ITEM 2.
M
ANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The
following information should be read in conjunction with the
consolidated financial statements and the notes thereto contained
elsewhere in this report. Statements made in this Item 2,
"Management's Discussion and Analysis or Plan of Operation," and
elsewhere in this 10-Q that do not consist of historical facts, are
"forward-looking statements." Statements accompanied or qualified
by, or containing words such as "may," "will," "should,"
"believes," "expects," "intends," "plans," "projects," "estimates,"
"predicts," "potential," "outlook," "forecast," "anticipates,"
"presume," and "assume" constitute forward-looking statements, and
as such, are not a guarantee of future performance. The statements
involve factors, risks and uncertainties, the impact or occurrence
of which can cause actual results to differ materially from the
expected results described in such statements. Risks and
uncertainties can include, among others, fluctuations in general
business cycles and changing economic conditions; changing product
demand and industry capacity; increased competition and pricing
pressures; advances in technology that can reduce the demand for
the Company's products, as well as other factors, many or all of
which may be beyond the Company's control. Consequently, investors
should not place undue reliance upon forward-looking statements as
predictive of future results. The Company disclaims any obligation
to update the forward-looking statements in this
report.
You
should read the following information in conjunction with our
financial statements and related notes contained elsewhere in this
report. You should consider the risks and difficulties frequently
encountered by early-stage companies, particularly those engaged in
new and rapidly evolving markets and technologies. Our limited
operating history provides only a limited historical basis to
assess the impact that critical accounting policies may have on our
business and our financial performance.
We encourage you to review our periodic reports filed with the SEC
and included in the SEC’s Edgar database, including the
annual report on Form 10-K filed for the year ended December 31,
2015, filed on March 30, 2016.
Corporate Information
On
January 22, 2015, the Company changed its name to “Orbital
Tracking Corp.” from “Great West Resources, Inc.”
pursuant to a merger with a newly-formed wholly owned
subsidiary.
On
March 28, 2014, the Company merged with a newly-formed wholly-owned
subsidiary of the Company solely for the purpose of changing its
state of incorporation to Nevada from Delaware, effecting a 1:150
reverse split of its common stock, and changing its name to Great
West Resources, Inc. in connection with the plans to enter into the
business of potash mining and exploration. During late
2014 the Company abandoned its efforts to enter the potash
business.
The
Company was originally incorporated in 1997 as a Florida
corporation. On April 21, 2010, the Company merged with and into a
newly-formed wholly-owned subsidiary for the purpose of changing
its state of incorporation to Delaware, effecting a 2:1 forward
split of its common stock, and changing its name to EClips Media
Technologies, Inc. On April 25, 2011, the Company
changed its name to “Silver Horn Mining Ltd.” pursuant
to a merger with a newly-formed wholly-owned
subsidiary.
Global Telesat
Communications Limited
(“GTCL”) was formed under the laws of
England and Wales in 2008. On February 19, 2015, the
Company entered into a share exchange agreement with
GTCL
and all of the holders of the
outstanding equity of GTCL pursuant to which GTCL became a wholly
owned subsidiary of the Company.
For
accounting purposes, this transaction is being accounted for as a
reverse acquisition and has been treated as a recapitalization of
Orbital Tracking Corp. with Global Telesat Communications Limited
considered the accounting acquirer, and the financial statements of
the accounting acquirer became the financial statements of the
registrant. The completion of the Share Exchange resulted in a
change of control. The Share Exchange was accounted for as a
reverse acquisition and re-capitalization. The GTCL Shareholders
obtained approximately 39% of voting control on the date of Share
Exchange. GTCL was the acquirer for financial reporting purposes
and the Orbital Tracking Corp. was the acquired company.
The consolidated financial statements after the acquisition
include the balance sheets of both companies at historical cost,
the historical results of GTCL and the results of the Company from
the acquisition date. All share and per share information in the
accompanying consolidated financial statements and footnotes has
been retroactively restated to reflect the
recapitalization.
The Company is a provider of satellite based hardware, airtime and
related services both in the United States and
internationally. We sell equipment and airtime for use
on all of the major satellite networks including Globalstar,
Inmarsat, Iridium and Thuraya and operate a short-term rental
service for customers who desire to use our equipment for a limited
time period. Our acquisition of GTCL in February 2015
expanded our global satellite based infrastructure and business,
which was first launched in December 2014 through the purchase of
certain contracts.
