NOTE
2 - LIQUIDITY AND MANAGEMENT PLANS
The Company generated an operating loss of $2,408,576
and a net loss of $2,395,417 for the six months ended June 30, 2022. As of June 30, 2022, the Company had cash and stockholders’
equity of $11,144,085 and $24,761,528, respectively. As of June 30, 2022, the Company had working capital of $11,208,250 compared to working
capital on December 31, 2021, of $13,098,049.
Given
the Company’s cash position on June 30, 2022, 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.
NOTE
3 - BASIS OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. In
the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments except as
otherwise noted, considered necessary for a fair statement of results of operations, financial position, stockholders’ equity,
and cash flows. The results for the interim periods presented are not necessarily indicative of the results expected for any future period.
The following information should be read in conjunction with the audited financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2021.
Net
loss per share and all share data for the three and six months ended June 30, 2021, have been retroactively adjusted to reflect the reverse
stock split that occurred in October 2021, in accordance with ASC 260-10-55-12, Restatement of EPS Data. See Note 6.
Certain prior year amounts have been reclassified
for consistency with the current year’s presentation. These reclassifications had no effect on the reported results of operations.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES IN THE FINANCIAL STATEMENTS
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The Company’s management evaluates these significant estimates and assumptions, including those related to the fair value
of acquired assets and liabilities, stock-based compensation, income taxes, allowance for doubtful accounts, long-lived assets, and inventories,
and other matters that affect the financial statements and disclosures. Actual results could differ from those estimates.
CASH
The
Company considers all highly liquid securities with an original maturity date of three months or less when purchased to be cash equivalents.
Due to their short-term nature, cash equivalents are carried at cost, which approximates fair value. On June 30, 2022, and December 31,
2021, the Company had no cash equivalents, respectively.
RESTRICTED
CASH
On
June 30, 2022, and December 31, 2021, the Company had restricted cash of $59,988 and $210,131, respectively. Restricted cash includes
amounts held back by the Company’s third-party credit card processor for potential customer refunds, claims, and disputes and held
as collateral for company credit cards.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS
OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains
its cash balances in large well-established financial institutions located in the United States. At times, the Company’s cash balances
may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits.
REVENUE
RECOGNITION
The
Company’s revenues consist of product sales to either end customers or distributors. The Company’s revenues are derived from
contracts with customers, which are in most cases customer purchase orders. For each contract, the promise to transfer the control of
the products, each of which is individually distinct, is considered to be the identified performance obligation. As part of the consideration
promised in each contract, the Company evaluates the customer’s credit risk. Our contracts do not have any financing components,
as payment terms are generally due Net-30 days after the invoice date. The Company’s products are almost always sold at fixed prices.
In determining the transaction price, we evaluate whether the price is subject to any refunds, due to product returns or adjustments
due to volume discounts, rebates, or price concessions to determine the net consideration we expect to be entitled to. The Company’s
sales are recognized at a point-in-time under the core principle of recognizing revenue when control transfers to the customer, which
generally occurs when the Company ships or delivers the product from its fulfillment center to our customers, when our customer accepts
and has the legal title of the goods, and the Company has a present right to payment for such goods. Based on the respective contract
terms, most of our contract revenues are recognized either (i) upon shipment based on free on board (FOB) shipping point, or (ii) when
the product arrives at its destination. For the six months ended June 30, 2022, and 2021, none of our sales were recognized over time.
SALES
TO DISTRIBUTORS AND RESELLERS
Sales to certain distributors and resellers are
made under terms allowing limited rights of return of the Company’s products held in their inventory or upon sale to their end customers.
The Company maintains a reserve for unprocessed and estimated future price adjustments claims and returns as a refund liability. The reserve
is recorded as a reduction to revenue in the same period that the related revenue is recorded and is calculated based on an analysis of
historical claims and returns over a period of time to appropriately account for current pricing and business trends. Similarly, sales
returns and allowances are recorded based on historical return rates, as a reduction in revenue with a corresponding reduction to cost
of sales for the estimated cost of inventory that is expected to be returned. These reserves were not material on the Condensed Balance
Sheets on June 30, 2022, and December 31, 2021.
SHIPPING
AND HANDLING
Amounts billed to customers for shipping and handling are included
in revenues. The related freight charges incurred by the Company are included in the cost of goods sold and were $181,551 and $373,213,
respectively, for the three and six months ended June 30, 2022, and $118,136 and $224,561, respectively, for the three and six months
ended June 30, 2021.
ACCOUNTS
RECEIVABLE
For
the three and six months ended June 30, 2022, and the year ended December 31, 2021, the Company’s revenues primarily included
shipments of the LogicMark products. The terms and conditions of these sales provided certain customers with trade credit terms. In
addition, these sales were made to the retailers with no rights of return and are subject to the normal warranties offered to the
ultimate consumer for product defects.
Accounts
receivable are 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. On June 30, 2022, and December
31, 2021, the Company had an allowance for doubtful accounts of $3,209 and $5,411, respectively.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
The
Company measures inventory at the lower of cost or net realizable value, defined as estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation.
