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Aug. 19, 2019, 5:26 p.m. EDT

10-Q: NXT-ID, INC.

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(EDGAR Online via COMTEX) -- Note 2 - Liquidity And Management Plans

The Company generated operating income from continuing operations of $1,071,102 and incurred a net loss from continuing operations of $2,465,134 during the six months ended June 30, 2019. Certain of these factors raise substantial doubt about the Company's ability to sustain operations for at least one year from the issuance of these financial statements. However, given the Company's cash position at June 30, 2019 and its projected cash flow from operations, the Company believes that it will have sufficient capital to sustain operations over the next twelve months following the date of this filing to alleviate such substantial doubt. As of June 30, 2019, the Company (excluding discontinued operations) had a working capital deficiency of $2,976,398 and stockholders' equity of $13,736,047. In order to execute the Company's long-term strategic plan to develop and commercialize its core products, fulfill its product development commitments and fund its obligations as they come due, the Company may need to raise additional funds, through public or private equity offerings, debt financings, or other means. Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue to fund its operations, the Company would need to engage in certain cost containment efforts, and/or curtail certain of its operational activities. See Note 8 for default notices and respective waivers received by the Company subsequent to June 30, 2019.

Cash and restricted cash, as presented on the Company's condensed consolidated statements of cash flows, consists of $1,303,172 and $190,501, as of June 30, 2019, respectively, and $1,313,305 and $513,866 as of June 30, 2018, respectively.

During the six months ended June 30, 2019, the Company received net proceeds of $3,197,810 from the sale of common stock in connection with the January 2019 At-the-Market Offering (See Note 6). However, the Company can give no assurance that any cash raised subsequent to June 30, 2019 will be sufficient to execute its business plan or meet its obligations. The Company can give no assurance that additional funds will be available on reasonable terms, or available at all, or that it will generate sufficient revenue to alleviate these conditions.

The Company's ability to execute its business plan is dependent upon its ability to raise additional equity, secure debt financing, and/or generate revenue. Should the Company not be successful in obtaining the necessary financing, or generate sufficient revenue to fund its operations, the Company would need to curtail certain of its operational activities.

Note 3 - Summary Of Significant Accounting Policies

Use of estimates in the financial statements

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's management evaluates these significant estimates and assumptions including those related to the fair value of acquired assets and liabilities, stock based compensation, derivative instruments, income taxes, accounts receivable and inventories, right-of-use assets and other matters that affect the condensed consolidated financial statements and disclosures. Actual results could differ from those estimates.

Principles of consolidation

The condensed consolidated financial statements include the accounts of Nxt-ID and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

The Company's revenues consist of product sales to either end customers or to distributors and its sales are recognized at a point-in-time under the core principle of recognizing revenue when control of the product transfers to the customer. The Company recognizes revenue when it ships or delivers the product from its fulfillment center to its customer, when the customer accepts and has legal title of the product, and the Company has a present right to payment for the product. For the six months ended June 30, 2019 and 2018, the Company had no sales recognized over time. The Company invoices its customers at the same time that the Company's performance obligation is satisfied. The Company generally receives customer orders with a specified delivery date and orders typically fluctuate from month-to-month based on customer demand and general business conditions.

Nxt-ID, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company offers standard product warranty coverage which provides assurance that the Company's products will conform to the contractually agreed-upon specifications for a limited period from the date of shipment. The Company's warranty liabilities and related expense have not been material and were not material in the accompanying condensed consolidated financial statements as of June 30, 2019 and December 31, 2018, and for the six months ended June 30, 2019 and 2018.

Accounts Receivable

Accounts receivable is stated at net realizable value. The Company regularly reviews accounts receivable balances and adjusts the receivable reserves as necessary whenever events or circumstances indicate the carrying value may not be recoverable. At June 30, 2019 and December 31, 2018, the Company had an allowance for doubtful accounts of $126,733.

Inventory

The Company performs regular reviews of inventory quantities on hand and evaluates the realizable value of its inventories. The Company adjusts the carrying value of the inventory as necessary with estimated valuation reserves for excess, obsolete, and slow-moving inventory by comparing the individual inventory parts to forecasted product demand or production requirements. As of June 30, 2019, inventory was comprised of $150,569 in raw materials and $1,065,080 in finished goods on hand. Inventory at December 31, 2018 was comprised of $870,513 in finished goods on hand. The Company is required to prepay for certain inventory with certain vendors until credit terms can be established. As of June 30, 2019 and December 31, 2018, the Company had prepaid inventory of $243,030 and $317,488, respectively. These prepayments were made primarily for finished goods inventory, and prepaid inventory is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Other Intangible Assets

At June 30, 2019, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $3,006,328; trademarks of $1,073,066; and customer relationships of $2,304,921. At December 31, 2018, the other intangible assets relating to the acquisition of LogicMark are comprised of patents of $3,191,159; trademarks of $1,104,246; and customer relationships of $2,466,687. The Company will continue amortizing these intangible assets using the straight-line method over their estimated useful lives which for the patents, trademarks and customer relationships are 11 years; 20 years; and 10 years, respectively. During the 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. During the six and three months ended June 30, 2018, the Company had amortization expense of $377,777 and $189,932, respectively, related to the LogicMark intangible assets.

