Filing summary: Orbital Tracking Corp. (10-Q, quarter ended March 31, 2016)
Issuer identity: The filing is for Orbital Tracking Corp., not Nextplat Corp. The summary below reflects the issuer named in the filing.
Business context and reporting period
Orbital Tracking, through its subsidiaries Global Telesat Communications Limited and Orbital Satcom Corp., sells satellite communications hardware, airtime, rentals and related services in the U.S. and internationally. It also aims to develop tracking devices for retail customers. The unaudited quarter is compared with the three months ended March 31, 2015; the company cautions that quarterly results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Revenue | $1.295 million | $0.800 million; up 62.0% |
| Gross profit / margin | $438,344 / 33.8% | $226,387 / 28.3% |
| Operating expenses | $742,020 | $639,368; up 16.6% |
| Operating loss | $303,676 | $412,981 |
| Net income (loss) | $59,946 | $(421,982) |
| Operating cash flow | $(469,469) | $(195,187) |
| Cash at quarter-end | $391,322 | $963,329 at Dec. 31, 2015 |
| Working capital | $585,964 | Not stated for the comparable quarter |
| Total assets / liabilities | $4.001 million / $912,790 | $4.316 million / $1.434 million at Dec. 31, 2015 |
Quarterly net income included a $464,505 gain from the decrease in fair value of derivative liabilities, a noncash valuation item. Interest expense was $75,878; foreign-exchange expense was $25,005. Cash declined by $572,007 during the quarter. Investing cash use was $3,318 and financing cash use was $101,259, including $75,626 of note payments and $25,632 of net related-party repayments. The filing reports a basic loss per share of $(0.02) despite positive net income; its EPS note says that after excluding the derivative fair-value gain the company had a loss. The presentation is not fully clear and warrants verification.
Material changes and management commentary
- Revenue growth came from both subsidiaries: GTCL sales increased 35.8% to $922,223, and Orbital Satcom sales increased about 205% to $367,771. Management cited greater international e-commerce presence, a mobile-friendly website and a UK Forestry Commission contract for lone-worker trackers.
- Management attributed gross-margin improvement to a high-volume SPOT Gen3 supply contract with the UK Forestry Commission.
- Operating costs rose, notably salaries and payroll taxes (up 130.8% to $173,855) and professional fees (up 80.7% to $300,568). Management cited added personnel, public-company compliance, investor-awareness activity and capital-raising fees. Stock-based compensation was zero in Q1 2016 versus $151,563 in Q1 2015.
- Management expects cost of sales and operating expenses to continue increasing as the business expands, but said it could not estimate the amounts. No specific revenue, earnings or cash-flow guidance was provided.
- The company reported $109,328 of derivative liabilities at March 31, 2016, valued using Level 3 inputs. It also had a convertible-note discount balance of $526,889; the balance sheet shows a $2,486 current convertible note payable, but the filing does not provide a clear total debt carrying value in the presented balance sheet.
Risks, contingencies and unusual items
- Management concluded disclosure controls and procedures were ineffective at quarter-end because of inadequate segregation of duties and a need for an updated accounting system. Remediation was being considered, with no assurance it would be timely or adequate.
- Cash fell substantially and operating activities used $469,469; working capital was positive, but liquidity depends on managing cash needs and continued operations. Accounts receivable rose to $235,642 and prepaid expenses totaled $538,135.
- Convertible instruments and warrants contain down-round provisions and generate fair-value liabilities that can materially affect reported earnings. The reported quarterly profit depended on a large derivative revaluation gain.
- Common shares outstanding rose to 22,146,014 from 19,252,082 at year-end, including shares issued for preferred-stock conversions and services. Additional preferred-stock conversions after quarter-end were disclosed through May 4, 2016; the cover page reports 24,826,344 common shares outstanding as of May 12, 2016.
- Related-party payable to CEO David Phipps was approximately $48,419. The company also employs three people related to him; their Q1 gross wages totaled $15,299. The CEO’s new employment agreement provides annual base pay of $144,000 plus £48,000 and potential bonus compensation of up to 50% of base salary.
- The filing reports no pending material litigation and no material off-balance-sheet arrangements. One supplier accounted for 25.9% of Q1 purchases; no customer accounted for 10% or more of revenue.
Important facts for investors to verify
- Confirm issuer identity and whether this Orbital Tracking filing is the intended company, given the Nextplat metadata.
- Reconcile the positive net income with the reported $(0.02) basic loss per share and clarify the EPS calculation excluding derivative gains.
- Review cash runway, expected operating cash needs and financing plans in light of the quarterly operating cash outflow and decline in cash.
- Assess the terms, carrying values, conversion features and dilution potential of convertible notes and preferred stock, including the post-quarter share conversions.
- Track whether management remediates the disclosed control weaknesses and upgrades the accounting system.
- Evaluate sustainability of the UK Forestry Commission contract, revenue growth, gross-margin improvement and the expected increase in expenses.