Through
GTCL, we believe we are one of the largest providers in Europe of
retail satellite based hardware, airtime and services through
various ecommerce storefronts, and one of the largest providers of
personal satellite tracking devices. Our customers include
businesses, the U.S. and foreign governments, non-governmental
organizations and private consumers. By enabling
wireless communications in areas not served or underserved by
terrestrial wireless and wireline networks and in circumstances
where terrestrial networks are not operational due to natural or
man-made disasters, we seek to meet our customers' increasing
desire for connectivity. Our principal focus is on
growing our existing satellite based hardware, airtime and related
services business line and developing our own tracking devices for
use by retail customers worldwide.
Recent Transactions
On
January 22, 2015, the Company changed its name to “Orbital
Tracking Corp.” from “Great West Resources, Inc.”
The Company effectuated the name change through a short-form merger
pursuant to Chapter 92A of the Nevada Revised Statutes where a
subsidiary formed solely for the purpose of the name change was
merged with and into the Company, with the Company as the surviving
corporation in the merger. The merger had the effect of amending
the Company’s Articles of Incorporation to reflect its new
legal name.
On February 19, 2015, the Company filed with the
Secretary of State of the State of Nevada a Certificate of
Designation for the Series E Convertible Preferred Stock, setting
forth the rights, powers, and preferences of the Series E
Convertible Preferred Stock.
Pursuant to the
Series E
Certificate of
Designation, the Company designated
8,746,000
shares of its blank
check preferred stock as Series E Convertible
Preferred
Stock
. Each share of Series
E
Convertible
Preferred
Stock
has
a stated value equal to its par value of $0.0001 per
share. In the event of a liquidation, dissolution or
winding up of the Company,
the holder of the Series E Convertible Preferred
Stock would have preferential payment and distribution rights over
any other class or series of capital stock that provide for Series
E Convertible Preferred Stock’s preferential payment and over
our common stock
. The Series E
Convertible
Preferred is
convertible into ten (10) shares of the Company’s common
stock. The Company is prohibited from effecting the conversion of
the Series E
Convertible
Preferred
Stock to the extent that, as a result of such conversion, the
holder beneficially owns more than 4.99%, in the aggregate, of the
issued and outstanding shares of common stock calculated
immediately after giving effect to the issuance of shares of common
stock upon the conversion of the Series E
Convertible
Preferred
Stock. Each share of Series E
Convertible
Preferred Stock
entitles the holder to vote on all matters voted on by holders of
common stock as a single class. With respect to any such vote, each
share of Series E
Convertible
Preferred Stock
entitles the holder to cast ten (10) votes per share of Series
E
Convertible
Preferred
Stock owned at the time of such vote, subject to the 4.99%
beneficial ownership limitation.
On February 19, 2015, the Company entered into a
share exchange agreement with
Global Telesat
Communications Limited,
a
Private Limited Company formed under the laws of England and Wales
(“GTCL”) and all of the holders of the outstanding
equity of GTCL (the “GTCL Shareholders”). Upon closing
of the transactions contemplated under the share exchange
agreement, the GTCL Shareholders transferred all of the issued and
outstanding equity of GTCL to the Company in exchange for (i) an
aggregate of 2,540,000 shares of the common stock of the Company
and 8,746,000 shares of the newly issued Series E Convertible
Preferred Stock of the Company (the “Series E Preferred
Stock”) with each share of Series E Preferred Stock
convertible into ten shares of common stock, (ii) a cash payment of
$375,000 and (iii) a one-year promissory note in the amount of
$122,536. Such exchange caused GTCL to become a wholly
owned subsidiary of the Company.
Also
on February 19, 2015, David Phipps, the founder, principal owner
and sole director of GTCL and the former founder and president of
GTC, was appointed President of Orbital
Satcom. Following the transaction, Mr. Phipps was
appointed Chief Executive Officer and Chairman of the Board of
Directors of the Company. The acquisition of GTCL
expands the Company’s global satellite based business
and enables the Company to operate as a vertically integrated
satellite services business with experienced management operating
from additional locations in Poole, England in the United Kingdom
and Aventura, Florida.
On
February 19, 2015, the Company issued to Mr. Rector, the former
Chief Executive Officer, Chief Financial Officer and director of
the Company, 850,000 shares of common stock and a seven year
immediately vested option to purchase 2,150,000 shares of common
stock at a purchase price of $0.05 per share as compensation for
services provided to the Company.
