Filing summary
Filing identity: The supplied 10-Q is for Orbsat Corp. (formerly Orbital Tracking Corp.), not Nextplat Corp. It reports the quarter and nine months ended September 30, 2020; the financial statements are unaudited.
Business context and reporting period
Orbsat sells satellite-based equipment, airtime and related services, including satellite phones, tracking devices and rentals, through U.S. and international operations. It says it is also developing tracking devices for retail customers. Amazon was its largest customer.
Financial results and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2020 (2019) | $1.475 million ($1.747 million) | $4.164 million ($4.454 million) |
| Gross profit, 2020 (2019) | $398,464 ($380,517) | $1.004 million ($900,555) |
| Gross margin, 2020 (2019) | 27.0% (21.8%) | 24.1% (20.2%) |
| Operating expenses, 2020 (2019) | $872,835 ($583,036) | $1.859 million ($1.710 million) |
| Net loss, 2020 (2019) | $1.100 million ($300,947) | $1.359 million ($996,194) |
| Basic and diluted loss per share, 2020 (2019) | $1.42 ($2.51) | $2.74 ($10.90) |
- Nine-month cash used in operating activities was $471,800, compared with $603,183 in 2019. Investing activities used $30,752; financing activities provided $1.263 million. Cash increased to $817,013 from $75,362 at year-end 2019.
- At September 30, cash was $817,013, current assets $1.598 million and current liabilities $1.502 million, for working capital of $95,587. Total assets were $2.934 million, total liabilities $1.963 million and stockholders’ equity $971,781.
- Balance-sheet debt included $134,868 of current notes payable, $330,887 of long-term notes payable and $101,029 of convertible debt, net of discount. The filing also describes convertible notes with $1.152 million of outstanding indebtedness before unamortized discounts, subject to conversion.
- Shares outstanding increased from 121,216 at December 31, 2019 to 3,564,299 at September 30, 2020, largely due to conversions of convertible debt. The filing reports 4,074,816 shares outstanding on November 13, 2020.
Changes versus the prior comparable period
- Third-quarter revenue fell 15.5%; nine-month revenue fell 6.5%. Management attributed weaker nine-month sales at its UK subsidiary partly to reduced recreational demand amid European lockdowns. U.S. subsidiary revenue grew 12.5% for the nine months, which management attributed to new products and stronger U.S. e-commerce sales.
- Gross margins improved in both comparison periods, but the higher gross profit did not offset operating expenses and financing-related costs. Third-quarter operating expenses rose 49.7%, including higher professional fees and $130,400 of stock-based compensation.
- Nine-month interest expense rose to $797,807 from $211,344, primarily reflecting amortization of convertible-debt discounts. The period also included a $269,261 gain on debt extinguishment.
- Amazon represented 60.1% of nine-month revenue, up from 57.6% in 2019; its third-quarter share was 64.9%, versus 63.6%.
Outlook, risks and unusual items
- Going concern: Management and the notes state that the accumulated deficit and losses raise substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Management plans to seek additional financing and improve profitability, but gives no assurance these efforts will succeed. It warns that a funding shortfall could force operational cuts or a temporary cessation of operations.
- Financing and dilution: The company issued $933,000 of convertible notes in August, bearing 6% interest and convertible at $0.20 per share, subject to terms and ownership limits. Earlier notes were amended, including a change in conversion price and an increase in the conversion ownership cap. Debt conversions materially increased shares outstanding.
- Other borrowing and support: The company received a $20,832 U.S. PPP loan and its UK subsidiary borrowed £250,000 under a six-year government-backed coronavirus interruption facility, secured by subsidiary assets. COVID-related support also included a UK wage reimbursement, grant and business-rate relief.
- Operating risks: Management said COVID-19 could adversely affect demand, supply chains, financing access, costs and liquidity; the duration and impact were uncertain. Revenue also depends heavily on Amazon and suppliers, and a substantial portion of sales is generated in Europe and subject to currency movements.
- Controls and governance: Management concluded disclosure controls were ineffective due to limited internal audit capacity and insufficient levels of transaction review. Planned remediation included new accounting software and additional personnel, dependent in part on raising capital. The CFO changed after quarter-end; the CEO’s employment was extended on short-term terms.
- No stated financial guidance: Management expects costs may rise as operations expand but says it cannot estimate the amounts; it cautions that improved margins may not persist. No quantified revenue or earnings guidance is provided.
Important facts for investors to verify
- Confirm the filing is for Orbsat Corp., not Nextplat Corp., and identify the intended issuer and reporting period.
- Reconcile conflicting figures in the filing: the notes and balance sheet report working capital of $95,587, accumulated deficit of $12,473,923 and equity of $971,781, while MD&A elsewhere gives different values. The cash-flow statement reports operating cash use of $471,800, although one MD&A passage describes that amount as cash provided.
- Review convertible-note balances, discount amortization, conversion terms and subsequent share issuances to assess remaining debt and potential dilution.
- Assess cash runway, near-term obligations and whether planned financing or cost reductions can address the disclosed going-concern uncertainty.
- Check the weighted-average share counts and loss-per-share calculations against the substantial increase in reported period-end shares, and review the stock-option grants and exercises.
- Monitor remediation of ineffective disclosure controls, leadership changes, customer concentration and the continuing effects of COVID-19 and foreign-exchange changes.