LogicMark(LGMK) - 2018 Q4 - Annual Report

PART I Business Overview Nxt-ID develops proprietary products for security, healthcare, FinTech, and IoT markets, with a planned spin-off of its FinTech business - Nxt-ID is a technology company focused on security, healthcare, FinTech, and IoT markets, leveraging expertise in access control, biometrics, security, encryption, payments, miniaturization, and sensor technologies[16] - The company operates through two main subsidiaries: LogicMark, which manufactures and distributes Personal Emergency Response Systems (PERS), and Fit Pay, Inc., which provides a proprietary technology platform for contactless payment capabilities and secure services within the IoT ecosystem[17] - On September 21, 2018, Nxt-ID announced a plan to separate its payments, authentication, and credential management business (Fit Pay) into an independent publicly traded company via a tax-free spin-off[18] Healthcare Business (LogicMark) LogicMark, Nxt-ID's healthcare subsidiary, focuses on personal emergency response systems (PERS), driven by connectivity, TeleHealth, and cost reduction, offering non-monitored and monitored products - LogicMark's business initiatives in healthcare are driven by three major market trends: increased desire for connectivity among older demographics, growth of 'TeleHealth' for distributed doctor care, and the need to reduce rising healthcare costs[21] - The global PERS market is projected to grow at a CAGR of 5.83% to $8.4 billion in 2020, with North America and Europe being the largest markets[24] - LogicMark differentiates itself by offering cost-effective non-monitored PERS products, primarily sold through the VA and healthcare distributors, requiring only a one-time purchase fee instead of recurring monthly contracts[26][27] Payments and Financial Technology Business (Fit Pay) Fit Pay, reclassified to discontinued operations, provides a proprietary platform for contactless payments in smart devices, connecting manufacturers to payment networks and expanding into cryptocurrency and tokenization - Fit Pay's core technology is a proprietary platform enabling contactless payment capabilities for smart device manufacturers, connecting them to leading payment card networks (Visa, Mastercard, Maestro, Discover) and over 280 issuing banks in 34 countries[34][35][44] - Fit Pay successfully commercialized its platform with Garmin Pay™ (now on 11 Garmin smartwatches) and extended functionality to SwatchPAY! on four new watches[34] - New product offerings include Flip™, a contactless payment device enabling Bitcoin holders to make retail purchases, and real-time e-commerce/credential-on-file tokenization services in partnership with Visa[37][38][45] - Fit Pay holds competitive advantages as one of the few platform providers certified by major card networks for embedded secure element tokenization, offering a white-label, power-efficient, and offline payment solution[57][60] Our Intellectual Property Nxt-ID protects its intellectual property through patents and trade secrets, with 11 awarded patents, while acknowledging risks of infringement claims and associated costs - Nxt-ID relies on patents and trade secret laws to protect its intellectual property, having filed 39 patent applications, with 11 awarded as of the report date[64] - The company faces risks of third-party infringement claims, which could lead to substantial defense costs, management distraction, and potential requirements to pay damages, re-engineer products, or obtain licenses[70] Corporate Information Nxt-ID, incorporated in Delaware in 2012, grew through strategic acquisitions and had 34 full-time employees as of December 31, 2018 - Nxt-ID was incorporated in Delaware on February 8, 2012, and has expanded through acquisitions, including 3D-ID (2012), LogicMark (2016), and Fit Pay (2017)[72][73][74][75] - As of December 31, 2018, Nxt-ID had 34 full-time employees: 3 in product engineering, 6 in finance and administration, 14 in sales and customer service, and 11 in product fulfillment[81] - The company ceased to be an 'emerging growth company' as of December 31, 2018[80] Risk Factors Nxt-ID faces significant risks including revenue uncertainty, limited operating history, intense competition, IT disruptions, the need for capital, stock volatility, and