On
February 19, 2015, the Company sold an aggregate of 550,000 units
at a per unit purchase price of $2.00, in a private placement to
certain accredited investors for gross proceeds of $1,100,000. Each
unit consists of: forty (40) shares of the Company’s common
stock or, at the election of any purchaser who would, as a result
of purchase of units become a beneficial owner of five (5%) percent
or greater of the outstanding common stock of the Company, four (4)
shares of the Company’s Series C Convertible Preferred Stock,
par value $0.0001 per share, with each share convertible into ten
(10) shares of common stock. The Company sold 15,000 units
consisting of an aggregate of 600,000 shares of common stock and
535,000 units consisting of an aggregate of 2,140,000 shares of
Series C Convertible Preferred Stock.
On
February 19, 2015, the Company issued an aggregate of 1,675,000
shares of common stock to certain current consultants, former
consultants and employees. These shares consist of (i)
250,000 shares of common stock issued to a consultant as
compensation for services relating to the provision of satellite
tracking hardware and related services, sales and lead generation,
valued at $12,500 (ii) 1 million shares of common stock issued to a
consultant as compensation for the design and delivery of dual mode
gsm/Globalstar Simplex tracking devices and related hardware and
intellectual property, valued at $50,000 (iii) 250,000 shares of
common stock, subject to a one year lock up, issued to the
Company’s controller, valued at $12,500 and (iv) 175,000
shares of common stock issued to MJI in full satisfaction of
outstanding debts of $175,000. MJI agreed to sell only up to 5,000
shares per day and the Company has a nine-month option to
repurchase these shares at a purchase price of $0.75 per
share.
On
June 18, 2015, the Company issued an aggregate of 150,000 shares of
its common stock, valued at $0.79 per share, or $118,500 to an
investor relations consultant for compensation of
services.
On
October 13, 2015, the Company through its wholly owned subsidiary,
Orbital Satcom Corp, purchased from World Surveillance Group, Inc.,
and its wholly owned subsidiary, Global Telesat Corp the
“Globalstar” license and equipment, which it had
previously leased. On December 10, 2014, the Company,
entered into a License Agreement with World Surveillance Group,
Inc., and its wholly owned subsidiary, Global Telesat Corp, by
which the Company had an irrevocable non-exclusive license to use
certain equipment, consisting of Appliques for a term of ten
years. Appliques are demodulator and RF interfaces
located at various ground stations for gateways. The
Company issued 2,222,222 common shares, valued at $1 per share
based on the quoted trading price on date of issuance, or
$2,222,222. The company reflected the license as an asset on its
balance sheet with a ten-year amortization, the term of the
license. On October 13, 2015, the Company acquired the
license for additional consideration of $125,000 in cash. The
Company valued the asset at $2,160,016, which is the unamortized
balance of the Appliques License, $2,043,010 plus the consideration
of $125,000.
On
December 21, 2015, the Company entered into a Placement Agent
Agreement with Chardan Capital Markets LLC, as Agent, pursuant to
which the Placement Agent agreed to serve as the non-exclusive
placement agent for the Company in connection with any private
placement from December 21, 2015 through January 15,
2017. The Company agreed to pay the Placement Agent a
cash fee of $50,000 and issue the Placement agent 250,000 shares of
common stock following the issuance of at least $900,000 of
securities prior to the expiration of the term of the Placement
Agent Agreement. On December 28, 2015, upon closing of
the note purchase and Series F subscription agreements, the Company
paid the respective fees and issued the common shares.
On December 28, 2015, the Company filed with the
Secretary of State of the State of Nevada a Certificate of
Designation for the Series F Convertible Preferred Stock, setting
forth the rights, powers, and preferences of the Series F
Convertible Preferred Stock.
Pursuant to the
Series F
Certificate of
Designation, the Company designated
1,100,000
shares of its blank
check preferred stock as Series F Convertible
Preferred
Stock
. Each share of Series
F
Convertible
Preferred
Stock
has
a stated value equal to its par value of $0.0001 per
share. In the event of a liquidation, dissolution or
winding up of the Company,
the holder of the Series F Convertible Preferred
Stock would have preferential payment and distribution rights over
any other class or series of capital stock that provide for Series
F Convertible Preferred Stock’s preferential payment and over
our common stock
. The Series F
Convertible
Preferred is
convertible into one (1) share of the Company’s common stock.