As of June 30, 2019, total amortization expense estimated for the remainder of fiscal year 2019 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: 2020 - $762,000; 2021 - $762,000; 2022 - $762,000; 2023 - $762,000; and 2024 - $762,000.

Stock-Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period or as earned. Stock-based compensation is recorded in the same component of operating expenses as if it were paid in cash. The Company generally issues new shares of common stock to satisfy conversion and warrant exercises.

Net Loss per Share

Basic loss per share was computed using the weighted average number of shares of common stock outstanding. Diluted loss per share includes the effect of diluted common stock equivalents. Potentially dilutive securities from the exercise of warrants to purchase 7,206,584 shares of common stock as of June 30, 2019 were excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive. As of June 30, 2018, potentially dilutive securities from the exercise of warrants to purchase 5,090,352 shares of common stock were excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.

Nxt-ID, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reclassifications

Certain accounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period consolidated financial statements. These reclassifications had no effect on the previously reported net loss.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") ASU 2018-13, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. Adoption of this guidance is required for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact of this update on its condensed consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, "I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception". Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, "Distinguishing Liabilities from Equity," because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. This ASU was adopted and did not have a material impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which amended, among other things, the existing guidance by requiring lessees to recognize lease right-of-use assets ("ROU assets") and liabilities arising from operating leases on the balance sheet. Since issuing Topic 842, the FASB has issued various subsequent ASUs, including but not limited to ASU 2018-10, "Codification Improvements to Topic 842, Leases," which clarified various aspects of the guidance under Topic 842, as well as ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which allows entities the option of recognizing the cumulative effect of applying Topic 842 as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance.

Prior to the adoption, the Company evaluated Topic 842, including the initial review of any necessary changes to existing processes and systems that would be required to implement this standard, in order to determine its impact on the Company's consolidated financial statements and related disclosures.

The Company adopted Topic 842 on January 1, 2019 using the updated modified retrospective transition approach allowed under ASU 2018-11 and did not restate prior periods. The Company recognized ROU assets and related lease liabilities on its condensed consolidated balance sheet as of January 1, 2019 of approximately $267,516 and $269,820, respectively, related to its operating lease commitments, and there was no cumulative impact on retained earnings as of January 1, 2019. Topic 842 did not have a material impact on the Company's condensed consolidated statements of income and condensed consolidated statements of cash flow for the six months ended June 30, 2019, nor did it have any impact on the Company's compliance with debt covenants. The adoption of Topic 842 provided various optional practical expedients in transition, some of which the Company elected. Going forward, the impact of Topic 842 on the Company's consolidated financial statements will be dependent upon the Company's lease portfolio. The accounting for finance leases (formerly referred to as "capital leases") remains substantially unchanged. See Note 7 herein for further details regarding the impact of the adoption of Topic 842 and other information related to the Company's lease portfolio.

Other recent accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption.

Nxt-ID, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 - Discontinued Operations

The following table presents the assets and liabilities related to the financial technology product line classified as assets and liabilities associated with discontinued operations (See Note 1) in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018:







                                                                         June 30,       December 31,
                                                                           2019             2018
        Accounts receivable, net                                       $    239,164     $     125,318
        Inventory                                                             5,018                 -
        Prepaid expenses and other current assets                           140,223            96,909
        Total current assets associated with discontinued operations   $    384,405     $     222,227
        Property and equipment, net                                          52,123            38,793
        Right-of-use assets                                                  76,583                 -
        Goodwill                                                          9,119,709         9,119,709
        Other intangible assets                                           2,804,733         3,112,224
        Total non-current assets associated with discontinued
        operations                                                     $ 12,053,148     $  12,270,726
        Accounts payable                                               $    167,971     $     175,982
        Accrued expenses                                                    195,964           185,978
        Customer deposits                                                     2,500             3,333
        Total current liabilities associated with discontinued
        operations                                                     $    366,435     $     365,293
        Other long-term liabilities                                          16,501                 -
        Total non-current liabilities associated with discontinued
        operations                                                     $     16,501     $           -
        


The following table represents the financial results of the discontinued operations for the six and three months ended June 30, 2019 and 2018:







                                                         Six Months Ended                 Three Months Ended
                                                             June 30,                          June 30,
                                                       2019             2018             2019            2018
        Net sales                                  $    454,062     $  1,399,268     $    232,586     $   805,175
        Cost of sales                                   121,876          727,718           58,895         465,586
        Gross profit                                    332,186          671,550          173,691         339,589
        Operating expenses                            2,519,601        2,540,662        1,357,243       1,273,470
        Interest expense                                  3,125              727            1,414               -
        Loss from discontinued operations          $ (2,190,540 )   $ (1,869,839 )   $ (1,184,966 )   $  (933,881 )
        


(1) The contingent liability associated with the earn-out payment due to certain of the Fit Pay legacy shareholders is not included in discontinued operations.