potential delisting - The company faces uncertainty in generating sufficient revenue and profitability, having incurred a net loss from continuing operations of $1,328,616 for the year ended December 31, 2018, and a working capital deficiency of $1,603,466[84][85] - Significant disruptions of information technology systems or security breaches could adversely affect business operations, leading to loss of confidential information, financial harm, and reputational damage[87][88] - Nxt-ID operates in rapidly evolving, intensely competitive markets, requiring continuous innovation and significant resources to develop new products and keep pace with technological changes, especially against larger, well-established competitors[91][95][96] - The market price for Nxt-ID's common stock is highly volatile due to its status as a relatively unknown company with a small and thinly traded public float and lack of profits, posing risks of substantial losses for investors[134] - The company's common stock could be delisted from the NASDAQ Capital Market if it fails to comply with continued listing requirements, potentially leading to reduced liquidity and investor confidence[135][136] Unresolved Staff Comments No unresolved staff comments from the SEC - No unresolved staff comments[150] Properties Nxt-ID leases principal executive offices in Sebastian, Florida, and additional office and warehouse spaces in Connecticut, Palm Bay, and Louisville - Nxt-ID's principal executive offices are located in Sebastian, Florida, under a three-year lease commenced June 1, 2018, with monthly rent increasing 3% annually[151] - The company also leases office space in Oxford, Connecticut, and Palm Bay, Florida, both currently on a month-to-month basis[152][153] - Following the LogicMark acquisition, Nxt-ID assumed and later renewed a three-year lease for office and warehouse space in Louisville, Kentucky, expiring in August 2020, with a monthly rent of $7,157[154] Legal Proceedings Nxt-ID is not involved in any material legal actions, suits, or proceedings that could significantly affect its business or financial condition - No material legal actions, suits, or proceedings are pending or threatened against Nxt-ID or its subsidiaries[155] Mine Safety Disclosures This item is not applicable to Nxt-ID, Inc - Not applicable[156] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Nxt-ID's common stock trades on Nasdaq under 'NXTD', experiencing volatility, with 97 holders of record and no anticipated dividends - Nxt-ID's common stock trades on the Nasdaq Capital Market under the symbol 'NXTD'[159] - As of March 29, 2019, there were approximately 97 holders of record of Nxt-ID's common stock[161] - The company has never declared or paid dividends on its common stock and does not anticipate doing so in the foreseeable future, intending to retain future earnings for operations and expansion[163][165] Common Stock Price Range (High/Low) by Quarter | Quarter | 2018 High ($) | 2018 Low ($) | 2017 High ($) | 2017 Low ($) | | :-------------------------- | :------------ | :----------- | :------------ | :----------- | | 1st Quarter | 3.98 | 1.72 | 4.17 | 1.66 | | 2nd Quarter | 2.23 | 1.52 | 2.87 | 1.21 | | 3rd Quarter | 2.04 | 1.25 | 2.80 | 1.45 | | 4th Quarter | 1.55 | 0.53 | 8.59 | 1.01 | Selected Financial Data As a smaller reporting company, Nxt-ID is not required to provide selected financial data - Nxt-ID is not required to provide selected financial data as it is a smaller reporting company[166] Management's Discussion and Analysis of Financial Condition and Results of Operations Nxt-ID saw increased revenue and operating profit in 2018, but a net loss and working capital deficiency raise liquidity concerns, addressed by a $16 million term loan and equity offerings Key Financial Performance (Continuing Operations) | Metric | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | Change (YoY) | | :--------------------------------- | :---------------------- | :---------------------- | :----------- | | Revenues | $17,116,511 | $16,043,060 | +$1,073,451 (+6.69%) | | Gross Profit | $12,312,720 | $10,978,868 | +$1,333,852 (+12.15%) | | Gross Profit Margin | 72% | 68% | +4 percentage points | | Operating Expenses | $11,725,231 | $13,130,581 | -$1,405,350 (-10.70%) | | Operating Income (Loss) | $587,489 | ($2,151,713) | +$2,739,202 (Shift to Profit) | | Net Loss from Continuing Operations | ($1,328,616) | ($8,549,129) | +$7,220,513 (Reduced Loss) | Liquidity and Capital Resources (as of Dec 31, 2018) | Metric | Amount | | :--------------------------------- | :------------- | | Cash | $425,189 | | Stockholders' Equity | $14,736,758 | | Working Capital Deficiency (Continuing Operations) | ($1,603,466) | Cash Flow Activities (Continuing Operations) | Activity | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--------------------------------- | :---------------------- | :---------------------- | | Net Cash Used in Operating Activities | ($50,189) | ($1,371,731) | | Net Cash Used in Investing Activities | ($3,166,854) | ($1,635,644) | | Net Cash Provided by Financing Activities | $3,063,334 | $9,587,460 | - The company raised approximately $425,000 from warrant exercises in 2018 and $1,322,484 in gross proceeds from an at-the-market offering in January-February 2019[178][181][203] - In May 2018, LogicMark secured a $16 million Senior Secured Credit Agreement (Term Loan) with Sagard Holdings Manager LP, maturing in May 2023, bearing interest at LIBOR + 9.5% per annum[192][420] - Nxt-ID adopted Topic 606 (Revenue from Contracts with Customers) as of January 1, 2018, using the modified retrospective method, recognizing revenue when control of products transfers to the customer, typically upon shipment or delivery[208][209][346][347] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Nxt-ID is not required to provide market risk disclosures - Nxt-ID is not required to provide quantitative and qualitative disclosures about market risk as it is a smaller reporting company[216] Financial Statements and Supplementary Data This item refers to the audited consolidated financial statements, notes, and the independent auditor's report, beginning on page F-1 - The financial statements, notes, and independent registered public accounting firm's report are filed in response to this item and begin on page F-1[217] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[218] Controls and Procedures Nxt-ID's disclosure controls and internal control over financial reporting were ineffective as of December 31, 2018, due to a material weakness in accounting personnel and segregation of duties - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018, due to a material weakness in internal controls over financial reporting[219] - A material weakness was identified in internal controls over financial reporting due to an insufficient number of accounting personnel for complex transactions, limited segregation of duties, and an incomplete assessment under the 2013 COSO framework[222] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect the company's internal control over financial reporting during the fourth quarter of fiscal year 2018[225] Other Information No other information is required to be disclosed in this item - No other information to report[226] PART III Directors, Executive Officers and Corporate Governance This section lists Nxt-ID's executive officers and directors, details board committees, identifies an Audit Committee Financial Expert, and notes Section 16(a) reporting delinquencies Executive Officers and Directors (as of April 1, 2019) | Name | Age | Position | Date First Elected or Appointed | | :--------------------------------- | :-- | :--------------------------------------- | :------------------------------ | | Gino M. Pereira | 61 | Chief Executive Officer, President and Director | February 8, 2012 | | Vincent S. Miceli | 61 | Vice President and Chief Financial Officer | September 29, 2014 | | David Tunnell | 53 | Vice President and Chief Technology Officer | June 25, 2012 | | Michael J. Orlando | 51 | Chief Operating Officer and Director | May 23, 2017 | | Stanley E. Washington | 55 | Chief Revenue Officer and President Healthcare Division | January 1, 2018 | | Major General David R. Gust, USA, Ret | 76 | Director | June 25, 2012 | | Michael J. D'Almada-Remedios, PhD | 56 | Director | September 26, 2013 | | Daniel P. Sharkey | 62 | Director | June 23, 2014 | | John Bendheim | 65 | Director | April 11, 2017 | | Robert A. Curtis, Pharm.D. | 64 | Director | July 25, 2018 | - The board of directors has an Audit Committee, Compensation