Filing summary
Entity and period: The supplied filing is Orbital Tracking Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017, not a filing identified in its text as Nextplat Corp. The company distributes and develops satellite communications hardware, airtime, tracking products and related services through U.S. and U.K. subsidiaries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.567 million | $1.189 million | $2.939 million | $2.484 million |
| Gross profit | $297,000 | $184,000 | $595,000 | $592,000 |
| Gross margin | 18.8% | 15.5% | 20.2% | 23.8% |
| Operating expenses | $1.120 million | $783,000 | $1.652 million | $1.494 million |
| Net loss | $3.131 million | $1.174 million | $3.360 million | $1.114 million |
| Loss per common share, basic and diluted | $0.05 | $0.04 | $0.08 | $0.06 |
- Revenue increased 31.9% in Q2 and 18.3% for the first half. Management attributed growth to recurring customers and new product lines.
- First-half gross profit was nearly flat despite higher sales; margin declined 3.6 percentage points. Management cited the weaker pound after the Brexit vote, pricing maintained to stay competitive, and larger reseller orders at lower margins. It estimated that first-half sales would have been $290,606 higher at the prior-year average exchange rate. GTCL sales in pounds increased 31.3%.
- First-half operating expenses rose 10.6%. Q2 and first-half results included $600,000 of stock-based compensation for immediately vested options.
- Other expense included $2.309 million related to Series J financing price-protection issuances. This expense also increased additional paid-in capital. The first-half net loss therefore includes significant disclosed noncash items, including this charge and stock compensation.
Cash, liquidity and obligations
- At June 30, cash was $502,000, current assets $1.396 million, current liabilities $1.074 million, and working capital $322,092. Cash was $115,000 at December 31, 2016.
- First-half operating cash use was $101,000, investing cash use $17,000, and financing cash inflow $493,000, primarily from $500,000 of preferred-stock proceeds. Ending cash increased by $387,000.
- Total liabilities were $1.074 million. The balance sheet reports no derivative liabilities at June 30; related-party amounts included a $15,004 note and other amounts payable to the CEO, with the note extended to February 2018. The filing reports no material off-balance-sheet arrangements.
- Management disclosed an accumulated deficit of $7.962 million and substantial doubt about the company’s ability to continue as a going concern for one year from issuance. It said additional capital or financing is needed and planned to seek funds through a public or private offering, with no assurance of success.
Capital, outlook and risks
- Common shares outstanding were 70,977,104 at June 30 and 72,977,104 on August 11, 2017. The company issued 30 million immediately vested options in May at a $0.01 exercise price, including 20 million to employees who are the CEO’s adult children. Total outstanding options were 42.85 million.
- Preferred-stock conversions and anti-dilution protections create substantial potential dilution. The filing’s financing table reports 172.9 million total common equivalents across listed preferred financings, including anti-dilution equivalents; actual conversion terms and limits vary by series.
- Management expected cost of revenues and operating expenses to continue increasing as the business expands, but said it could not estimate the amounts. No quantified revenue or earnings guidance was provided.
- Key risks include the going-concern funding need, foreign-exchange exposure, pressure on gross margins, potential dilution, and the company’s limited operating history in a changing technology market. Two suppliers accounted for 34.1% and 14.6% of purchases in Q2 2017; no customer represented 10% or more of quarterly revenue.
- The company reported no pending material litigation. It said disclosure controls were ineffective because of limited internal audit functions and insufficient levels of transaction review; it was pursuing accounting-software upgrades but gave no assurance that remediation would be timely or adequate.
Most important facts to verify
- Confirm the issuer identity: the request names Nextplat Corp., while the filing names Orbital Tracking Corp.
- Review the going-concern disclosure, cash runway and feasibility of planned financing.
- Reconcile common shares outstanding at quarter-end and the August 11 count, and assess conversion, anti-dilution and option-related dilution across preferred series.
- Examine the $2.309 million Series J-related charge, its accounting treatment, and the terms and beneficiaries of the associated price-protection issuances.
- Assess progress in correcting ineffective disclosure controls and the effect of currency movements and reseller pricing on margins.