The Company performs regular reviews of inventory quantities on hand
and evaluates the realizable value of its inventories. The Company adjusts the carrying value of the inventory as necessary with estimated
valuation reserves for excess, obsolete, and slow-moving inventory by comparing the individual inventory parts to forecasted product demand
or production requirements. The inventory is valued at the lower of cost or net realizable value with cost determined using the first-in,
first-out method. As of June 30, 2022, inventory was comprised of $622,893 in finished goods on hand. As of December 31, 2021, inventory
was comprised of $1,237,280 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, 2022, and December 31, 2021, $599,112 and $559,938 respectively, of prepayments made for
inventory are included in prepaid expenses and other current assets on the balance sheet.
LONG-LIVED
ASSETS
Long-lived
assets, such as property and equipment, and other intangibles are evaluated for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. When indicators exist, the Company tests for the impairment of the definite-lived
assets based on the undiscounted future cash flow the assets are expected to generate over their remaining useful lives, compared to
the carrying value of the assets. If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value
is recorded. Management estimates future cash flows using assumptions about expected future operating performance. Management’s
estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions,
or changes to the Company’s business operations.
PROPERTY
AND EQUIPMENT
Property and equipment consisting of equipment, furniture and fixtures,
and website and other are stated at cost. The costs of additions and improvements are generally capitalized and expenditures for repairs
and maintenance are expensed in the period incurred. When items of property and equipment are sold or retired, the related costs and accumulated
depreciation are removed from the accounts, and any gain or loss is included in income. Depreciation of property and equipment is provided
utilizing the straight-line method over the estimated useful life of the respective asset as follows:
| Equipment | |
| 5 years | |
| Furniture and fixtures | |
| 3 to 5 years | |
| Website and other | |
| 2 to 3 years | |
GOODWILL
Goodwill
is reviewed annually in the fourth quarter, or when circumstances indicate that an impairment may have occurred. The Company first performs
a qualitative assessment of goodwill impairment, which considers factors such as market conditions, performance compared to forecast,
business outlook, and unusual events. If the qualitative assessment indicates a possible goodwill impairment, goodwill is then quantitatively
tested for impairment. The Company may elect to bypass the qualitative assessment and proceed directly to the quantitative test. If a
quantitative goodwill impairment test is required, the fair value is determined using a variety of assumptions including estimated future
cash flows using applicable discount rates (income approach) and comparisons to other similar companies (market approach).
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
INTANGIBLE ASSETS
The
Company’s intangible assets are related to the acquisition of LogicMark, LLC and are included in other intangible assets in the
Company’s balance sheet on June 30, 2022, and December 31, 2021.
On
June 30, 2022, Other intangible assets, net of amortization, are comprised of patents of $1,887,784; trademarks of $883,579; and customer
relationships of $1,321,808. On December 31, 2021, the other intangible assets are comprised of patents of $2,072,984; trademarks of
$915,619; and customer relationships of $1,488,044. The Company amortizes 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 three and six months ended June 30, 2022, the Company recorded amortization expense of $194,178 and $388,284, respectively.
During the three and six months ended June 30, 2021, the Company recorded amortization expense of $189,932 and $377,777, respectively.
As
of June 30, 2022, total amortization expense estimated for the remainder of fiscal year 2022 is $373,531, and for each of the next five
fiscal years, the total amortization expense is estimated to be as follows: 2023 - $761,815; 2024 - $761,815; 2025 - $761,815; 2026 -
$618,790; and 2027- $272,235.
CONVERTIBLE
INSTRUMENTS
The
Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for
hybrid contracts that feature conversion options. The accounting standards require companies to separate conversion options from their
host instruments and account for them as free-standing derivatives according to certain criteria. The criteria include circumstances
in which (i) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics
and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative and the host contract is not re-measured
at fair value under generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii)
a separate instrument with the same terms as the embedded derivative would be considered a derivative. The derivative is subsequently
marked to market at each reporting date based on the current fair value, with the changes in fair value reported in the results of operations.
Conversion
options with variable settlement features such as provisions to adjust the conversion price upon subsequent issuances at exercise prices
more favorable than that in the hybrid contract generally result in their separation from the host instrument.
The
Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. The debt discounts under these arrangements are amortized over the earlier of (i) the
term of the related debt using the straight-line method which approximates the interest rate method or (ii) conversion of the debt. The
amortization of debt discount is included as interest expense included in other income and expenses in the statements of operations.
DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company does not use derivatives to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. Derivative financial
instruments accounted for as liabilities are initially recorded at fair value and then re-valued at each reporting date, with changes
in the fair value reported in the statements of operations. For stock-based derivatives, the Company uses the Black-Scholes or binomial
option valuation model to value the derivatives at inception and on subsequent valuation dates. The Company accounts for conversion features
that are embedded within the Company’s convertible notes payable that do not have fixed settlement provisions as a separate derivative.
