Business context and reporting period
The filing is Orbital Tracking Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company sells satellite communications hardware, airtime, rentals and related services, and is developing tracking devices. The request metadata identifies Nextplat Corp.; that does not match the registrant named in this filing.
Financial performance and condition
- Revenue: Second-quarter sales were $1.189 million, essentially flat year over year. Six-month sales were $2.484 million, up 25.9% from $1.973 million.
- Gross profit and margin: Second-quarter gross profit was $206,000 and margin was 17.3%, versus $324,000 and 27.3% a year earlier. Six-month gross profit was $644,000 and margin was 25.9%, versus $540,000 and 27.4%.
- Operating costs and losses: Second-quarter operating expenses rose 50% to $805,000; professional fees increased to $388,000. Net loss was $1.174 million for the quarter, versus $215,000, and $1.114 million for the six months, versus $655,000. Six-month basic and diluted loss per share was $0.06, compared with $0.07.
- Cash flow: Six-month operating cash use was $706,000, compared with $301,000 in 2015. Investing used $31,000 and financing used $89,000. Cash declined $828,000 to $135,000.
- Liquidity: Current assets were $945,000 and current liabilities $842,000, leaving working capital of approximately $103,000. Total assets were $3.403 million and total liabilities $842,000.
- Debt and equity: On May 17, $504,168 of convertible notes were exchanged for 10,083,351 Series G preferred shares; the filing reports no convertible note balance at June 30. The transaction eliminated the related conversion-feature derivative liability. Common shares outstanding increased from 19.252 million at year-end to 34.213 million at June 30; 36.144 million were outstanding on August 9. Preferred stock and options create additional potential dilution.
Material changes, outlook and risks
- Management attributed six-month revenue growth to expanded international e-commerce storefronts, a mobile-friendly website and a recurring UK Forestry Commission lone-worker tracker contract. In the quarter, increased GTCL sales were offset by lower Orbital Satcom sales; management cited exchange-rate effects and reduced Amazon U.S. sales.
- Cost of sales grew faster than six-month revenue, reducing gross margin. Management expects cost of revenues and operating expenses to continue rising as the business expands, but provided no quantified forecast.
- Interest expense was $527,000 in the second quarter and $603,000 for the first half; the filing attributes much of the unusual expense to amortization of the convertible-note discount. The notes were exchanged for preferred stock during the period.
- Going concern: Management states that the accumulated deficit, net losses and operating cash use raise substantial doubt about the company’s ability to continue as a going concern. It intends to seek additional capital, but gives no assurance it can obtain financing. It reported no available credit or bank financing.
- Other risks: Management reported ineffective disclosure controls due to inadequate segregation of duties and an outdated accounting system; remediation was in progress without assurance of timely or adequate completion. Foreign-exchange movements affect reported results. One supplier represented 31.5% of first-half purchases. The filing reports no material pending litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Orbital Tracking Corp., not Nextplat Corp.
- Assess cash runway and the feasibility, timing and dilution impact of planned financing.
- Review the causes and sustainability of weaker gross margins, rising professional fees and losses.
- Verify the terms and conversion, voting and anti-dilution rights of outstanding preferred shares, including Series G.
- Track progress in remediating the disclosed control weaknesses and confirm the filing’s unusual debt-related interest and derivative accounting.