Nextplat Corp. — 2019 Q3 Form 10-Q Summary
Registrant identity: The supplied filing is for Orbsat Corp., formerly Orbital Tracking Corp., not Nextplat Corp. The summary below reflects the filing as provided. The unaudited reporting period ended September 30, 2019; comparisons are with the three and nine months ended September 30, 2018, and balance-sheet comparisons are with December 31, 2018. Amounts are in U.S. dollars.
Business context and reporting period
Orbsat distributes and resells satellite communications hardware, airtime and related services through U.S. and U.K. subsidiaries. It also develops tracking products and provides equipment rentals. The company reported 35,000-plus customers across almost 160 countries. Its common stock underwent a 1-for-15 reverse split in August 2019, and its name changed to Orbsat Corp.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1.747 million | $1.387 million | $4.454 million | $4.655 million |
| Gross profit | $381,000 | $246,000 | $901,000 | $981,000 |
| Gross margin | 21.8% | 17.8% | 20.2% | 21.1% |
| Operating expenses | $583,000 | $529,000 | $1.710 million | $1.519 million |
| Net loss | $301,000 | $324,000 | $996,000 | $593,000 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $(603,000) | $(497,000) |
Q3 basic and diluted loss per share was reported as $2.51; the nine-month statements report $10.90. A separate EPS note reports a nine-month loss per share applicable to common shareholders of $8.69 after a preferred-share redemption adjustment.
At September 30, cash was $91,000, current assets $974,000 and current liabilities $1.327 million, yielding negative working capital of approximately $354,000. Total assets were $2.624 million, total liabilities $1.606 million and stockholders’ equity $1.018 million. Inventory was $448,000 and accounts receivable $245,000.
Long-term liabilities included $805,000 face amount of 6% convertible notes, shown net of a $703,000 unamortized discount at $102,000, and $122,000 of notes payable. Operating lease liabilities totaled $82,000 ($27,000 current and $54,000 long-term). The filing reports $757,000 of convertible-note proceeds and $87,778 of repayments during the nine-month period. Cash used in investing was $51,000; financing provided $602,000.
Material changes versus prior comparable periods
- Q3 sales rose 25.9%, while nine-month sales declined 4.3%. Management attributed Q3 growth to new product lines and stronger U.S. Amazon sales; nine-month results were also affected by GBP/USD exchange rates.
- Gross margin improved in Q3 but declined for the nine-month period. Nine-month gross profit fell about $81,000 despite lower cost of sales.
- Nine-month operating expenses rose 12.6%, notably professional fees, which increased $243,000, mainly for recapitalization and the $805,000 convertible-note financing.
- Nine-month net loss increased by approximately $403,000. Interest expense and other financing-related items contributed to the larger loss.
- Amazon represented 63.6% of Q3 sales and 57.6% of nine-month sales, up from 50.7% and 42.7%, respectively, in 2018.
- Cash decreased from $143,000 at year-end 2018 to $91,000. Current liabilities increased 25.7% from year-end, while current assets increased 36.2%.
Outlook, risks and unusual items
- Going concern: Management and the filing state that substantial doubt exists about the company’s ability to continue as a going concern for one year from issuance. The company cited its accumulated deficit of $10.732 million, negative working capital, nine-month net loss and operating cash burn. It expects to seek additional capital, but gives no assurance that financing will be available.
- No quantified guidance: Management said costs and expenses may increase as operations expand, but did not estimate the amounts. It cautioned that Q3 margin improvement may not continue. The filing provides no specific revenue or earnings forecast.
- Convertible financing and dilution: The May 2019 notes carry 6% interest, mature in 2022 and are convertible at $0.10 per share, subject to adjustments and a 4.99% beneficial-ownership limit. The filing identifies 8.05 million potential conversion shares, compared with 121,216 common shares outstanding at September 30, before considering applicable limits and adjustments.
- Preferred-share exchange: The company exchanged preferred shares for $168,270 of 6% promissory notes, with $121,848 remaining at September 30. It also reported a $201,924 preferred-share redemption adjustment in its EPS note.
- Customer, supplier and currency exposure: Sales are concentrated in Amazon, while four suppliers each accounted for at least 10% of nine-month purchases. Europe generated 72.2% of nine-month revenue. Management estimated that the weaker GBP reduced 2019 nine-month revenue by $191,712 compared with using the prior-year average exchange rate.
- Controls and contingencies: Management concluded disclosure controls were not effective, citing limited internal audit capacity and insufficient levels of transaction review; it was working on an accounting-software upgrade. The company reported no pending material litigation. A three-year U.K. office and warehouse lease began in July 2019; a $29,000 one-year loan from Amazon was entered into on October 9, 2019.
Important facts for investors to verify
- Confirm the registrant and security identity: the provided 10-Q is for Orbsat Corp., not Nextplat Corp.
- Reconcile the nine-month loss-per-share figures ($10.90 in the operations statement versus $8.69 in the EPS note) and the related preferred-share redemption adjustment.
- Review the convertible notes’ conversion terms, adjustments, potential share issuance and resulting dilution against the very small reported common-share count.
- Assess the company’s cash runway, near-term obligations and ability to obtain additional financing in light of its going-concern disclosure and negative working capital.
- Monitor Amazon sales concentration, supplier dependence, gross margins and GBP/USD effects on reported revenue and results.