In addition, warrants issued by the Company that do not have fixed settlement provisions are also treated as derivatives. The classification
of derivatives, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting
period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of
the derivative could be required within 12 months of the balance sheet date.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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 APPLICABLE TO COMMON SHAREHOLDERS PER SHARE
Net loss applicable to common shareholders equals the Company’s
net loss minus preferred stock dividends.
Basic net loss applicable to common shareholders per share (“Basic
net loss per share”) was computed using the weighted average number of common shares outstanding. Diluted net loss applicable to
common shareholders per share (“Diluted net loss per share”) includes the effect of diluted common stock equivalents. Potentially
dilutive securities from the exercise of stock options to purchase 365,385 shares of common stock and warrants to purchase 4,295,380 shares
of common stock as of June 30, 2022, were excluded from the computation of diluted net loss per share because the effect of their inclusion
would have been anti-dilutive. Potentially dilutive securities from the exercise of stock options to purchase 40,858 shares of common
stock and warrants to purchase 937,813 shares of common stock as of June 30, 2021, were excluded from the computation of diluted net loss
per share because the effect of their inclusion would have been anti-dilutive.
RESEARCH
AND DEVELOPMENT AND PRODUCT DEVELOPMENT COSTS
Research
and development costs are expenditures on new market development and related engineering costs. In addition to internal resources, the
Company utilizes functional consulting resources, third-party software, and hardware development firms. The Company expenses all research
and development costs as incurred until technological feasibility has been established for the product. Once technological feasibility
is established, development costs including software and hardware design are capitalized until the product is available for general release
to customers. Judgment is required in determining when technological feasibility of a product is established. For the six months ended
June 30, 2022, the Company capitalized $269,268 of such product development costs. Amortization of these costs, which will be on a straight-line
basis over three years, has not yet commenced.
RECENT
ACCOUNTING PRONOUNCEMENTS
Recent
accounting standards that have been issued or proposed by FASB (Financial Accounting Standards Board) 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 financial statements
upon adoption.
NOTE
5 - ACCRUED EXPENSES
Accrued
expenses consist of the following:
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Salaries, payroll taxes and vacation | |
$ | 77,972 | | |
$ | 54,229 | |
| Merchant card fees | |
| 20,044 | | |
| 17,853 | |
| Professional fees | |
| 243,206 | | |
| 104,500 | |
| Management incentives | |
| 312,200 | | |
| 285,000 | |
| Lease liability | |
| 69,771 | | |
| 64,346 | |
| Dividends – Series C and F Preferred Stock | |
| 46,735 | | |
| 94,933 | |
| Other | |
| 92,295 | | |
| 228,424 | |
| Totals | |
$ | 862,223 | | |
$ | 849,285 | |
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - STOCKHOLDERS’ EQUITY AND REDEEMABLE PREFERRED STOCK
October
2021 Reverse stock split
On October 15, 2021, the Company announced that
its shareholders had approved a reverse split of its common stock and Series C Redeemable Preferred at a ratio of 1 for 10. As a result
of the reverse split, every 10 pre-split shares of common stock outstanding and every 10 pre-split shares of Series C Redeemable Preferred
Stock outstanding were automatically exchanged for one new share of each without any action on the part of the holders. The number of
outstanding common shares was reduced from approximately 88.3 million shares to approximately 8.8 million shares, and the number of outstanding
Series C preferred shares was reduced from 2,000 shares to 200 shares. The reverse stock split did not affect the total number of shares
of capital stock, including Series C Redeemable Preferred Stock, that the company is authorized to issue.
Loss
per share and all share data for the three months and six months ended June 30, 2021, have been retroactively adjusted to reflect the
reverse stock split in accordance with ASC 260-10-55-12, Restatement of EPS Data.
September
2021 Offering
On
September 15, 2021, the Company sold an aggregate of (i) 2,788,750 shares of common stock, par value of $0.0001 per share, and (ii) accompanying
warrants to purchase up to an aggregate of 2,788,750 shares of Common Stock, at an exercise price of $4.95 per share, both of which include
the underwriter’s full over-allotment option to purchase an additional 363,750 shares of common stock.
The
Shares and the Warrants were offered and sold to the public pursuant to the Company’s registration statement on Form S-1, as amended
(File No. 333-259105), filed by the Company with the Securities and Exchange Commission (SEC) under the Securities Act of 1933, as amended
(Securities Act), which became effective on September 14, 2021.
The
Warrants were not immediately exercisable, as the Company did not have a sufficient number of shares of Common Stock to reserve for issuance
for the Warrants until the date (the “Initial Exercise Date”) that the Company’s stockholders approved an amendment
to the Company’s certificate of incorporation to affect a reverse stock split of the shares of Common Stock so that there were
a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants. The Warrants became exercisable on the Initial
Exercise Date (the effective date of the reverse stock split) and will terminate five years after the Initial Exercise Date. The exercise
price of the Warrants is subject to customary adjustments for stock dividends, stock splits and other subdivisions, combinations, and
re-classifications, and was reset on the date of the Company’s reverse stock split to the lower of (i) the closing price per share
of the Common Stock immediately before the reverse stock split, giving effect to the reverse stock split and (ii) the exercise price
then in effect. The Warrants are also exercisable on a cashless basis under certain circumstances, any time after the Initial Exercise
Date, pursuant to the formula outlined in the Warrants. On October 15, 2021, after shareholder and Board approval of the reverse stock
split, the exercise price for the Warrants was adjusted to $3.956 per share, The reverse stock split and the exercise price were retroactively
reported in accordance with ASC 260-10-55-12, Restatement of EPS Data.
