generally provide us with normal trade payment
terms. During the six months ended June 30, 2020, net cash provided by operating activities totaled $609,994, which was comprised
of a net loss of $229,565, positive non-cash adjustments to reconcile net loss to net cash used in operating activities of $827,537,
and changes in operating assets and liabilities of positive $12,022, as compared to net cash provided by operating activities of
$668,661 for the six months ended June 30, 2019, which was comprised of a net loss of $2,465,134, positive non-cash adjustments
to reconcile net loss to net cash used in operating activities of $3,344,234, and changes in operating assets and liabilities of
negative $210,439.
Cash Used in Investing Activities.
During the six months ended June 30, 2020, we did not have any net cash
used in investing activities. During the six months ended June 30, 2019 net cash used in investing activities totaled $161,434
and was primarily related to an earn-out payment of $154,367 to the sellers of Fit Pay and the purchase of equipment of $7,067.
Cash Provided by Financing Activities.
During the six months ended June 30, 2020, net cash used in financing activities totaled $834,860 and was related to our term
loan repayments of $1,181,250 which was partially offset by $346,390 in loan proceeds received under the Paycheck Protection Program
under the Coronavirus Aid, Relief, and Economic Security Act. During the six months ended June 30, 2019, net cash provided by financing
activities totaled $1,489,122 and was primarily related to the net proceeds received of $3,197,810 from the sale of stock from
our January 2019 At-the-Market Offering and $14,670,579 in net proceeds received from the refinancing with CrowdOut Capital, which
closed on May 3, 2019 all of which was partially offset by the pay down of $16,000,000 related to the term loan facility with Sagard
Holdings Manager, L.P., pay downs in short-term debt of $159,720, a scheduled term loan repayment of $171,875 and fees paid in
connection with equity offerings totaling $47,672.
Potential Impacts of COVID-19
on Our Business and Operations
The COVID-19 pandemic
represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies,
including locations where we have offices, employees, customers, vendors and other suppliers and business partners.
Like most US-based
businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. By that
time, much of our first fiscal quarter was completed. During the quarter ended June 30, 2020, we have observed recent decreases
in demand from certain customers, primarily our VA hospitals.
Given the fact our products are sold through a variety of distribution
channels, including through hospitals, we expect our sales will experience more volatility as a result of the changing and less
predictable operational needs of many customers as a result of the COVID-19 pandemic. We are aware that many companies, including
many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future operating results. Although
we observed significant declines in demand for our products from certain customers during the three months ended June 30, 2020,
we believe that it remains too early for us to know the exact impact COVID-19 will have on the long-term demand for our products.
We also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic may go through several phases
of varying severity and duration.
In light of broader
macro-economic risks and already known impacts on certain industries that use our products and services, we have taken and are
taking targeted steps to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts of COVID-19
on our operations closely and this situation could change based on a significant number of factors that are not entirely within
our control and are discussed in this and other sections of this report on Form 10-Q. We do not expect there to be material changes
to our assets on our balance sheet or our ability to timely account for those assets. Further, in connection with the preparation
of this quarterly report on Form 10-Q and the interim financial statements contained herein, we reviewed the potential impacts
of the COVID-19 pandemic on goodwill and intangible assets and have determined there to be no material impact at this time. We
have also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business-related
items.
To date, travel
restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver products
or services to customers. However, if such restrictions become more severe, they could negatively impact those activities in a
way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist our
customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect
these restrictions on personal travel to be material to our business operations or financial results. We have taken steps to restrain
and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between
costs and revenues.
Like most companies,
we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines
as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business
effectively. To date, we have been able to operate our business effectively using these measures and to maintain all internal controls
as documented and posted. We also have not experienced challenges in maintaining business continuity and do not expect to incur
material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and
it remains possible that challenges may arise in the future.
The actions we
have taken so far during the pandemic include, but are not limited to:
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Requiring all employees who can work from home to work from home;
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Increasing our IT networking capability to best assure employees can work effectively outside the office;
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For employees who must perform essential functions in one of our offices:
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Having employees maintain a distance of at least six feet from other employees whenever possible;
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Having employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
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Having employees stay segregated from other employees in the office with whom they require no interaction;
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Requiring employees to wear masks while they are in the office whenever possible;
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On each of May 6 and May 8, 2020, we
and LogicMark, LLC, our wholly owned subsidiary, received loans (the “Loans”) from Bank of America, NA in the
aggregate amount of $346,390.00, 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. Under the terms of the PPP,
PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for
eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan
forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. As of June
30, 2020, we have used the entirety of the loan proceeds for purposes consistent with the PPP and have not taken any actions
that we believe will reduce the amount eligible for forgiveness. As such, the Company believes that the entire amount of the
loans will be eligible for forgiveness. However, to the extent any portion of the loan is determined to be ineligible for
forgiveness, such unforgiven portion of the loan is payable over 2-5 years at an interest rate of 1%, with a deferral of
payments for the first six months.