The Company is prohibited from effecting the conversion of the
Series F
Convertible
Preferred
Stock to the extent that, as a result of such conversion, the
holder beneficially owns more than 4.99%, in the aggregate, of the
issued and outstanding shares of common stock calculated
immediately after giving effect to the issuance of shares of common
stock upon the conversion of the Series F
Convertible
Preferred
Stock. Each share of Series F
Convertible
Preferred Stock
entitles the holder to vote on all matters voted on by holders of
common stock as a single class. With respect to any such vote, each
share of Series F
Convertible
Preferred Stock
entitles the holder to cast one (1) vote per share of Series
F
Convertible
Preferred
Stock owned at the time of such vote, subject to the 4.99%
beneficial ownership limitation.
On
December 28, 2015, the Company entered into separate subscription
agreements with accredited investors relating to the issuance and
sale of $550,000 of shares of Series F convertible preferred stock
at a purchase price of $0.50 per share. The Preferred F Shares are
convertible into shares of common stock based on a conversion
calculation equal to the stated value of such Preferred F Share
divided by the conversion price. The stated value of each Preferred
F Share is $0.50 and the initial conversion price is $0.50 per
share, each subject to adjustment for stock splits, stock
dividends, recapitalizations, combinations, subdivisions or other
similar events. Subject to certain specified exceptions, in the
event the Company issues securities at a
per share price less than the conversion price
for a period of two years from the closing, each holder will be
entitled to receive from the Company additional shares of common
stock such that the holder shall hold that number of conversion
shares, in total, had such holder purchased the Preferred F Shares
with a conversion price equal to the lower price
issuance.
On
December 28, 2015, the Company entered into separate note purchase
agreements with accredited investors relating to the issuance and
sale of an aggregate of $605,000 in principal amount of original
issue discount convertible notes for an aggregate purchase price of
$550,000.
The
Notes mature on December 28, 2017. The Company must
repay 1/24th of the principal of the Notes each month commencing
January 18, 2016. The Notes do not bear interest except
that all overdue and unpaid principal bears interest at a rate
equal to the lesser of 18% per year or the maximum rate permitted
by applicable law. The Notes are convertible into common
stock at the option of the holder at a conversion price of $1.00,
subject to adjustment for stock splits, stock dividends,
recapitalizations, combinations, subdivisions or other similar
events; provided however, that the principal and interest, if any,
on the Notes may not be converted to the extent that, as a result
of such conversion, the holder would beneficially own more than
4.99% of the number of shares of common stock outstanding
immediately after giving effect to the issuance of shares of common
stock upon conversion of the Notes. Subject to certain
specified exceptions, in the event the Company issues securities at
a per share price less than the conversion
price for a period of one year from the closing, each holder will
be entitled to receive from the Company additional shares of common
stock such that the holder shall hold that number of conversion
shares, in total, had such holder purchased the Notes with a
conversion price equal to the lower price issuance.
Pursuant
to the Subscription Agreement and Note Purchase Agreement, the
Company agreed to use its reasonable best efforts to effectuate the
increase of its authorized shares of common stock from 200,000,000
shares of common stock to 750,000,000 shares of common stock on or
prior to January 31, 2016. The Company’s shareholders on
March 5, 2016, approved the increase in authorized common and
preferred shares. $350,000 of the proceeds from the sale of
Preferred F Shares and the Notes are intended to be utilized for
public relations and expenses associated with publications, reports
and communications with shareholders and others concerning the
company's business. The Subscription Agreement provides
the purchasers of the Preferred F Shares with a 100% right of
participation in all future securities offerings of the Company,
subject to customary exceptions.
On
December 28, 2015 the Company and Theresa Carlise, its Chief
Financial Officer, amended her employment agreement, dated June 9,
2015. Pursuant to the Amendment, which is effective December 1,
2015, the term of Ms. Carlise’s employment was extended to
December 1, 2016 from June 9, 2016, her annual salary was increased
to $140,000 from $72,000 and she agreed to devote her full business
time to the Company. The term of the Original Agreement,
as amended by the Amendment, shall automatically extend for
additional terms of one year each, unless either party gives prior
written notice of non-renewal to the other party no later than 60
days prior to the expiration of the initial term or the then
current renewal term, as applicable.
