Nextplat Corp annual report, FY2015

Business context and reporting period

This is an audited Form 10-K for the fiscal year ended December 31, 2015, filed March 30, 2016. The filing identifies the registrant as Orbital Tracking Corp. (OTC: TRKK), not Nextplat Corp.; verify the issuer and filing match the requested company. Orbital Tracking sells satellite communications hardware, airtime, rentals, tracking and mapping services. Its February 2015 acquisition of Global Telesat Communications Limited (GTCL) was accounted for as a reverse acquisition and recapitalization, with GTCL treated as the accounting acquirer.

Financial results and liquidity

Revenue grew 63.2%, while gross margin was essentially flat. Operating expenses rose 365%, including $1.073 million of noncash stock compensation and $505,762 of professional fees. Year-end cash was $963,329; current assets were $1.632 million and current liabilities $1.127 million, implying working capital of $505,149. However, MD&A also reports working capital of $695,117, which does not reconcile to the balance sheet.

Year-end total liabilities were $1.434 million, including $605,000 face value of original-issue-discount convertible notes, $618,391 of derivative liabilities, $74,051 due to a related party, and $112,397 of discontinued-operation liabilities. The notes mature in December 2017 and require monthly principal repayments beginning January 2016. Stockholders’ equity was $2.882 million; accumulated deficit was $2.011 million.

Changes versus the prior period

• GTCL acquisition and the satellite business expansion materially changed the company’s operations and reporting scope. Management reports GTCL comparable-sales growth of 14.2%; Orbital Satcom contributed $1.181 million of the total revenue increase.
• Despite higher revenue and stable gross margin, the company moved from operating income to a substantial operating and net loss as operating costs rose sharply.
• Cash increased from $65,892 to $963,329, primarily because of $1.648 million from common and preferred stock sales and $550,000 of note proceeds, while operating cash flow turned negative.
• The audited statements show 2014 net income of $6,490 in the narrative and balance sheet, but the statement of operations’ net-income line displays $624,118. The filing does not provide a clear reconciled comparative value.

Outlook, risks and unusual items

• Going concern: The auditor and management state that recurring operating losses and funding needs raise substantial doubt about the company’s ability to continue as a going concern. Management intends to seek additional capital; success is not assured. Management also says it may lack sufficient cash and borrowing capacity for the next 12 months without further financing.
• Operating outlook: Management expects costs of sales and operating expenses to increase as the business expands, but says it cannot estimate the amounts. A dual-mode cellular/satellite tracker was expected to reach the market after testing and regulatory certification; estimated development and certification costs were $50,000–$75,000. Additional tracking products were estimated to require $75,000–$100,000.
• Financing and dilution: December 2015 financing included $550,000 of Series F preferred stock and notes with $605,000 principal sold for $550,000. The instruments include conversion and price-protection provisions. In March 2016, shareholders approved increasing authorized common shares to 750 million and preferred shares to 50 million. Conversion of outstanding preferred securities, options and notes could materially dilute common shareholders.
• Controls: Management concluded disclosure controls were ineffective and identified significant deficiencies involving limited internal audit resources and inadequate segregation of accounting duties. Remediation was planned but not established as complete.
• Other risks: The company depends on key executives and satellite-network suppliers; product development, certification and commercialization may be delayed or unsuccessful. Its shares trade thinly on the OTC market. The filing reports no pending legal proceeding expected to have a material adverse effect.
• Unusual expense: Stock-based compensation was $1.073 million, including immediately vested options. The reported loss also included a $63,454 net expense from changes in derivative fair value.

Important facts for investors to verify

• Confirm that this Orbital Tracking Corp. 10-K is the intended filing for Nextplat Corp.
• Reconcile reported working capital ($505,149 on the balance sheet versus $695,117 in MD&A) and the conflicting 2014 net-income figures.
• Assess cash burn, scheduled note repayments and the company’s ability to obtain additional financing.
• Review the conversion, anti-dilution and voting terms of preferred stock and notes, as well as the resulting potential share dilution.
• Track remediation of control deficiencies and validate the tracker’s certification, launch timing, costs and customer demand.
• Evaluate supplier concentration and the sustainability of revenue growth and gross margins after the GTCL acquisition.