On
the Closing Date, the Company received gross proceeds of approximately $12.5 million, before deducting underwriting discounts and commissions
and estimated offering expenses. The Company intends to use the net proceeds from the Offering primarily for new product development,
marketing, working capital, and liability reduction purposes.
August
2021 Offering
On
August 13, 2021, the Company entered into a securities purchase agreement with institutional accredited investors providing for an aggregate
investment of $4,000,000 for the issuance by the Company of (i) 1,333,333 shares of Series F Convertible Preferred Stock, par value $0.0001
per share, of the Company (the Series F Preferred Stock) convertible into shares of common stock, par value $0.0001 per share, of the
Company that is issuable upon conversion of shares of Series F Preferred Stock; (ii) warrants, with a term of five and a half years exercisable
after February 16, 2022, to purchase an aggregate of up to 666,667 shares of Common Stock at an exercise price of $7.80 per share. The
securities issued to the investors were exempt from registration under the Securities Act of 1933, as amended, or the Securities Act,
in reliance on Section 4(a)(2) thereof and Rule 506 of Regulation D thereunder, based on representations made by the investors, their
prior relationship with the Company, and the absence of any general solicitation. The Company used the net proceeds from this offering
for working capital and liability reduction purposes. In the three months ended September 30, 2021, 1,160,000 shares of Series F preferred
stock were converted into 656,604 shares of common stock. On October 15, 2021, after shareholder and Board approval of the reverse stock
split, the exercise price for the Warrants was adjusted to $4.95 per share and was retroactively reported in accordance with ASC 260-10-55-12,
Restatement of EPS Data. For the three months and six months ended June 30, 2022, the Company recorded Series F Preferred Stock dividends
of $13,144 and $26,145, respectively.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - STOCKHOLDERS’ EQUITY AND REDEEMABLE PREFERRED STOCK
(CONTINUED)
February
2021 Offering
On
February 2, 2021, the Company closed a registered direct offering and concurrent private placement pursuant to which the Company issued
(i) an aggregate of 1,476,016 shares of Series E preferred stock, convertible into up to 295,203 shares of common stock, (ii) common
stock purchase warrants to purchase up to 100,000 shares of common stock at an exercise price of $12.30 per share, which were exercisable
immediately and had a term of five years, and (iii) common stock purchase warrants to purchase up to 195,203 shares of common stock at
an exercise price of $12.30 per share with a term of five and one-half years first exercisable nine months after issuance, for gross
proceeds of $4,000,003, before deducting any offering expenses. The Company used the net proceeds from this offering for working capital
and liability reduction purposes. In February 2021, 1,476,016 shares of Series E preferred stock were converted into 295,203 shares of
common stock. Also in February 2021, the Company recorded a deemed dividend of $1,480,801 from the beneficial conversion feature associated
with the issuance of the Series E convertible preferred stock and warrants.
January
2021 Warrant exchange
On
January 8, 2021, the Company entered into a Warrant Amendment and Exercise Agreement (the “Amendment”) with holders (the
“Holder”) of a common stock purchase warrant, dated April 4, 2019, previously issued by the Company (the “Original
Warrant”).
In consideration for each exercise of the Original Warrant within 45
calendar days of the Amendment, in addition to the issuance of the Warrant shares, the Company agreed to deliver a new warrant to purchase
shares of the Company’s common stock equal to the number of Original Warrants that the Holder exercised, at an exercise price of
$15.25 per share, which represents the average Nasdaq Official Closing Price of the common stock for the five trading days immediately
preceding the date of the Amendment (the “New Warrants”). The Investor held Original Warrants exercisable for up to 246,913
shares of common stock, subsequently exercised 50,000 Original Warrants within the 45 days, and received 50,000 New Warrants in addition
to the Warrant shares.
Series C Redeemable Preferred Stock
In May 2017, the Company authorized Series C Redeemable
Preferred Stock. Holders of Series C Redeemable Preferred Stock are entitled to receive dividends of 15% per year, payable in cash. For
the three and six months ended June 30, 2022, the Company recorded Series C Redeemable Preferred Stock dividends of $75,000 and $150,000,
respectively.
The Series C Redeemable Preferred Stock may be
redeemed by the Company at the Company’s option in cash at any time, in whole or in part, upon payment of the stated value of the
Series C Redeemable Preferred Stock and unpaid dividends. If a “fundamental change” occurs, the Series C Redeemable Preferred
Stock shall be immediately redeemed in cash equal to the stated value of the Series C Redeemable Preferred Stock, and unpaid dividends.
A fundamental change includes but is not limited to any change in the ownership of at least fifty percent of the voting stock; liquidation
or dissolution, or the common stock ceases to be listed on the market upon which it currently trades.