Committee, and Corporate Governance and Nomination Committee. Daniel P. Sharkey is identified as an Audit Committee Financial Expert[252][253] - The company has adopted a Code of Business Ethics and Conduct, available on its website[260] - Certain officers and directors, including David Tunnell, Michael Orlando, and Robert A. Curtis, had delinquencies in Section 16(a) beneficial ownership reporting during fiscal year 2018[261] Executive Compensation This section details compensation for named executive officers and non-employee directors for 2018 and 2017, including salary, bonus, and stock awards Summary Compensation Table for Named Executive Officers | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :-------------------------- | :--- | :--------- | :-------- | :--------------- | :------------------------- | :-------- | | Gino M. Pereira, CEO | 2018 | 420,000 | 130,000 | 547,500 | 25,899 | 1,123,399 | | | 2017 | 381,150 | - | 100,000 | 25,780 | 506,930 | | Vincent S. Miceli, CFO | 2018 | 300,000 | 70,000 | 292,000 | 30,818 | 692,818 | | | 2017 | 265,650 | - | 70,000 | 26,724 | 362,374 | | Michael J. Orlando, COO | 2018 | 350,000 | 50,000 | 109,500 | - | 509,500 | | | 2017 | 130,942 | - | - | 5,381 | 136,323 | | Stanley E. Washington, CRO | 2018 | 250,000 | - | 912,500 | - | 1,162,500 | | | 2017 | - | - | - | - | - | - Gino M. Pereira's employment agreement was extended for three years from October 1, 2018, with a base salary of $420,000, and eligibility for bonus plans and equity awards[263][474] - Michael J. Orlando's employment agreement, effective May 23, 2017, includes a base salary of $350,000 (increased from $150,000 in 2018) and eligibility for bonus plans and equity awards[263][474] Director Compensation for Fiscal Year 2018 | Name | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :--------------------------------- | :--------------- | :------------------------- | :-------- | | Major General David R. Gust, USA, Ret. | 80,000 | 1,757 | 81,757 | | Michael J. D'Almada Remedios, PhD | 80,000 | - | 80,000 | | Daniel P. Sharkey | 80,000 | 2,851 | 82,851 | | John Bendheim | 80,000 | 1,543 | 81,543 | | Robin A. Richards | 15,111 | - | 15,111 | | Robert A. Curtis, Pharm.D. | 40,000 | 1,700 | 41,700 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock by key individuals and outlines shares authorized under equity compensation plans, limited to 10% of outstanding shares Beneficial Ownership of Common Stock (as of March 29, 2019) | Name | Amount and Nature of Beneficial Ownership | Percent of Class of Common Stock | | :--------------------------------------- | :---------------------------------------- | :------------------------------- | | Gino M. Pereira | 904,015 | 3.42% | | David Tunnell | 695,933 | 2.63% | | Vincent S. Miceli | 85,191 | * | | Michael J. Orlando | 1,199,605 | 4.54% | | Stanley E. Washington | 125,000 | * | | Major General David R. Gust, USA, Ret. | 134,782 | * | | Michael J. D'Almada-Remedios, PhD | 140,150 | * | | Daniel P. Sharkey | 129,770 | * | | John Bendheim | 91,857 | * | | Robert A. Curtis, Pharm.D. | 44,679 | * | | Directors and Executive Officers as a Group (10 persons) | 3,550,982 | 13.43% | Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Number of Securities Remaining Available for Future Issuance under the Plan | | :------------------------------------------ | :------------------------------------------------------------------------ | | Equity compensation plans approved by security holders (LTIP) | 975,886 | | Equity compensation plans approved by security holders (2017 SIP) | 2,522,807 | | Total | 3,498,693 | - The maximum aggregate number of shares issuable under the LTIP and 2017 SIP is limited to 10% of the common stock outstanding on the first trading day of any fiscal year, which is 2,522,807 shares for fiscal year ending December 31, 2019[283][452][453] Certain Relationships and Related Transactions, and Director Independence Nxt-ID had related party transactions with WorldVentures Holdings, LLC, with revenue decreasing significantly, and the Audit Committee reviews such transactions, while certain directors are deemed independent Revenue from Related Party (WorldVentures Holdings, LLC) | Metric | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--------------------------------- | :---------------------- | :---------------------- | | Revenue