Also
on December 28, 2015, the Company issued Ms. Carlise options to
purchase up to 500,000 shares of common stock and issued Hector
Delgado, a director of the Company, options to purchase up to
200,000 shares of common stock. The options were issued
outside of the Company’s 2014 Equity Incentive Plan and are
not governed by the Plan. The options have an exercise
price of $0.05 per share, vest immediately, and have a term of ten
years.
On
January 15, 2016, the Company engaged IRTH Communications LLC., for
a term of 12 months to provide investor relations, public
relations, internet development, communication and consulting
services. As consideration for its services, IRTH will receive from
the Corporation a monthly fee of $7,500 and as a single one-time
retainer payment, $100,000 worth of shares of the Company’s
common stock; calculated by the average closing price of the
Company’s common stock on its principal exchange for the 10
(ten) trading days immediately prior to the execution of this
Agreement; which shares shall be Restricted Securities, pursuant to
the provisions of Rule 144. As additional compensation, in the
event the Company, during or within two (2) years after the term of
this Agreement, receives investment monies (debt, equity or a
combination thereof) from investor(s) introduced to the Company by
IRTH as described herein, Company agrees to pay IRTH a finder's fee
equal to three percent (3%) of all gross monies invested by
investor(s) and received by Company.
On
February 11, 2016, the Company issued 136,612 shares of its common
stock, valued at $0.60 per share, or $81,967, to IRTH
Communications LLC for services, as disclosed above.
On
March 3, 2016, the Company entered into an Executive Employment
Agreement with David Phipps, its Chairman, President and Chief
Executive Officer, effective January 1, 2016. Under the
Employment Agreement, Mr. Phipps will serve as the Company’s
Chief Executive Officer and President, and receive an annual base
salary equal to the sum of $144,000 and $48,000. Mr.
Phipps is also eligible for bonus compensation in an amount equal
to up to fifty (50%) percent of his then-current base salary if the
Company meets or exceeds criteria adopted by the Compensation
Committee, if any, or Board and equity awards as may be approved in
the discretion of the Compensation Committee or
Board. Also on March 3, 2016 and effective January 1,
2016, the Corporation’s wholly owned subsidiary Orbital
Satcom Corp. and Mr. Phipps terminated an employment agreement
between them dated February 19, 2015 pursuant to which Mr. Phipps
was employed as President of Orbital Satcom for an annual base
salary of $180,000. The other terms of the Original
Agreement are identical to the terms of the Employment
Agreement. Mr. Phipps remains the President of Orbital
Satcom.
On May
17, 2016, the Company entered into exchange agreements with holders
of the Company's outstanding $504,168 convertible notes originally
issued on December 28, 2015, pursuant to which the Notes were
cancelled and the exchanging holders were issued an aggregate of
10,083,351 shares of newly designated Series G Convertible
Preferred Stock.
The
terms of the shares of Series G Preferred Stock are set forth in
the Certificate of Designation of Series G Convertible Preferred
Stock as filed with the Secretary of State of the State of Nevada.
The Series G COD authorizes 10,090,000 Preferred G Shares. The
Preferred G Shares are convertible into shares of common stock
based on a conversion calculation equal to the stated value of such
Preferred G Share divided by the conversion price. The stated value
of each Preferred G Share is $0.05 and the initial conversion price
is $0.05 per share, each subject to adjustment for stock splits,
stock dividends, recapitalizations, combinations, subdivisions or
other similar events. The Company is prohibited from effecting a
conversion of the Preferred G Shares to the extent that, as a
result of such conversion, such investor would beneficially own
more than 4.99% of the number of shares of common stock outstanding
immediately after giving effect to the issuance of shares of Common
Stock upon conversion of the Preferred G Shares. Each Preferred G
Share entitles the holder to vote on all matters voted on by
holders of common stock as a single class. With respect to any such
vote, each Preferred G Share entitles the holder to cast one vote
per share of Series G Preferred Stock owned at the time of such
vote subject to the 4.99% beneficial ownership limitation. Subject
to certain specified exceptions, in the event the Company issues
securities at a per share price less than the conversion price
prior to December 28, 2016, each holder will be entitled to receive
from the Company additional shares of common stock such that the
holder shall hold that number of conversion shares, in total, had
such holder purchased the Preferred G Shares with a conversion
price equal to the lower price issuance.