The holders of the Series C Redeemable Preferred
Stock are entitled to vote on any matter submitted to the stockholders of the Company for a vote. One share of Series C Redeemable Preferred
Stock carries the same voting rights as one share of common stock.
Redeemable equity security is to be classified
as temporary equity if it is conditionally redeemable upon the occurrence of an event that is not solely within the control of the issuer.
Upon the determination that such events are probable, the equity security would be classified as a liability. Given that the Series C
Redeemable Preferred Stock contains a fundamental change provision, the security is considered conditionally redeemable. Therefore, the
Company has classified the Series C Redeemable Preferred Stock as temporary equity in the balance sheets on June 30, 2022, and December
31, 2021, until such time that events occur that indicate otherwise.
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - STOCKHOLDERS’ EQUITY AND REDEEMABLE PREFERRED STOCK
(CONTINUED)
Warrants
There
was no warrant activity during the six months ended June 30, 2022. The following table summarizes the Company’s warrants outstanding
and exercisable on June 30, 2022, and December 31, 2021:
| | |
Number of Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Life In Years | | |
Aggregate Intrinsic Value | |
| Outstanding and Exercisable at January 1, 2021 | |
| 1,569,007 | | |
$ | 13.30 | | |
| 4.10 | | |
$ | 10,850,158 | |
| Issued | |
| 3,897,534 | | |
$ | 5.26 | | |
| 4.77 | | |
| - | |
| Exercised | |
| (1,002,307 | ) | |
$ | 9.07 | | |
| - | | |
| - | |
| Cancelled | |
| (168,854 | ) | |
$ | 38.32 | | |
| - | | |
| - | |
| Outstanding and Exercisable at December 31, 2021 | |
| 4,295,380 | | |
$ | 6.02 | | |
| 4.59 | | |
| - | |
| Outstanding and Exercisable at June 30, 2022 | |
| 4,295,380 | | |
$ | 6.02 | | |
| 4.27 | | |
$ | 0.00 | |
NOTE
7 - STOCK INCENTIVE PLANS
2017
Stock Incentive Plan
On
August 24, 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (2017 SIP). The aggregate maximum number of
shares of common stock that may be issued under the 2017 SIP is limited to 10% of the outstanding shares of common stock, calculated
on the first business day of each fiscal year. Under the 2017 SIP, options that are forfeited or terminated, settled in cash in lieu
of shares of common stock, or settled in a manner such that shares are not issued, will again immediately become available to be issued.
If shares of common stock are withheld from payment of an award to satisfy tax obligations concerning 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.
During
the quarter ended March 31, 2022, the Company issued 430,339 shares of common stock vesting over periods ranging from 30 to 48 months
with an aggregate fair value of $1,331,870 to certain employees as inducement and incentive grants. During the quarter ended June 30,
2022, the Company issued 15,559 shares of common stock vesting on September 30, 2022 with an aggregate fair value of $17,582 to certain
non-employees in lieu of cash payment for services.
2013
Long-Term Stock Incentive Plan
On
January 4, 2013, the Company’s stockholders approved the Company’s Long-Term Stock Incentive Plan (LTIP). The maximum number
of shares of common stock that may be issued under the LTIP, including stock awards, stock issued to the Company’s Board, and stock
appreciation rights, are limited to 10% of the common shares outstanding on the first business day of any fiscal year.
During
the three months ended March 31, 2022, the Company issued 237,500 stock options (5,000 of which were forfeited during the three months
ended June 30, 2022) vesting over four years to employees with an exercise price of $3.36 and an option for 12,500 shares to a non-employee
with a strike price of $2.20 and a total expense of $325,336. In addition, 27,276 fully vested stock options were granted to six non-employee
Board directors at an exercise price of $2.20 during the three months ended March 31, 2022. The aggregate fair value of the shares issued
to the directors was $51,187. A total of 22,101 stock options were granted to two Advisory Board members at strike prices ranging from
$1.80 to $1.82 vesting over periods up to one year during the three months ended June 30, 2022.
Stock-based
Compensation Expense
Total stock-based compensation expense during
the six months ended June 30, 2022, pertaining to awards under the 2017 Stock Incentive Plan and 2013 Long-Term Stock Incentive Plan amounted
to $743,919
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
From
time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of our business. 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 equipment, in the U.S., which is classified as operating leases expiring at various dates. The Company
determines if an arrangement qualifies as a lease at the lease inception. Operating lease liabilities are recorded based on the present
value of the future lease payments over the lease term, assessed as of the commencement date. The Company’s real estate lease,
which is for office space and a fulfillment center, with a lease term of 5 years in August 2025. The Company also leases a copier with
a lease term of 5 years, ending August 2023. The Company has elected to account for the lease and non-lease components (insurance and
property taxes) as a single lease component for its real estate leases. Lease payments, which include lease components and non-lease
components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed
amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs over
such amounts are expensed as incurred as variable lease costs.
