NOTE
2 - LIQUIDITY AND MANAGEMENT PLANS
The
Company generated an operating loss of $4,546,683 and a net loss of $4,488,936 for the nine months ended September 30, 2022. As of September
30, 2022, the Company had cash and cash equivalents and stockholders’ equity of $9,328,504 and $23,039,621, respectively. As of
September 30, 2022, the Company had working capital of $9,391,383 compared to working capital on December 31, 2021, of $13,098,049.
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.
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 $9,328,504 and $12,044,415, respectively.
RESTRICTED
CASH
On
September 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.
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 $9,057,747 on September 30, 2022.
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 $94,080 and $467,293, respectively, for the three and nine months ended September 30, 2022, and $149,923,
and $374,484, respectively, for the three and nine months ended September 30, 2021.
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 $1,146 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 September 30, 2022, inventory was comprised
of $1,077,160 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 September 30, 2022,
and December 31, 2021, $670,221 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 | | | 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 September 30, 2022 and December 31, 2021.
On
September 30, 2022, Other intangible assets, net of amortization, are comprised of patents of $1,793,889; trademarks of $867,559; and
customer relationships of $1,238,690. On December 31, 2021, 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 nine months ended September 30, 2022, the Company recorded amortization expense of $194,232 and $582,516, respectively.
During the three and nine months ended September 30, 2021, the Company recorded amortization expense of $192,019 and $569,796, respectively.
As
of September 30, 2022, total amortization expense estimated for the remainder of fiscal year 2022 is $194,241, and for each of the next
five fiscal years, the total amortization expense is estimated to be as follows: 2023 - $776,964; 2024 - $776,964; 2025 - $776,964; 2026
- $602,648; 2027- $241,218; and later years - $531,139.
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.
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
444,660 shares of common stock and warrants to purchase 4,295,380 shares of common stock as of September 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 4,393,230 shares of
common stock as of September 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 nine months ended
September 30, 2022, the Company capitalized $481,768 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:
| | |
September 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Salaries, payroll taxes and vacation | |
$ | 160,719 | | |
$ | 54,229 | |
| Merchant card fees | |
| 17,018 | | |
| 17,853 | |
| Professional fees | |
| 197,825 | | |
| 104,500 | |
| Management incentives | |
| 420,350 | | |
| 285,000 | |
| Lease liability | |
| 71,101 | | |
| 64,346 | |
| Dividends – Series C and F Preferred Stock | |
| 53,524 | | |
| 94,933 | |
| Other | |
| 129,217 | | |
| 228,424 | |
| Totals | |
$ | 1,049,754 | | |
$ | 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.
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 has been using the net proceeds from the Offering primarily for new product development,
marketing and working capital.
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 $3,999,999 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 nine months ended September 30, 2022, the Company recorded Series F Preferred Stock
dividends of $6,790 and $32,934, 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 nine months ended September 30, 2022, the Company recorded Series
C Redeemable Preferred Stock dividends of $75,000 and $225,000, 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 September 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 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 | |
| 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 September 30, 2022 | |
| 4,295,380 | | |
$ | 6.02 | | |
| 4.02 | | |
$ | 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. No shares were issued during the three months ended September 30, 2022.
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 aggregate fair value of $743,310. 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 and a total aggregate
fair value of $34,203. During the three months ended September 30, 2022, the Company issued 22,500 stock options vesting over four years
to employees with an exercise price of $1.09 and 10,900 stock options with 100% cliff vesting in one year to non-employees with a strike
price of $1.09 and a total aggregate fair value of $54,233. In addition, 45,875 fully vested stock options were granted to five non-employee
Board directors at an exercise price of $1.09 during the three months ended September 30, 2022. The aggregate fair value of the shares
issued to the directors was $72,815.
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 $1,197,320.
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 real estate lease,
which is for office space and a fulfillment center, with a lease term of 5 years, expiring 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 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 September 30, 2022. The current monthly rent of $6,400 commenced in September 2022
and increases approximately 3% annually thereafter.
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 $75,761 of which $58,613 is recorded in direct operating
costs and $17,148 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 September 30, 2022:
| Year
Ending December 31, | |
| | |
| 2022 (excluding
the nine months ended September 30, 2022) | |
$ | 23,746 | |
| 2023 | |
| 89,724 | |
| 2024 | |
| 80,000 | |
| 2025 | |
| 54,400 | |
| Total future minimum lease
payments | |
$ | 247,870 | |
| Less
imputed interest | |
| (41,051 | ) |
| Total
present value of future minimum lease payments | |
$ | 206,819 | |
LogicMark,
Inc.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)