The
exchanging holders, GRQ Consultants Inc. 401K, Michael Brauser and
Intracoastal Capital LLC, are each holders of over 5% of a class of
the Company’s voting securities. The Exchange Agreements
contain customary representations, warranties and agreements by the
Company and the other parties thereto. The representations,
warranties and covenants contained therein were made only for
purposes of such agreements and as of specific dates, were solely
for the benefit of the parties to such agreements and may be
subject to limitations agreed upon by the contracting
parties.
On
October 26, 2016, the Company entered separate subscription
agreements with accredited investors relating to the issuance and
sale of $350,000, out of a maximum of $800,000, of shares of Series
H convertible preferred stock at a purchase price of $4.00 per
share. The initial conversion price is $0.04 per share, subject to
adjustment as set forth in the Series H COD. The Company is
prohibited from effecting a conversion of the Series H Preferred
Stock to the extent that, because of such conversion, the investor
would beneficially own more than 4.99% of the number of shares of
the Company’s common stock outstanding immediately after
giving effect to the issuance of shares of common stock upon
conversion of the Series H Preferred Stock.
Each
Series H Preferred Stock
entitles the holder to cast
one vote per share of
Series H Preferred Stock
owned as of the record date for the
determination of shareholders entitled to vote, subject to the
4.99% beneficial ownership limitation. The Company received the
necessary consents as required from prior subscription agreements,
Preferred Series C, Preferred Series G and Preferred Series H, as
well as antidilution rights.
Certain shareholders have
waived their right to adjustment, equal treatment, most favored
nations and other rights to which they were entitled pursuant to
the Prior Offerings, including without limitation, certain rights
granted to holders of our Series C Preferred Stock, Series F
Preferred Stock and G Preferred Stock.
The Company was required to issue
550,000 shares of its Preferred Series C, which is convertible into
5,500,000 shares of the Company’s common stock and 114,944
shares of Preferred Series I, which is convertible into 11,494,400
shares of the Company’s common stock. Preferred Series I was
issued to certain holders in lieu of Preferred Series G and
Preferred Series H.
At
September 30,2016, the Company had an accumulated deficit of
approximately $3.5 million. For the nine months ended September 30,
2016, the Company incurred a net loss of approximately $1,454,120
and had cash flows used in operations in the amount of $772,933.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent upon obtaining
additional capital and financing. Management intends to attempt to
raise additional funds by way of a public or private offering.
While the Company believes in the viability of its strategy to
raise additional funds, there can be no assurances to that
effect.
Results of Operations for the Three and Nine Months Ended September
30, 2016 compared to the Three and Nine Months Ended September 30,
2015
Revenue.
Sales for the three and nine months
ended September 30, 2016 consisted primarily of sales of satellite
phones, accessories and airtime plans. For the three months ended
September 30, 2016, revenues generated were approximately
$1,299,373 compared to approximately $982,775 of revenues for the
three months ended September 30, 2015, an increase in total
revenues of $316,598 or 32.2%. Sales for the nine months ended
September 30, 2016 generated approximately $3,783,230 compared to
approximately $2,955,453 of revenues during the nine months ended
September 30, 2015, a $827,777 increase in total revenues or
28.0%.
Factors relative to the increase in revenue for the three months
ended September 30, 2016 compared to the same period in 2015 are
related to
increased presence in several international
e-commerce storefronts, the introduction of GTC’s new
mobile friendly website, and it being awarded a recurring revenue
contract for lone worker trackers from the UK Forestry Commission.
Comparable sales for Global Telesat Communications Ltd. were
$998,878 for the three months ended September 30, 2016 as compared
to $650,749 for the three months ended September 30, 2015, an
increase of $348,129 or 53.5%. For the nine months ended September
30, 2016 and September 30, 2015 comparable sales were $2,791,808
and $2,082,863, an increase of $708,945 or 34.0%. Comparable sales
for Orbital Satcom for the three months ended September 30, 2016
were $300,495 as compared to $332,026 for the three months ended
September 30, 2015, a decrease of $31,531 or 9.5%. This decrease
was attributable to decreased Amazon US sales, which was more than
offset by an increase in Global Telesat Communications sales on the
same storefront following its launch in 2015. Comparable sales for
Orbital Satcom for the nine months ended September 30, 2016 were
$991,422 as compared to $872,590 for the nine months ended
September 30, 2015, an increase of $118,832 or 13.6%.