We currently believe
revenue for the three months ended September 30, 2020 will decline significantly year over year due to the conditions noted. In
April 2020, we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses for the three months ending
June 30, 2020. Actions taken to date include work hour and salary reductions for senior management. These cost reductions are in
addition to the significant restructuring actions we initiated in the fourth quarter of 2019. Based on our current cash position,
our projected cash flow from operations and our cost reduction and cost containment efforts to date, we believe that we will have
sufficient capital to sustain operations for a period of one year following the date of this filing. If business interruptions
resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and
cash flows would be negatively impacted. We will continue to actively monitor this situation and will implement actions necessary
to maintain business continuity.
Business Outlook
Our future financial
performance depends, in large part, on conditions in the markets that we serve and on conditions in the U.S. During
the quarter ended June 30, 2020, the impact of the COVID-19 pandemic significantly affected our results of operations as we experienced
meaningful reductions in customer demand for our products and services. During the second quarter, the Company continued
to identify and assess risks and modify operating plans following guidance from national, state and local governmental and health
authorities. During the second quarter, although we continued to experience minimal supply chain disruption, customer
demand was noticeably weaker. In addition, during the second quarter we also took several proactive measures
to protect the Company’s balance sheet and strengthen its liquidity position, including: making additional cost reductions
through executive wage rollbacks, discretionary spending reductions, corporate travel suspension, and service provider and other
expense reductions as well as leveraging government work programs and tax deferrals and extensions to the extent they do not incur
interest rate fees or penalties.
The COVID-19 pandemic
and its effects on the economic environment remain extremely fluid and it is difficult to predict with certainty what unforeseen
circumstances may develop as we progress through the remainder of the year. As a result, we will continue to proceed
cautiously by managing our cost structure and cash flows. In addition, we are rethinking our strategic plans to best
position our company to adapt to these changing conditions and to continue to serve our customers and community.
COVID-19
Considerations
The Company’s
priorities during the COVID-19 pandemic are protecting the health and safety of our employees and rethinking and reevaluating our
operational and strategic plans to overcome the current challenges. In the quarter ended June 30, 2020, the COVID-19 pandemic
had a material net impact on our consolidated operating results. In the future, the pandemic may cause continued or prolonged reduced
demand for our products or services if, for example, the pandemic results in a recessionary economic environment to the markets
that we serve; however since the products services that we offer are essential to the daily lives of our current and future customers,
we believe that over the long term, there will continue to be strong demand for our products and services as we rethink our distribution
paradigm in the post-COVID-19 environment.
Our ability to
operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect
our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities
to protect our employees, with particular measures in place for those working in our customer facilities. For the six months ended
June 30, 2020, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate
in managing our business. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our
workforce and supply chain as well as impact the purchasing decisions by some of our larger customers.
Through
June 30, 2020, the pandemic has not materially impacted the Company’s liquidity position as of such date, however,
during the three-month period ended June 30, 2020, we failed to generate operating cash flow as we had in the prior
quarter. We currently expect to maintain access to the capital markets should the effects of the pandemic on our operations
continue. We have not observed any material impairments of our assets or a significant change in the fair value of our assets
due to the COVID-19 pandemic.
For additional
information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors”
in Part II, Item 1A of this Form 10-Q.
Impairment
of Goodwill and Indefinite-Lived Intangible Assets
The Company conducts
an annual impairment review of goodwill and indefinite-lived intangible assets each year, unless events occur which trigger the
need for an interim impairment review. During the first quarter of 2020 the Company considered the economic impact of the COVID-19
pandemic to be a triggering event for an interim impairment review. Because we were in the early
stages of the pandemic, we elected not to undertake a formal review of our assets for impairment purposes.
During the second quarter of 2020,
the Company again considered the economic impact of the COVID-19 pandemic on the Company’s operations and determined
there was no triggering event, particularly inasmuch as the Company’s sales began to recover
during the second half of the second quarter of 2020. The Company continues to monitor the impact of the pandemic on
its business and anticipates continuing to review guidance issued by the Securities and Exchange Commission as well as governing
audit bodies to guide its future reviews and posture.
Impact of Inflation
We believe that our business has not been
affected to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the
worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost
of certain raw materials, component parts and labor used in the production of our products. It also may increase our operating
expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets. We have generally been able to maintain
or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent,
price increases, and we expect to be able to do the same during the remainder of fiscal year 2020. As such, we do not believe that
inflation will have a significant impact on our business during the remainder of fiscal year 2020.
Off Balance Sheet Arrangements
We do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
such relationships.
Recent Accounting Pronouncements
See Note 3 to our condensed consolidated
financial statements for the six months ended June 30, 2020, included elsewhere in this document.