UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) (Zip Code)
|
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 10, 2022, there were
LogicMark, Inc.
Form 10-Q
Table of Contents
September 30, 2022
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LogicMark, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment: | ||||||||
| Equipment | ||||||||
| Furniture and fixtures | ||||||||
| Website and other | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Right-of-use assets, net | ||||||||
| Product development costs | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net of amortization of $ | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities, Series C Redeemable Preferred Stock and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Total Current Liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Series C Redeemable Preferred Stock | ||||||||
| Series C redeemable preferred stock, par value $ | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, par value $ | ||||||||
| Series F preferred stock, par value $ | ||||||||
| Common stock, par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities, Series C Redeemable Preferred Stock and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements
1
LogicMark, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 (1) | 2022 | 2021 (1) | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs of goods sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Direct operating cost | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Other expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income and (Expense) | ||||||||||||||||
| Interest income (expense) | ( | ) | ( | ) | ||||||||||||
| Forgiveness of Paycheck Protection Program loan and accrued interest | ||||||||||||||||
| Warrant modification expense | ( | ) | ||||||||||||||
| Total Other Income (Expense), Net | ( | ) | ( | ) | ||||||||||||
| Loss before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (expense) benefit | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| (1) |
The accompanying notes are an integral part of these condensed financial statements
2
LogicMark, Inc.
CONDENSED STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance - July 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of stock options for services | - | - | ||||||||||||||||||||||||||
| Shares issued as stock compensation | - | - | ||||||||||||||||||||||||||
| Series C Redeemable Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Series F Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance - January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of stock options for services | - | - | ||||||||||||||||||||||||||
| Shares issued as stock compensation | ||||||||||||||||||||||||||||
| Series C Redeemable Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Series F Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance - July 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Issuance of stock options for services | - | - | ||||||||||||||||||||||||||
| Issuance of Series F Preferred stock, net | ||||||||||||||||||||||||||||
| Conversion of Series F Preferred stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Sale of common stock and warrants pursuant to a registration statement on Form S-1 | ||||||||||||||||||||||||||||
| Fees incurred in connection with equity offerings | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Shares issued as stock compensation | ||||||||||||||||||||||||||||
| Common Stock issued for dividends | ( | ) | ||||||||||||||||||||||||||
| Series C Redeemable Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Series F Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
3
LogicMark, Inc.
CONDENSED STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance - January 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Issuance of stock for services | - | - | ||||||||||||||||||||||||||
| Issuance of Series E Preferred stock, net | ||||||||||||||||||||||||||||
| Conversion of Series E Preferred stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Deemed dividend related to beneficial conversion feature of Series E preferred stock | - | - | ( | ) | ||||||||||||||||||||||||
| Issuance of Series F Preferred stock, net | ||||||||||||||||||||||||||||
| Conversion of Series F Preferred stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of common stock purchase warrants on a cash basis | ||||||||||||||||||||||||||||
| Exercise of common stock purchase warrants on a cashless basis | ( | ) | ||||||||||||||||||||||||||
| Warrant modification expense recorded in connection with the issuance of replacement warrants | - | - | ||||||||||||||||||||||||||
| Shares issued in connection with the management incentive plan for 2018 and 2019 | ||||||||||||||||||||||||||||
| Sale of common stock and warrants pursuant to a registration statement on Form S-1 | ||||||||||||||||||||||||||||
| Fees incurred in connection with equity offerings | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Shares issued as stock compensation | - | |||||||||||||||||||||||||||
| Common Stock issued for dividends | ( | ) | ||||||||||||||||||||||||||
| Series C Redeemable Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Series F Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements
4
LogicMark, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Stock based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of deferred debt issuance costs | ||||||||
| Non-cash charge for modification of warrant terms | ||||||||
| Forgiveness of Paycheck Protection Plan loans and accrued interest | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash flows from Investing Activities | ||||||||
| Purchase of equipment and website development | ( | ) | ||||||
| Product development costs | ( | ) | ||||||
| Purchase of intangible assets | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ||||||
| Cash flows from Financing Activities | ||||||||
| Proceeds from sale of common stock and warrants | ||||||||
| Proceeds received in connection with issuance of Series E preferred stock, net | ||||||||
| Proceeds received in connection with issuance of Series F preferred stock, net | ||||||||
| Proceeds from exercise of common stock warrants | ||||||||
| Term loan repayment | ( | ) | ||||||
| Fees paid in connection with equity offerings | ( | ) | ||||||
| Series C redeemable preferred stock dividends | ( | ) | ||||||
| Net Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash | ( | ) | ||||||
| Cash, Cash Equivalents and Restricted Cash - Beginning of Year | ||||||||
| Cash, Cash Equivalents and Restricted Cash - End of Period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the periods for: | ||||||||
| Interest | ||||||||
| Taxes | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Accrued fees incurred in connection with equity offerings | ||||||||
| Accrued Series C redeemable and Series F preferred stock dividends | ||||||||
| Shares issued in connection with prior year accrual | ||||||||
| Conversion of Series E preferred stock to common stock | ||||||||
| Conversion of Series F preferred stock to common stock | ||||||||
| Website development included in accounts payable | ||||||||
The accompanying notes are an integral part of these condensed financial statements
5
LogicMark, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITIES
LogicMark, Inc. (“LogicMark” or the “Company”) was incorporated in the State of Delaware on February 8, 2012. LogicMark provides personal emergency response systems (PERS), health communications devices, and Internet of Things (“IoT”) technology that creates a connected care platform. The Company’s devices give people the ability to receive care at home and the confidence to age independently. LogicMark revolutionized the PERS industry by incorporating two-way voice communication technology directly in the medical alert pendant and providing life-saving technology at a price point everyday consumers could afford. The PERS technologies are sold through dealers and distributors, as well as directly to the United States Veterans Health Administration.
NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS
The
Company generated an operating loss of $
Given the Company’s cash position on September 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 which was filed with the SEC on April 15, 2022.
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.
6
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 AND CASH EQUIVALENTS
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 September 30, 2022, and December
31, 2021, cash and cash equivalents totaled $
RESTRICTED CASH
On
September 30, 2022, and December 31, 2021, the Company had restricted cash of $
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and cash equivalents balances in large
well-established financial institutions located in the United States. At times, the Company’s cash and cash equivalents balances
may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. Cash equivalents
amounted to
7
LogicMark, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nine months ended September 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 September 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 $
ACCOUNTS RECEIVABLE - NET
For the three and nine months ended September 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 allowance for doubtful accounts as necessary whenever events
or circumstances indicate the carrying value may not be recoverable. On September 30, 2022, and December 31, 2021, the Company had an
allowance for doubtful accounts of $
8
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 September 30, 2022, inventory was comprised
of $
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:
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).
9
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 September 30, 2022 and December 31, 2021.
On
September 30, 2022, Other intangible assets, net of amortization, are comprised of patents of $
As
of September 30, 2022, total amortization expense estimated for the remainder of fiscal year 2022 is $
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 unaudited condensed 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 unaudited condensed balance sheet date.
10
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 ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE
Net loss attributable to common shareholders equals the Company’s net loss minus preferred stock dividends.
Basic
net loss attributable 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
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 nine months ended
September 30, 2022, the Company capitalized $
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:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Salaries, payroll taxes and vacation | $ | $ | ||||||
| Merchant card fees | ||||||||
| Professional fees | ||||||||
| Management incentives | ||||||||
| Lease liability | ||||||||
| Dividends – Series C and F Preferred Stock | ||||||||
| Other | ||||||||
| Totals | $ | $ | ||||||
11
LogicMark, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - STOCKHOLDERS’ EQUITY AND REDEEMABLE PREFERRED STOCK
October 2021 Reverse stock split
September 2021 Offering
On
September 15, 2021, the Company sold an aggregate of (i)
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 $
On
the Closing Date, the Company received gross proceeds of approximately $
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 $
12
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
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 $
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
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.
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 September 30, 2022, and December 31, 2021, until such time that events occur that indicate otherwise.
13
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 nine months ended September 30, 2022. The following table summarizes the Company’s warrants outstanding and exercisable on September 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 | $ | $ | ||||||||||||||
| Issued | $ | |||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding and Exercisable at December 31, 2021 | $ | |||||||||||||||
| Outstanding and Exercisable at September 30, 2022 | $ | $ | ||||||||||||||
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
During
the quarter ended March 31, 2022, the Company issued
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
During
the three months ended March 31, 2022, the Company issued
Stock-based Compensation Expense
Total
stock-based compensation expense during the nine months ended September 30, 2022, pertaining to awards under the 2017 Stock Incentive
Plan and 2013 Long-Term Stock Incentive Plan amounted to $
14
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. 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 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 ROU asset value-added
because of this new lease agreement was $
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 nine months ended September 30, 2022, the total operating lease cost was $
| Year Ending December 31, | ||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total future minimum lease payments | $ | |||
| Less imputed interest | ( | ) | ||
| Total present value of future minimum lease payments | $ |
15
LogicMark, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
| As of September 30, 2022 | ||||
| Operating lease right-of-use assets | $ | |||
| Other accrued expenses | $ | |||
| Other long-term liabilities | ||||
| $ | ||||
| As of September 30, 2022 | ||||
| Weighted Average Remaining Lease Term | ||||
| Weighted Average Discount Rate | % | |||
NOTE 9 - SUBSEQUENT EVENT
Nasdaq Notification
On
October 31, 2022, the Company received a written notification (the “Notice”) from the Listing Qualifications Department of
the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was not in compliance with the minimum bid price requirement
for continued listing on the Nasdaq Capital Market, as set forth under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”),
because the closing bid price of the Common Stock was below $
Pursuant
to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted 180 calendar days from the date of the Notice, or until April 29,
2023 (the “Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. If at any time during the Compliance
Period, the bid price of the Common Stock closes at or above $
16
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 three and nine months ended September 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 September 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 solutions 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 two main themes:
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.