Cost of
Sales.
During the
three months ended September 30, 2016, cost of revenues increased
to $1,003,026 compared to $697,862 for the three months ended
September 30, 2015, an increase of $305,164 or 43.7%. During the
nine months ended September 30, 2015, cost of revenues increased to
$2,842,986 compared to $2,130,271 for the nine months ended
September 30, 2015 an increase of $712,715 or 33.5%. Gross profit
margins for the three months and nine months ended September 30,
2016, were 22.8% and 24.9%, respectively. For the three and nine
months ended September 30, 2015, gross profit margins were 29.0%
and 27.9%, respectively. Selling and general administrative costs
decreased with certain costs being absorbed as cost of sales. We
expect our cost of revenues, to continue to increase during fiscal
2016 and beyond, as we expand our operations and begin generating
additional revenues under our current business. However, we are
unable at this time to estimate the amount of the expected
increases.
Operating Expenses.
Total operating expenses for the three
months ended September 30, 2016 were $605,705, an increase of
$24,277, or 4.2%, from total operating expenses for the three
months ended September 30, 2015 of $581,428. For the nine months
ended September 30, 2016, total operating expenses were $2,152,432
an increase of $390,360 or 22.2%. Factors contributing to the
increase are described below.
Selling, general and
administrative expenses
were
$182,276 and ($27,638) for the three months ended September 30,
2016 and 2015, respectively, an increase of $209,914. For the nine
months ended September 30, 2016 and 2015, selling, general and
administrative expenses were $549,526 and $429,991, respectively,
an increase of $119,535 or 27.8%. The increase during the three
months ended September 30, 2016 as compared to the same period in
2015 were due to reclassification from selling, general and
administrative to professional fees. The increase for the nine
months ended September 30, 2016 as compared to the same period in
2015, was primarily due to variable expenses which increase with
sales, such as e-commerce fees, bank charges and postage and
delivery.
Salaries, wages and payroll
taxes
were $158,720 and
$338,533 for the three months ended September 30, 2016 and 2015,
respectively, a decrease of $179,813 or 53.1%. The
decrease was attributable to additional wages expensed from a prior
period for the three months ended September 30, 2015. For the nine
months ended September 30, 2016 and 2015, salaries, wages and
payroll taxes were $503,556 and $479,251, respectively, an increase
of $24,305 or 5.1%. The company has added additional personnel to
accommodate and support its revenue goals and compliance needs for
reporting as a public company, as well as, build its infrastructure
for future growth and opportunities.
Stock-based
compensation
was $0, for the
three months ended September 30, 2016 and 2015. On February 19,
2015, the Company issued options to its former Chief Executive
Officer, valued using the Black-Scholes option pricing model at
$107,500, as well as issued stock as compensation to its Controller
and certain consultants. For the nine months ended September 30,
2016 stock based compensation was $0 as compared to $149,999 for
the same period in 2015.
Professional fees
were $192,834 and $151,603 for the
three months ended September 30, 2016 and 2015, respectively, an
increase of $41,231 or 27.2%. For the nine months ended
September 30, 2016 and 2015, professional fees were $881,318 and
$409,605, respectively, an increase of $471,713 or 115.2%. The
increase during the three and nine months ended September 30, 2016
as compared to the same period in 2015, were primarily attributable
to fees incurred for investor awareness, fees associated with the
compliance requirements of public companies are included in
Professional fees, as well as fees associated with raising
capital.
Depreciation and
amortization
expenses were
$70,219 and $118,931 for the three months ended September 30, 2016
and 2015, respectively, a decrease of $48,712 or
40.0%. For the nine months ended September 30, 2016 and
2015, depreciation and amortization were $216,375 and $293,226, a
decrease of $76,851 or 26.2%. The decrease during the
2016 period was primarily attributable to decrease in amortization,
as expenses were offset to professional fees.
We
expect our expenses in each of these areas to continue to increase
during fiscal 2016 and beyond as we expand our operations and begin
generating additional revenues under our current business. However,
we are unable at this time to estimate the amount of the expected
increases.
Total Other (Income)
Expense.