from WVH | $737,993 | $7,065,755 | | Accounts Receivable from WVH (period end) | $0 | $1,364,405 | - The Audit Committee reviews and approves related party transactions to ensure they are on terms comparable to or more beneficial than arm's length dealings[281] - Major General David R. Gust, Daniel P. Sharkey, John Bendheim, and Dr. Robert A. Curtis are deemed 'independent' directors under NASDAQ rules[282] Principal Accounting Fees and Services Marcum LLP served as Nxt-ID's auditor, billing approximately $170,000 for audit services in 2018, with no other fees, and the Audit Committee pre-approves all services Principal Accounting Fees (Marcum LLP) | Fee Type | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--------------------------------- | :---------------------- | :---------------------- | | Audit Fees | ~$170,000 | $286,192 | | Audit Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | - The Audit Committee pre-approves all audit and non-audit services provided by the independent auditors[288] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and a comprehensive index of exhibits filed as part of the 10-K report - The report includes audited consolidated financial statements, notes, and the independent registered public accounting firm's report[291] - No financial statement schedules are included as they are either not applicable or the information is in the consolidated financial statements/notes[292] - A comprehensive list of exhibits is provided, with references to previously filed SEC documents where applicable[292][296][297][480][481] Form 10-K Summary This item is not applicable to Nxt-ID, Inc - Not applicable[294] SIGNATURES - The report is signed by Gino M. Pereira (Chief Executive Officer and Director) and Vincent S. Miceli (Chief Financial Officer), along with other directors, on April 1, 2019[307][308] Financial Statements Report of Independent Registered Public Accounting Firm Marcum LLP issued an unqualified opinion on Nxt-ID's consolidated financial statements for 2018 and 2017, affirming fair presentation in accordance with U.S. GAAP, without auditing internal control over financial reporting - Marcum LLP issued an unqualified opinion on Nxt-ID's consolidated financial statements for the years ended December 31, 2018 and 2017, affirming fair presentation in accordance with U.S. GAAP[313] - Marcum LLP has served as the company's auditor since 2016[317] - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[315] Consolidated Balance Sheets Consolidated balance sheets show total assets decreased from $48.24 million in 2017 to $38.06 million in 2018, with stockholders' equity declining to $14.74 million Consolidated Balance Sheet Highlights | Metric | December 31, 2018 ($) | December 31, 2017 ($) | | :--------------------------------- | :-------------------- | :-------------------- | | Cash | 425,189 | 5,636,415 | | Restricted cash | 1,189,452 | 40,371 | | Total Current Assets | 3,397,728 | 12,000,178 | | Assets associated with discontinued operations | 222,227 | 4,428,944 | | Total Assets | 38,055,564 | 48,242,745 | | Total Current Liabilities | 5,144,260 | 10,682,912 | | Total Liabilities | 21,511,506 | 27,305,278 | | Total Stockholders' Equity | 14,736,758 | 19,130,167 | Consolidated Statements of Operations Consolidated statements of operations show increased revenues and a shift to operating income in 2018, but a $7.09 million net loss due to discontinued operations Consolidated Statements of Operations Highlights | Metric | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Revenues | 17,116,511 | 16,043,060 | | Gross Profit | 12,312,720 | 10,978,868 | | Operating Income (Loss) | 587,489 | (2,151,713) | | Loss from Continuing Operations | (1,328,616) | (8,549,129) | | (Loss) Income from Discontinued Operations, net of tax | (5,761,346) | 284,256 | | Net Loss | (7,089,962) | (8,264,873) | | Net Loss Per Share - Basic and Diluted | (0.29) | (0.70) | | Weighted Average Number of Common Shares Outstanding | 24,561,791 | 12,812,376 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $19.13 million in 2017 to $14.74 million in 2018, influenced by a $7.09 million net loss and equity transactions Changes in Stockholders' Equity Highlights | Metric | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total