The
Company’s lease agreements generally do not specify an implicit borrowing rate, and as such, the Company uses its incremental borrowing
rate 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. The Company entered
into a new five-year lease agreement in June 2020 for a new warehouse space located in Louisville, Kentucky. The monthly rent which commenced
in September 2020 is $6,400 per month and increases approximately 3% annually thereafter. The ROU asset value-added because of this new
lease agreement was $279,024. The Company’s ROU asset and lease liability accounts reflect the inclusion of this lease in the Company’s
balance sheet as of June 30, 2022.
The
Company’s lease agreements include options for the Company to either renew or early terminate the lease. 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 the significance
of leasehold improvements on the property, whether the asset is difficult to replace, or specific characteristics unique to the lease
that would make it reasonably certain that the Company would exercise the 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.
For
the six months ended June 30, 2022, the total operating lease cost was $49,750 and is recorded in general and administrative expenses.
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 the non-cancelable lease for each of the next four years and thereafter, incorporating the practical
expedient to account for lease and non-lease components as a single lease component for our existing real estate lease, (ii) a reconciliation
of the undiscounted lease payments to the present value of the lease liabilities, and (iii) the lease-related account balances on the
Company’s balance sheet as of June 30, 2022:
| Year Ending December 31, | | |
| | |
| 2022 (excluding the six months ended June 30, 2022) | | |
$ | 47,093 | |
| 2023 | | |
| 89,724 | |
| 2024 | | |
| 80,000 | |
| 2025 | | |
| 54,400 | |
| Total future minimum lease payments | | |
$ | 271,217 | |
| Less imputed interest | | |
| (48,073 | ) |
| Total present value of future minimum lease payments | | |
$ | 223,144 | |
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
| As of June 30, 2022 | |
| |
| Operating lease right-of-use assets | |
$ | 216,345 | |
| | |
| | |
| Other accrued expenses | |
$ | 69,771 | |
| Other long-term liabilities | |
| 153,373 | |
| | |
$ | 223,144 | |
| As of June 30, 2022 | |
| |
| Weighted Average Remaining Lease Term | |
| 2.99 | |
| Weighted Average Discount Rate | |
| 12.89 | % |
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 months ended June 30, 2022 should
be read together with our condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2022 (this “Form 10-Q”). This discussion contains forward-looking statements and information
relating to our business that reflect our current views and assumptions concerning future events and is 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 Form 10-Q. 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 to
these statements to actual results.
All share and price per share information in this
Management’s Discussion and Analysis of Financial Condition and Results of Operations section has been adjusted to reflect our one-for-ten
reverse stock split of our outstanding common stock, par value $0.0001 per share (the “Common Stock”), and Series C Redeemable
Non-Convertible Voting Preferred Stock, par value $0.0001 per share (the “Series C Redeemable Preferred Stock”), which became
effective on October 15, 2021. Expenses included in the results of operations for 2021 have been reclassified to conform to the 2022 presentation
format.
Overview
LogicMark,
Inc. provides PERS, health communications devices, and IoT technology that creates a connected care platform. The Company’s devices
provide people with the ability to receive care at home and age independently and to check, manage and monitor a loved one’s health
and safety remotely. The Company’s PERS devices incorporate two-way voice communication technology directly in the medical alert
pendant providing life-saving technology at a consumer-friendly price point aimed at everyday consumers. The Company is focused on modernizing
remote monitoring to help people stay safe and live independently longer. The PERS technologies are sold through dealers and distributors,
as well as through the Veterans Health Administration (the “VA”). The Company enjoys a strong base of business with the VA
and plans to expand to other government services after being awarded a five-year General Services Administration agreement in 2021.
Environmental,
Social and Governance (“ESG”)
In
June 2021, Chia-Lin Simmons was appointed Chief Executive Officer and a member of the Board of Directors and in March 2022 was appointed
President. Ms. Simmons and the Board set out to recognize our ESG responsibilities and create the highest standards for both social and
shareholder endeavors. We have structured our ESG efforts around three main themes:
Financial/Policy
Reviews and Audits
To
protect shareholder interest, the Company immediately set about remediating its potential delisting from the Nasdaq stock market. While
the process extended over many months, compliance was successfully regained. Ongoing adherence to Nasdaq’s governance guidelines
is required to remain listed and the Company is using its best efforts to do so.
Diversity
and Equity
Making
products that serve the neediest and most vulnerable is an example of how our social and shareholder responsibility goals align. The
Company believes that its core business of providing PERS devices to veterans, the elderly, and our loved ones plays a vital role in
making our world more equitable. We believe safety, security, and serving the desire to gracefully age at home are basic needs. Offering
differing price points for our products, as well as eliminating ongoing monthly fees, also meets the needs of persons in varying socioeconomic
situations.
More
than 500,000 of our PERS devices have been deployed, the vast majority to U.S. veterans. Our staff has the privilege of serving as ambassadors
in this marketplace, taking an average of 150 calls from veterans each day. Many of our employees work remotely and volunteerism is encouraged
in the communities where we reside.
Our
Chief Executive Officer has been a champion of diversity and inclusion throughout her career. In addition to hiring new key female and
minority employees, we have added another female Board member to the team. We will also begin looking at Company diversity and inclusion practices
and examining labor standards across our supplier base.