Nxt-ID, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Debt refinancings

On May 24, 2018, LogicMark, a wholly owned subsidiary of Nxt-ID, entered into a Senior Secured Credit Agreement (the "Credit Agreement") with the lenders thereto and Sagard Holdings Manager LP, as administrative agent and collateral agent for the lenders party to the Credit Agreement (collectively, the "Lender"), whereby the Lender extended a term loan (the "Term Loan") to LogicMark in the principal amount of $16,000,000. The original maturity date of the Term Loan was May 24, 2023. The Term Loan Facility with Sagard Holdings Manager LP was repaid on May 3, 2019 with Term Loan proceeds received from CrowdOut Capital LLC (see below). The outstanding principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted monthly, plus 9.5% per annum (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 is being 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, 2021 and requires the Company to make minimum principal payments over the three-year term amortized over 96 months. Since the inception of the refinancing, the Company has made one principal repayment of $171,875 through June 30, 2019. The outstanding principal amount of the Term Loan bears interest at a rate of LIBOR, adjusted monthly, plus 11.0% per annum (approximately 13.40% as of June 30, 2019). 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, 2019, the Company amortized $21,069 of the original issue discount which is included in interest expense in the condensed consolidated statement of operations. At June 30, 2019 the unamortized balance of the original issue discount was $391,431. The Company also incurred $1,831,989 in deferred debt issue costs related to the Term Loan. The deferred debt issue costs include an exit fee of $1,072,500 which is equivalent to 6.5% of the term loan amount borrowed from CrowdOut Capital. The exit fee is due to CrowdOut Capital upon the earlier of final repayment of the term loan facility or the maturity date. The liability for the exit fee is included as part of other long-term liabilities in the Company's condensed consolidated balance sheet. During the six and three months ended June 30, 2019, the Company amortized $96,452 of the deferred debt issue costs which is included in interest expense in the condensed consolidated statement of operations. At June 30, 2019 the unamortized balance of deferred debt issue costs was $1,735,537.

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 L.P. totaling $757,308.

The Credit Agreement contains customary financial covenants. As of June 30, 2019, the Company was in compliance with such covenants. See Note 8.

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

2013 Long-Term Stock Incentive Plan

On January 4, 2013, a majority of the Company's stockholders approved by written consent the Company's 2013 Long-Term Stock Incentive Plan ("LTIP"). The maximum aggregate number of shares of common stock that may be issued under the LTIP, including stock awards, stock issued to directors for serving on the Company's board of directors, and stock appreciation rights, is limited to 10% of the shares of common stock outstanding on the first business or trading day of any fiscal year, which is 975,886 shares of common stock at January 1, 2019.

During the six months ended June 30, 2019, the Company issued an aggregate of 247,805 shares of common stock under the LTIP to five (5) non-employee directors for serving on the Company's board. The aggregate fair value of the shares issued to the directors was $200,000.

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, 2019, the Company issued 289,216 shares of common stock with an aggregate fair value of $216,267 to certain non-executive employees related to the Company's 2017 and 2018 management incentive plan.

During the six months ended June 30, 2019, the Company accrued $110,000 of management and employee bonus expense.

During the six months ended June 30, 2019, the Company issued 362,105 shares of common stock with a fair value of $246,990 to non-employees for services rendered.

Warrants

As of June 30, 2019, the Company had outstanding warrants to purchase an aggregate of 7,206,584 shares of common stock with a weighted average exercise price and remaining life of $3.76 and 3.73 years, respectively. At June 30, 2019, the warrants had no aggregate intrinsic value. During the six months ended June 30, 2019, warrants to purchase an aggregate of 352,904 shares of common stock with a weighted-average exercise price of $8.73 expired.

Series C Preferred Stock

On June 11, 2019, the Company made a retroactive dividend payment adjustment of $50,000 to the Series C Preferred Stockholders pursuant to the terms and conditions set forth in the Certificate of Designations, Preferences and Rights of the Series C Non-Convertible Voting Preferred Stock.

Nxt-ID, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

. . .

Aug 19, 2019

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