Stockholders' Equity (Beginning) | 19,130,167 | 2,818,731 | | Net Loss | (7,089,962) | (8,264,873) | | Issuance of common stock for services | 846,983 | 3,153,569 | | Issuance of common stock and warrants for cash, net | - | 13,030,388 | | Warrants issued in connection with debt refinancing | 705,541 | - | | Warrant modification expense | 345,280 | 228,630 | | Total Stockholders' Equity (Ending) | 14,736,758 | 19,130,167 | Consolidated Statements of Cash Flows Cash and restricted cash decreased by $4.06 million in 2018 to $1.61 million, driven by discontinued operations and investing activities, partially offset by financing Consolidated Statements of Cash Flows Highlights | Activity | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net Cash Used in Operating Activities of Continuing Operations | (50,189) | (1,371,731) | | Net Cash Used in Investing Activities of Continuing Operations | (3,166,854) | (1,635,644) | | Net Cash Provided by Financing Activities of Continuing Operations | 3,063,334 | 9,587,460 | | Net (Decrease) Increase in Cash and Restricted Cash from Continuing Operations | (153,709) | 6,580,085 | | Net Cash Used by Discontinued Operations | (3,908,436) | (4,243,349) | | Net (Decrease) Increase in Cash and Restricted Cash | (4,062,145) | 2,336,736 | | Cash and Restricted Cash - End of Year | 1,614,641 | 5,676,786 | Supplemental Disclosures of Cash Flow Information | Item | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Cash paid for Interest | 3,153,450 | 3,396,040 | | Cash paid for Taxes | 13,843 | 4,500 | | Warrants issued in connection with debt refinancing | 706,541 | - | Notes to Consolidated Financial Statements NOTE 1 - ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITIES Nxt-ID, incorporated in 2012, operates in security, healthcare, FinTech, and IoT, with key acquisitions of LogicMark and Fit Pay, and a planned spin-off of its FinTech business - Nxt-ID, Inc. was incorporated in Delaware on February 8, 2012, and operates in security, healthcare, financial technology, and IoT markets[330] - Key acquisitions include LogicMark, LLC (July 2016) for personal emergency response systems, and Fit Pay, Inc. (May 2017) for contactless payment technology[331][332][333] - On September 21, 2018, Nxt-ID announced the spin-off of its financial technology business (Fit Pay and related intellectual property) into a new independent publicly traded company, reclassifying it to discontinued operations[334] NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS Nxt-ID's 2018 net loss and working capital deficiency raise substantial doubt about its ability to sustain operations, necessitating additional financing despite management's confidence in current capital - Nxt-ID incurred a net loss from continuing operations of $1,328,616 and had a working capital deficiency of $1,603,466 as of December 31, 2018, raising substantial doubt about its ability to sustain operations for at least one year[337] - Management believes that cash on hand, proceeds from subsequent equity offerings, and projected cash flow from operations will provide sufficient capital for the next twelve months[337] - The company may need to raise additional funds through equity offerings, debt financings, or other means to execute its long-term strategic plan and meet obligations[337][339] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines Nxt-ID's significant accounting policies, including the adoption of Topic 606 for revenue recognition, cash management, goodwill impairment, and other intangible asset amortization - Nxt-ID adopted Topic 606 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective method, recognizing revenue at a point-in-time when control of products transfers to the customer[346][347] - Restricted cash of $1,189,452 at December 31, 2018, includes amounts held by credit card processors and $998,950 related to LogicMark's excess cash flow, which is required to be deposited into a restricted bank account controlled by Sagard Holdings Manager LP[343][420] - Goodwill related to LogicMark was qualitatively assessed as not impaired in 2018, while Fit Pay's goodwill was quantitatively assessed as not impaired as of September 30, 2018, despite its reclassification to discontinued operations[361][362] - Other intangible