Business context and reporting period
Entity note: The supplied filing is Orbital Tracking Corp.’s Form 10-K, formerly Great West Resources, Inc.; it does not identify Nextplat Corp. The filing covers the fiscal year ended December 31, 2014, and was signed March 26, 2015. References to the company below follow the filing.
The company abandoned its planned potash business in late 2014 and began entering satellite hardware, airtime and related services in December 2014. It purchased Globalstar-related contracts for $250,000 and issued 2,222,222 common shares for a related equipment license. In February 2015, after year-end, it acquired Global Telesat Communications Limited (GTCL), expanding its satellite retail and services operations. The January 2015 name change to Orbital Tracking Corp. also occurred after year-end.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $8,410 | $0 |
| Cost of revenue / gross profit | $202 / $8,208 | $0 / $0 |
| Gross margin | Approximately 98% | Not meaningful |
| Operating expenses | $426,650 in the audited statement | $573,793 |
| Operating loss | $(418,240) | $(573,793) |
| Net income (loss) | $(411,234) | $624,118 |
| Net income (loss) available to common stockholders | $(544,508), including a $133,274 preferred deemed dividend | $624,118 |
| Basic and diluted earnings (loss) per share | $(0.13) / $(0.13) | $0.38 / $0.36 |
| Cash from (used in) operations | $(209,906) | $(20) |
| Cash from investing activities | $(250,000) | $0 |
| Cash from financing activities | $537,043 | $0 |
| Cash at year-end | $77,137 | $0 |
| Working capital | Deficit of approximately $379,000 | Not clearly comparable in the filing |
| Total assets / current liabilities | $2,555,224 / $696,959 | Balance sheet reports zero total assets and $765,832 of current liabilities |
| Stockholders’ equity (deficit) | $1,858,265 | $(765,832) |
| Accumulated deficit | Approximately $49.5 million | Approximately $49.0 million |
Interest expense was zero in 2014 versus $120,575 in 2013; 2013 results included a $1,285,872 gain from debt settlement. The 2014 balance sheet reported no convertible note or debenture balance, but did include $402,583 of accounts payable and accrued expenses, $175,000 payable to a related party, $112,397 of discontinued-operation liabilities and a $4,936 derivative liability. Assets included $2,219,677 of prepaid expenses, largely related to the satellite-equipment license, and $250,000 of acquired contracts.
Material changes versus the prior period
- Revenue began in 2014 but remained very small; the company reported no revenue in 2013.
- Net results shifted from 2013 income to a 2014 loss. The comparison is substantially affected by 2013’s large debt-forgiveness gain, while 2014 had a preferred deemed dividend charged in arriving at loss available to common stockholders.
- Operating cash use rose to $209,906 from $20. The company also spent $250,000 on acquired contracts and funded operations partly through a $500,000 private common-stock placement and related-party advances.
- Operating expenses declined year over year, but the MD&A gives 2014 operating expenses as $426,448, while the audited statement reports $426,650; the filing text does not reconcile the difference.
- Capital structure changed materially: the company issued 10 million common shares for $500,000 and 5 million Series D preferred shares in exchanges for $35,000 of notes and approximately $98,275 of unpaid interest. The filing reports 13,733,172 common shares outstanding at year-end and 11,048,172 at March 25, 2015, following subsequent exchanges and other transactions.
Outlook, risks and unusual items
Management stated that cash and borrowing capacity would not be sufficient to meet working-capital needs for the following 12 months without additional financing. The auditor and management cited substantial doubt about the company’s ability to continue as a going concern; the financial statements contain no adjustments for a possible failure to continue. A February 2015 private placement generated $1.1 million gross proceeds, but the filing does not establish that this resolves the company’s ongoing funding needs.
Management planned an Orbital Satcom e-commerce launch in April 2015, additional international websites, increased inventory purchases, and development of proprietary tracking products. Estimated development costs included $50,000–$75,000 for a dual-mode tracker and $75,000–$100,000 for additional tracking products. These are plans and estimates, not assured results. Management expected costs to rise as operations expanded, but did not quantify expected revenue, margins or expense growth.
- Acquisition and related-party matters: The February 2015 GTCL acquisition consideration included $375,000 cash, a $122,536 one-year note, 2,540,000 common shares and 8,746,000 Series E preferred shares, each convertible into ten common shares. CEO David Phipps was a GTCL shareholder and received a substantial portion of the consideration; the filing also describes payment of the cash and note to him.
- Potential dilution and control: Preferred shares carry conversion and voting rights, generally subject to 4.99% ownership blockers. Subsequent financing, options, warrants and preferred conversions may materially dilute common holders. The filing also disclosed plans to seek increased authorized share capital.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing limited internal audit resources and inadequate segregation of accounting duties. The audit firm did not attest to internal-control effectiveness.
- Other risks: The company described dependence on key personnel, the need for additional capital, product-development and commercialization uncertainty, competition, export and communications regulation, supplier concentration, potential product liability, thin OTC trading and possible difficulty selling shares.
- Legal matters: The company reported no pending litigation expected to have a material adverse effect. It disclosed a disputed historical related-party obligation to MJI; a February 2015 settlement subsequently issued MJI 175,000 common shares in full satisfaction of outstanding debts.
Important facts for investors to verify
- Confirm the filing’s registrant identity: the supplied document names Orbital Tracking Corp., not Nextplat Corp.
- Reconcile the MD&A operating-expense figure with the audited financial statements and clarify the unusual 2013 comparative balance-sheet presentation.
- Assess cash needs and post-year-end cash use against the going-concern warning, including the February 2015 financing and vendor settlements.
- Review the GTCL acquisition accounting, consideration, related-party disclosures and expected contribution to revenue and cash flow.
- Calculate fully diluted ownership, including preferred conversion rights, options, warrants, equity-plan reserves and any anti-dilution provisions.
- Evaluate the recoverability and valuation of the prepaid license asset and customer contracts, and monitor remediation of the disclosed control deficiencies.