Operational
Efficiency
Building
a sustainable enterprise is a priority for the Company. As a result, we have closed offices to streamline operations and reduce cost.
We have begun to reduce paper waste throughout the Company and are working toward a goal of decreasing the amount of marketing collateral
and printed materials included with each device by 50%.
We
expect to conduct an energy and resources evaluation to determine if increased efficiencies are possible. In addition, we are exploring
new packaging and recycling programs for the Company and our customers. Expansion and improvement of domestic and international supply
chain channels, and a CO2 offset program are all under review to ensure we meet customer demand and that suppliers adhere to recommended
codes of conduct.
To
fulfill our responsibilities and to discharge our duty, these guidelines are subject to modification as the Board of Directors deems
appropriate and in the best interests of the Company and our shareholders or as required by applicable laws and regulations.
Results
of Operations
Three
and six months ended June 30, 2022, compared with the three and six months ended June 30, 2021.
Revenue,
Cost of Revenue, and Gross Profit
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Revenue | |
$ | 3,367,692 | | |
$ | 2,782,575 | | |
$ | 7,018,380 | | |
$ | 5,221,256 | |
| Cost of Goods Sold | |
| 1,364,586 | | |
| 1,074,878 | | |
| 2,811,891 | | |
| 2,064,265 | |
| Gross Profit | |
$ | 2,003,106 | | |
$ | 1,707,697 | | |
$ | 4,206,489 | | |
$ | 3,156,991 | |
| Profit Margin | |
| 59 | % | |
| 61 | % | |
| 60 | % | |
| 60 | % |
We experienced a 21% increase in revenue for the three months ended
June 30, 2022 and a 34% increase in revenue for the six months ended June 30, 2022, compared to the same periods ended June 30, 2021.
Such revenue increases were driven by improvements in sales to VA hospitals and clinics and from replacement sales of 4G Guardian Alert
911Plus devices to our out-of-warranty customers holding the 3G version of the same device. Due to the sunsetting of the 3G service by
the nation’s cellular network providers, our customers’ 3G units no longer work in areas of the country not being supported
by 3G service. The percentage increase in revenue for the quarter ended June 30, 2022 was lower than that in the previous quarter, as
the replacement program was mostly completed by the quarter ended June 30, 2022.
Gross profit increased by 17% for the three months ended June 30, 2022
and by 33% for the six months ended June 30, 2022, compared to the same periods ended June 30, 2021. Gross profit margin decreased from
61% to 59% for the quarter ended June 30, 2022 and from remained constant at 60% for the six months ended June 30, 2022, compared to the
same periods ended June 30, 2021. This decrease in profit margin for both the three and six month periods ended June 30, 2022, compared
to the prior period last year was due to the shift in mix toward the lower margin Guardian Alert 911 Plus units and higher shipping costs.
Operating
Expenses
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| Operating Expenses | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Direct operating cost | |
$ | 336,544 | | |
$ | 255,859 | | |
$ | 810,987 | | |
$ | 500,528 | |
| Selling and marketing | |
| 275,011 | | |
| 89,781 | | |
| 464,216 | | |
| 169,904 | |
| Research and development | |
| 204,592 | | |
| 279,450 | | |
| 467,077 | | |
| 593,344 | |
| General and administrative | |
| 2,115,700 | | |
| 1,078,258 | | |
| 4,451,647 | | |
| 2,457,327 | |
| Other expense | |
| 2,000 | | |
| 14,697 | | |
| 32,084 | | |
| 25,268 | |
| Depreciation and amortization | |
| 194,691 | | |
| 201,324 | | |
| 389,054 | | |
| 405,181 | |
| Total Expenses | |
$ | 3,128,538 | | |
$ | 1,919,369 | | |
$ | 6,615,065 | | |
$ | 4,151,552 | |
Direct
Operating Cost
Direct operating costs increased for each of the three and for the
six months ended June 30, 2022, compared to the same periods last year as a result of increased warranty replacement costs. While the
sunsetting of the 3G cellular network did not trigger a warranty claim as our products continued to work where 3G cell service was available,
the Company made the business decision to replace all 3G products still under warranty with new 4G units at no cost to the customer.
Selling
and Marketing
Expenditures
in sales and marketing for each of the three and six months ended June 30, 2022 exceeded such expenditures for the same periods last
year due to the addition of a senior sales leader and higher sales commissions paid on the increase in sales described above for such
periods. Increased marketing costs in for the three and six month periods ended June 30, 2022 were due to the addition of a senior marketing
leader and a marketing associate as well as the addition of investor relations, public relations, social media support organizations.
Research
and Development
Research
and development costs for each of the three and six month periods ended June 30, 2022 were less than such costs for the same periods
last year. As we strive to accelerate the pace of new product development in future quarters, we expect to continue to see an increase
in engineering costs devoted to new product development as compared to the previous year periods.