assets from the LogicMark acquisition (patents, trademarks, customer relationships) are amortized over 10-20 years, with an estimated annual amortization expense of approximately $762,000 for the next five fiscal years[364][365] NOTE 4 - DISCONTINUED OPERATIONS Nxt-ID reclassified its financial technology business (Fit Pay) to discontinued operations in 2018, reporting a $5.76 million net loss and significantly reduced related party revenue - Nxt-ID's financial technology business (Fit Pay and related IP) was reclassified to discontinued operations as of September 21, 2018[334][387] - Revenue from related party WorldVentures Holdings, LLC (WVH) decreased significantly from $7,065,755 in 2017 to $737,993 in 2018, with accounts receivable from WVH reducing to $0 by December 31, 2018[387] Financial Results of Discontinued Operations | Metric | Year Ended Dec 31, 2018 ($) | Year Ended Dec 31, 2017 ($) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net sales | 1,696,414 | 7,273,909 | | Gross profit (loss) | (787,743) | 652,654 | | Operating expenses | 4,969,140 | 2,139,888 | | (Loss) income from discontinued operations | (5,761,346) | 284,256 | NOTE 5 - ACQUISITIONS This note details the acquisitions of LogicMark (2016) and Fit Pay (2017), outlining their respective purchase considerations, including cash, stock, and earn-out payments - The LogicMark acquisition (July 2016) included $17.5 million cash, a $2.5 million secured promissory note, 78,740 common shares, and warrants. The 2017 earn-out payment of $3,156,088 was paid in Q2 2018[331][389] - The Fit Pay merger (May 2017) had an aggregate purchase price of $10,104,184, consisting of cash, 1,912,303 common shares, 2,000 Series C Preferred Stock shares, debt payments, and an earn-out provision[392][396] - The earn-out provision for Fit Pay is 12.5% of gross revenue for 16 fiscal quarters (Oct 2017 - Dec 2021), with a remaining balance of $678,881 owed at December 31, 2018[392] - Goodwill of $9,119,709 was recognized from the Fit Pay acquisition, representing expected operational synergies and unqualifying intangibles[398] NOTE 6 - ACCRUED EXPENSES Accrued expenses decreased from $2.45 million in 2017 to $1.70 million in 2018, with reductions in interest expense and amounts due to LogicMark Sellers Accrued Expenses Breakdown | Category | December 31, 2018 ($) | December 31, 2017 ($) | | :--------------------------------- | :-------------------- | :-------------------- | | Salaries and payroll taxes | 89,065 | 88,964 | | Consulting fees | 236,000 | 70,000 | | Professional fees | 84,704 | 31,781 | | Management incentives | 868,082 | 891,667 | | Interest expense | 16,342 | 639,030 | | Amount due to LogicMark Sellers | - | 421,606 | | Agent and loan amendment fees | 235,000 | - | | Totals | 1,701,561 | 2,448,157 | NOTE 7 - CONVERTIBLE NOTES PAYABLE This note details the July 2017 and November 2016 exchange agreements for convertible notes and warrants, which were fully converted into common stock by December 31, 2017 - In July 2017, Nxt-ID amended November Notes and Warrants, lowering conversion/exercise prices from $3.00 to $2.00 per share, and issued 370,000 restricted common shares for a maturity date extension[403] - The company incurred non-cash charges for modification of convertible exchange note terms ($191,630) and warrant terms ($37,000) in 2017[404] - All July 2017 Notes and November 2016 Exchange Notes, along with accrued interest, were fully converted into common stock by December 31, 2017, eliminating their outstanding principal balances[406][408] NOTE 8 - FAIR VALUE MEASUREMENTS Nxt-ID categorizes fair value measurements into a three-level hierarchy, with no recurring fair value liabilities and Level 3 liabilities valued using unobservable inputs - Nxt-ID uses a three-level hierarchy for fair value measurements, with Level 1 for quoted prices in active markets, Level 2 for observable inputs, and Level 3 for unobservable inputs[411] - As of December 31, 2018 and 2017, the company had no liabilities carried at fair value on a recurring basis[412] - Level 3 financial liabilities, including conversion feature liability and common stock purchase warrants, are valued using unobservable inputs due to the absence of current market prices, requiring significant judgment[414][415] NOTE 9 - DEBT REFINANCING LogicMark secured a $16 million Senior Secured Term Loan in May 2018, maturing in 2023 at LIBOR + 9.5%, refinancing previous debt and including excess cash flow deposit requirements - On May 24, 2018, LogicMark entered into a Senior Secured Credit Agreement for a $16 million Term Loan with Sagard Holdings Manager LP, maturing May 24, 2023, at LIBOR + 9.5% interest[420] - The Term Loan refinanced and repaid the outstanding $13.5 million revolving loan facility with ExWorks Capital Fund I, L.P., resulting in a $68,213 loss on extinguishment of debt[391] - The Credit Agreement requires LogicMark to deposit 50% of its excess cash flow into a restricted bank account, which amounted to $998,950 at December 31, 2018[420] - Nxt-ID issued two common stock purchase warrants to the lender, exercisable for 244,081 shares each at $3.90 and $4.88 per share, and recorded a debt discount of $705,541[423][424] NOTE 10 - STOCKHOLDERS' EQUITY This note details changes in stockholders' equity, including preferred stock conversions, 2017 equity offerings, a September 2018 warrant amendment, and equity awards under the LTIP and 2017 SIP - All Series A and Series B Preferred Stock, including dividends, were converted into common stock by December 31, 2017[427][428] - In 2017, Nxt-ID completed multiple equity offerings, including a registered direct offering of 2,170,000 common shares and pre-funded warrants in July, and another offering of 2,941,177 common shares in November, raising significant net proceeds[429][431] - A September 2018 Warrant Amendment and Exercise Agreement reduced the exercise price of certain Old Warrants from $2.00 to $1.50 per share, resulting in a $165,640 warrant modification expense[447][449] - The LTIP and 2017 SIP limit aggregate common stock issuance to 10% of outstanding shares on the first trading day of any fiscal year, with 975,886 shares available under LTIP and 2,522,807 under 2017 SIP as of December 31, 2018[452][453] NOTE 11 - INCOME TAXES Nxt-ID applies the asset and liability method for income taxes, maintaining a full valuation allowance against significant NOL carryovers due to realization uncertainties, despite a 2017 Tax Cuts and Jobs Act provisional charge - Nxt-ID recognized a provisional charge of $4,295,052 in Q4 2017 due to the Tax Cuts and Jobs Act, which was offset by an equal reduction to the valuation allowance, resulting in no net tax impact[459] - A full valuation allowance is maintained against deferred tax assets due to significant uncertainties regarding future realization of taxable income[469] - The Fit Pay acquisition in 2017 was a change of control event under Section 382, but no limitation was computed for Nxt-ID's NOLs[462] Net Operating Loss (NOL) Carryovers and Tax Credits (as of Dec 31, 2018) | Item | Amount ($) | | :--------------------------------- | :----------- | | US federal NOL carryovers | 39,386,864 | | State NOL carryovers | 32,519,993 | | Tax credit carryforwards | 333,673 | NOTE 12 - COMMITMENTS AND CONTINGENCIES Nxt-ID has no material legal proceedings, with future lease obligations totaling $173,062 through 2021 and $15.00 million of debt maturing in 2023 - Nxt-ID is not involved in any material legal actions or claims[471] Future Lease Obligations | Year | Amount ($) | | :--- | :--------- | | 2019 | 97,597 | | 2020 | 70,309 | | 2021 | 5,156 | | Total | 173,062 | Debt Maturity Schedule | Year | Amount ($) | | :--- | :----------- | | 2019 | 1,265,151 | | 2020 | 212,961 | | 2021 | 159,719 | | 2022 | - | | 2023 | 15,001,050 | | Total debt | 16,638,881 | NOTE 13 - SUBSEQUENT EVENTS Subsequent events include common stock issuances for services, a January 2019 at-the-market offering generating $1.32 million in gross proceeds, and LogicMark's temporary withdrawals from restricted cash - In January 2019, Nxt-ID issued 63,889 shares of common stock for services ($44,000 fair value) and 25,000 shares for services ($31,250 fair value)[475][477] - From January 15 to February 21, 2019, Nxt-ID sold 1,084,227 common shares through an at-the-market offering, generating $1,322,484 in gross proceeds[203][476] - LogicMark made temporary withdrawals of $500,000 from its restricted cash balance in December 2018 and February 2019, incurring usage fees of $75,000 and $131,250, respectively[420][478]