Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The filing identifies the registrant as Orbsat Corp. (formerly Orbital Tracking Corp.), a provider of satellite hardware, airtime, rentals and related services. This differs from the request metadata naming Nextplat Corp.; verify the issuer and filing identity.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.220 million | $2.688 million |
| Gross profit / margin | $258,000 / 21.1% | $606,000 / 22.5% |
| Operating expenses | $447,000 | $986,000 |
| Operating loss | $189,000 | $380,000 |
| Net income (loss) | $27,000 | $(258,000) |
| Operating cash flow | Not separately presented | $48,000 |
Quarterly net income reflected $269,000 in debt-extinguishment gain and $32,000 in other income; the company still recorded an operating loss. Six-month results also included the debt-extinguishment gain. Cash at June 30 was $317,000, versus $75,000 at December 31, 2019. Current assets were $921,000 and current liabilities $1.882 million, leaving negative working capital of $961,000. Total liabilities were $1.941 million and stockholders’ equity was $387,000.
Balance-sheet debt included $132,000 of current notes payable, $12,000 on a line of credit, and convertible notes with $790,000 principal but only $14,000 net carrying value after a $776,000 unamortized discount. Accounts payable and accrued liabilities were $1.274 million. The company also had $110,000 payable to related parties.
Changes versus prior comparable periods
- Second-quarter revenue fell 13.4% year over year; six-month revenue declined 0.7%.
- Gross margin improved to 21.1% from 19.5% for the quarter and to 22.5% from 19.2% for the six-month period.
- Operating expenses decreased 30.6% for the quarter and 12.5% for the six months, including lower professional fees and payroll costs.
- Net results improved from a $388,000 second-quarter 2019 loss to $27,000 income in Q2 2020, and from a $695,000 six-month 2019 loss to a $258,000 loss in 2020. Debt-extinguishment gains materially affected the comparison.
- Cash from operations improved from a $394,000 use in the first half of 2019 to $48,000 provided in the first half of 2020; financing cash inflow declined to $225,000 from $603,000.
Outlook, risks and unusual items
Management and the auditor-related disclosure state that substantial doubt exists about the company’s ability to continue as a going concern. The company cites its accumulated deficit of $11.373 million, negative working capital, operating losses and need for additional capital. Management planned fundraising and cost reductions, but gave no quantified earnings or revenue guidance and cautioned that financing and profitability were not assured.
- COVID-19 disrupted recreational demand in Europe; management also warned of potential supply-chain, financing and operating impacts. Six UK employees were furloughed, with government wage reimbursement reported, and the UK subsidiary received a non-repayable grant.
- A $20,832 U.S. PPP loan was recorded in May. After quarter-end, the UK subsidiary entered into a £250,000 (reported as approximately $313,875) government-backed interruption loan, secured by subsidiary assets.
- Amazon represented 58.5% of second-quarter and 57.5% of first-half revenue. Europe remained the largest geographic market; UK subsidiary sales were affected by lower demand and currency translation.
- Convertible-note terms were amended in June, including changing the conversion price from $0.10 to $0.20 per share and raising the beneficial-ownership conversion limit. Note conversions increased shares outstanding from 121,216 at year-end to 255,329 at June 30; the filing reports 278,766 shares outstanding on August 14.
- Disclosure controls were deemed ineffective because of limited internal audit capacity and insufficient transaction-review layers. Management planned an ERP upgrade and additional personnel, subject to available capital.
- The CEO and CFO employment arrangements were extended in successive 30-day periods after their prior terms ended; the latest disclosed extension ran through September 13, 2020.
- The company reported no pending material litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm that this Orbsat Corp. filing is the intended filing, given the Nextplat Corp. request metadata.
- Assess near-term funding needs, cash runway and the availability and terms of additional financing, including the post-quarter UK loan.
- Review convertible-note balances, conversion activity, amended terms and potential dilution; reconcile the reported share counts through August 14.
- Evaluate the sustainability of improved gross margins and the effect of Amazon and European-market concentration.
- Track remediation of ineffective disclosure controls and the status of executive employment agreements.