17
More than 800,000 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 now have three female Board members on the team. We are continuing to look 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 nine months ended September 30, 2022, compared with the three and nine months ended September 30, 2021.
Revenue, Cost of Revenue, and Gross Profit
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | 2,751,570 | $ | 2,383,029 | $ | 9,769,951 | $ | 7,604,287 | ||||||||
| Cost of Goods Sold | 1,047,204 | 1,255,445 | 3,860,176 | 3,319,710 | ||||||||||||
| Gross Profit | $ | 1,704,366 | $ | 1,127,584 | $ | 5,909,775 | $ | 4,284,577 | ||||||||
| Profit Margin | 62 | % | 47 | % | 60 | % | 56 | % | ||||||||
We experienced a 15% increase in revenue for the three months ended September 30, 2022 and a 28% increase in revenue for the nine months ended September 30, 2022, compared to the same periods ended September 30, 2021. Revenue increases were driven by improvements in sales to VA hospitals and clinics. The percentage increase in revenue for the quarter ended September 30, 2022 was lower than that in the previous quarters, as the 3G replacement program was mostly completed by the quarter ended June 30, 2022.
18
Gross profit increased by 51% for the three months ended September 30, 2022 and by 38% for the nine months ended September 30, 2022, compared to the same periods ended September 30, 2021. Gross profit margin increased from 47% to 62% for the quarter ended September 30, 2022 and from 56% to 60% for the nine months ended September 30, 2022, compared to the same periods ended September 30, 2021. In the quarter ended September 30, 2021 the Company recorded a $314,000 inventory obsolescence reserve. There was no inventory write down during the nine months ended September 30, 2022.
Operating Expenses
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Operating Expenses | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Direct operating cost | $ | 345,972 | $ | 228,512 | $ | 1,156,959 | $ | 729,038 | ||||||||
| Selling and marketing | 332,698 | 75,389 | 796,916 | 245,292 | ||||||||||||
| Research and development | 374,842 | 136,891 | 841,917 | 730,236 | ||||||||||||
| General and administrative | 2,575,105 | 969,264 | 7,025,674 | 3,426,596 | ||||||||||||
| Other expense | 3,222 | 20,588 | 35,306 | 45,856 | ||||||||||||
| Depreciation and amortization | 210,632 | 193,823 | 599,686 | 599,004 | ||||||||||||
| Total Expenses | $ | 3,842,471 | $ | 1,624,467 | $ | 10,456,458 | $ | 5,776,022 | ||||||||
Direct Operating Cost
Direct operating costs increased for each of the three and for the nine months ended September 30, 2022, compared to the same periods last year as a result of higher sales and the initiation of online advertising to support the July 2022 launch of the Company’s new direct to consumer eCommerce Web site
Selling and Marketing
Expenditures in sales and marketing for each of the three and nine months ended September 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 nine month periods ended September 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, and social media support organizations.
Research and Development
Research and development costs for each of the three and nine month periods ended September 30, 2022 increased from the same periods last year due to our new product development activity. 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 nine months of last year, general and administrative expenses increased due to higher D&O insurance costs, higher consultant fees, increased spending in the accounting and finance area, and higher legal and proxy solicitation costs related to the Company’s August annual general meeting.
19
Other Income and (Expense)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Other Income and (Expense) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Interest Income (Expense) | $ | 44,587 | $ | (144,821 | ) | $ | 57,747 | $ | (1,395,611 | ) | ||||||
| Forgiveness of Paycheck Protection Plan loan and accrued interest | - | - | - | 349,176 | ||||||||||||
| Warrant modification expense | - | - | - | (2,881,729 | ) | |||||||||||
| Total Other Income (Expense) | $ | 44,587 | $ | (144,821 | ) | $ | 57,747 | $ | (3,928,164 | ) | ||||||
Liquidity and Capital Resources
Sources of Liquidity
The Company generated a net loss of $2,093,518 and $4,488,936, respectively, for the three and nine months ended September 30, 2022. As of September 30, 2022, the Company had unrestricted cash and cash equivalents of $9,328,504. On September 30, 2022, the Company had working capital of $9,391,383.