General
and Administrative
Beginning in the first quarter of 2022, we added resources to our organization
to drive revenue growth and new product development as well as accounting and finance infrastructure to ensure proper controls and processes
were in place to safeguard the Company’s assets. As much as feasible, this is being accomplished with temporary, experienced fractional
consultants to minimize permanent expense while also taking advantage of these consultants’ deep expertise and ability to execute
quickly. Compared to the first quarter and first half of last year, general and administrative expenses increased due to higher director
and officer insurance costs, higher consultant fees, increased spending in the accounting and finance area, higher costs related to being
a public company, and a higher accrual rate for management incentives.
Other
Income and Expenses
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| Other Income & Expenses | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Interest Income/(Expense) | |
$ | 13,159 | | |
$ | (389,541 | ) | |
$ | 13,159 | | |
$ | (1,250,789 | ) |
| Forgiveness of Paycheck Protection Plan loan and accrued interest | |
| - | | |
| 45,466 | | |
| - | | |
| 349,176 | |
| Warrant modification expense | |
| - | | |
| - | | |
| - | | |
| (2,881,729 | ) |
| Total Expenses | |
$ | 13,159 | | |
$ | (344,075 | ) | |
$ | 13,159 | | |
$ | (3,783,342 | ) |
Liquidity
and Capital Resources
Sources
of Liquidity
The Company generated a net loss of $1,112,273
and $2,395,417, respectively, for the three and six months ended June 30, 2022. As of June 30, 2022, the Company had unrestricted cash
and stockholders’ equity of $11,144,085 and $24,761,528, respectively. On June 30, 2022, the Company had working capital of $11,208,250.
Given
our cash position on June 30, 2022, and our projected cash flow from operations, we believe we will have sufficient capital to sustain
operations for the next year. We may also raise funds through equity or debt offerings to accelerate the execution of our long-term strategic
plan to develop and commercialize our new products.
Cash
Flows
Cash
Used in Operating Activities
Our primary ongoing uses of operating cash relate
to payments to vendors, salaries and related expenses for our employees, and consulting and professional fees. Our vendors and consultants
generally provide us with normal trade payment terms (net 30). During the six months ended June 30, 2022, net cash used in operating activities
was $453,489. During the six months ended June 30, 2021, net cash used in operating activities was $1,773,223.
Cash
Used in Investing Activities
During the six months ended June 30, 2022, we
purchased $172,908 in equipment and invested $269,268 in product development. During the six months ended June 30, 2021, we did not use
cash in investing activities.
Cash
Provided by Financing Activities
| | |
Six Months Ended | |
| Cash flows from Financing Activities | |
2022 | | |
2021 | |
| Proceeds from sale of common stock and exercise of warrants | |
| - | | |
$ | 6,670,011 | |
| Proceeds received in connection with issuance of preferred stock, net | |
| - | | |
| 4,000,003 | |
| Term loan repayment | |
| - | | |
| (10,031,250 | ) |
| Fees paid in connection with equity offerings | |
| - | | |
| (10,030 | ) |
| Preferred Stock Dividends | |
| (150,000 | ) | |
| - | |
| Net Cash (Used in) Provided by Financing Activities | |
$ | (150,000 | ) | |
$ | 628,734 | |
During the three and six months ended June 30,
2022, we paid cash dividends of $75,000 and $150,000, respectively, to our holders of Series C Redeemable Preferred Stock.
During the six months ended June 30, 2022, there
was no net cash provided by financing activities. During the six months ended June 30, 2021, net cash provided by financing activities
totaled $628,734 and was primarily related to the $6,670,494 in proceeds received from the exercise of warrants into shares of common
stock and from the issuance of $4,000,003 of shares of Series E preferred stock, all of which was partially offset by a total of $10,031,250
in term loan repayments and $10,030 in fees paid in connection with equity offerings.
COVID-19
Considerations on Our Business and Operations
Like
many US-based businesses, the COVID-19 pandemic, and efforts to deal with it, began to impact our business in March 2020. Between April
2020 and January 2022, we experienced decreases in demand from certain key customers, primarily our VA clinics. As the adverse effects
of the COVID-19 pandemic began to ease in February 2022, we have begun to experience an increase in sales.
Many
of our products are sourced from Asia and, to date, we have been able to work around travel restrictions and supply chain constraints,
by, as an example, air freighting certain hardware products to the United States rather than using cargo ship transportation. To date,
we have also been able to continue to source certain integrated circuits from such region with only a minor increase in cost. We are
concerned, however, about certain Asian governments’ policies of shutting down major cities and ports, which may impact our ability
to source product and have it delivered to the United States. In addition, we are concerned about our ability to obtain certain integrated
circuits in the future from such region at an economically reasonable price.
Impact
of Inflation
We
believe that our business was not materially impacted by inflationary pressures during 2021, but given inflationary trends seen so far
in 2022, we believe we will face increased costs in operating, fulfillment, and overhead expenses during the remainder of 2022 and possibly
onward. We plan to mitigate part of these increases through productivity and efficiency improvements, and cost reduction programs. We
may also need to take price increases on our products.
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 to facilitate 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.
Critical
Accounting Policies
There
were no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2022, from those disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2021.