Given our cash position on September 30, 2022, and our projected cash flow from operations, we believe we will have sufficient capital to sustain operations for the next year from this filing. In the future, we may also choose to raise funds through equity or debt offerings to accelerate the execution of our long-term strategic plan to develop and commercialize our new products or to change our supply chain strategies
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 nine months ended September 30, 2022, net cash used in operating activities was $1,910,660. During the nine months ended September 30, 2021, net cash used in operating activities was $3,290,319.
Cash Used in Investing Activities
During the nine months ended September 30, 2022, we purchased $242,618 in equipment and invested $481,768 in product development. During the nine months ended September 30, 2021, we did not use cash in investing activities.
Cash (Used in) Provided by Financing Activities
| Nine Months Ended | ||||||||
| Cash flows from Financing Activities | 2022 | 2021 | ||||||
| Proceeds from sale of common stock and exercise of warrants | - | $ | 11,834,722 | |||||
| Proceeds received in connection with issuance of Series E preferred stock, net | - | 4,000,003 | ||||||
| Proceeds received in connection with issuance of Series F preferred stock, net | - | 3,999,999 | ||||||
| Proceeds from exercise of common stock warrants | - | 6,670,494 | ||||||
| Term loan repayment | - | (11,095,877 | ) | |||||
| Fees paid in connection with equity offerings | - | (424,813 | ) | |||||
| Preferred Stock Dividends | (225,000 | ) | - | |||||
| Net Cash (Used in) Provided by Financing Activities | $ | (225,000 | ) | $ | 14,984,528 | |||
During the three and nine months ended September 30, 2022, we paid cash dividends of $75,000 and $225,000, respectively, to our holders of Series C Redeemable Preferred Stock.
20
During the nine months ended September 30, 2021, net cash provided by financing activities totaled $14,984,528 and was primarily related to the proceeds from the sale of common stock and warrants of $11,834,722, the $6,670,494 in proceeds received from the exercise of warrants into shares of common stock, proceeds of $4,000,003 from the issuance of Series E preferred stock, and the proceeds of $3,999,999 from the issuance of Series F preferred stock, all of which was partially offset by $11,095,877 in term loan repayments and $424,813 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 contract manufactured in 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. We’re currently reviewing our supply chain strategies in light of the foregoing.
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 likely onward. We plan to mitigate part of these increases through productivity and efficiency improvements, and cost reduction programs. We will also increase prices on some of our products commencing on November 1, 2022.
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 nine months ended September 30, 2022, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are not required to provide the information required by this Item as we are a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we are required to perform an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act, as of September 30, 2022. Management has not completed such evaluation but concluded, based on the material weaknesses in our internal controls over financial reporting described below, that our disclosure controls and procedures were not effective as of September 30, 2022 to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
We noted the following deficiencies that we believe to be material weaknesses:
| - | As of December 31, 2021, management had not completed an assessment of the Company’s internal controls over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that, during the first nine months of 2022, its internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. |
| - | After the end of 2021, the Company determined that the tax provision related to prior years, prepared by the Company’s tax advisors, was incorrect resulting in a non-cash adjustment to increase deferred tax liabilities and income tax expense in 2021. |
| - | The Company changed accounting software for one of its subsidiaries in 2021 and did not have proper controls in place to ensure the accounting data was transferred over completely and accurately. The migration error was discovered and corrected before the software conversion was completed. |
| - | Due to a limited number of accounting personnel, the Company has historically had difficulty accounting for complex transactions and has limited segregation of duties within the accounting department. |
Additional time is required to complete our staffing, fully document our systems, implement control procedures, and test their operating effectiveness before we can conclude that we have fully remediated our material weaknesses. Management is currently assessing the Company’s internal controls over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework along with a related evaluation of the Company’s internal controls.
Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the nine months ended September 30, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Limitations of the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become subject to legal proceedings, claims, or litigation arising in the ordinary course of business. We are not presently a party to any other legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit | ||
| Number | Description | |
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LogicMark, Inc. | ||
| Date: November 10, 2022 | By: | /s/ Chia-Lin Simmons |
| Chia-Lin Simmons | ||
| Chief Executive Officer | ||
| (Duly Authorized Officer and Principal Executive Officer) | ||
| Date: November 10, 2022 | By: | /s/ Mark Archer |
| Mark Archer | ||
| Chief Financial Officer | ||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||
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