Our total other (income) expenses were $30,971
compared to $4,069, during the three months ended September 30,
2016 and 2015 respectively, increase of $26,902 or
661%. The increase is attributable to an increase
in costs for foreign currency exchange rates fluctuations. Our
total other expenses were $241,933 compared to $18,295 during the
nine months ended September 30, 2016 and 2015 respectively, an
increase of $223,638 or 1,222.2%. The increase is
related to interest expense incurred for convertible debt, offset
by the decrease recognized to the change in fair value of
derivative instruments and an increase for exchange rate variances,
during the nine months ended September 30,
2016.
Net Income (Loss)
We
recorded net loss before income tax of $338,672 for the three
months ended September 30, 2016 as compared to a net loss of
$300,584, for the three months ended September 30, 2015. For the
nine months ended September 30, 2016 we recorded a net loss of
$1,452,463 as compared to a net loss of $955,185. The decrease in
income is a result of the factors as described above.
Comprehensive (Loss) Income
We
recorded a gain for foreign currency translation adjustments for
the three and nine months ended September 30, 2016, of $19,888 and
$17,513. For the three and nine months ended September 30, 2015
$2,530 and $8,172, was recorded as a gain for foreign currency
translation adjustments. The gains are attributable to exchange
rate variances. Comprehensive loss was $318,785 as compared to loss
of $298,054 for the three months ended September 30, 2016 and 2015,
respectively. For the nine months ended September 30, 2016 and
2015, comprehensive loss was $1,434,951 and $947,013,
respectively.
Liquidity and Capital Resources
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. At September 30, 2016, we
had a cash balance of $118,248. Our working capital is ($97,646) at
September 30, 2016.
Our
current assets at September 30, 2016 decreased by approximately
46.7% from December 31, 2015 and included cash, accounts
receivable, inventory, unbilled revenue, prepaid expenses and other
current assets and inventory.
Our
current liabilities at September 30, 2016 decreased by 14.2% from
December 31, 2015 and included our accounts payable, derivative
liabilities and deferred revenue and other liabilities in the
ordinary course of our business.
Operating Activities
Net
cash flows used in operating activities for the nine months ended
September 30, 2016 amounted to $772,935 and were primarily
attributable to our net loss of $1,452,463, total amortization
expense of $621,265, depreciation of $197,625, imputed interest of
$912, issuance of common stock for prepaid services of $164,608 and
offset by change in fair value of derivative liabilities of
$425,790 and net change in asset and liabilities of $120,908,
primarily attributable to an increase in accounts receivable of
$28,139, increase in inventory of $99,202, decrease in unbilled
revenue of $17,415, decrease in prepaid expense of $115,359,
increase in other current assets of $1,909, increase in accounts
payable of $131,321 and an decrease in deferred revenue of
$13,937.
Net
cash flows used in operating activities for the nine months ended
September 30, 2015 amounted to $477,929 and were primarily
attributable to our net loss of $955,185, offset by stock based
compensation of $149,999, total amortization expense of $185,417,
depreciation of $53,908, and add back of change in fair value of
derivative liabilities of $342 and net change in asset and
liabilities of $30,977, primarily attributable to an increase in
accounts receivable of $20,361, increase in inventory of $29,821,
increase in unbilled revenue of $34,910, increase in other current
assets of $16,710, increase in accounts payable of $161,670, offset
by a decrease in deferred revenue of $28,891.
.
Investing Activities
Net
cash flows used in investing activities were ($34,967) and
($408,404) for the nine months ended September 30, 2016 and 2015,
respectively. We purchased property and equipment of $34,970 during
the nine months ended September 30, 2016. During the nine months
ended September 30, 2015, we used cash to pay $375,000 in
connection with the Share Exchange Agreement, purchase of property
and equipment of $64,338 and offset by $30,934 of cash acquired
from acquisition.
Financing Activities
Net
cash flows (used in) provided by financing activities were
($43,027) and $1,030,094 for the nine months ended September 30,
2016 and 2015, respectively. Net cash used in financing activities
were repayments of convertible notes payable of $100,834 and
proceeds from related party payable of $57,807, respectively.
During the nine months ended September 30, 2015, we received net
proceeds from the sale of our common stock and preferred stock of
$1,097,500 offset by repayments of related party note payable of
$67,406.
Off-Balance Sheet Arrangements
We
do not currently have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to our
stockholders.
Our
company has not entered into any transaction, agreement or other
contractual arrangement with an entity unconsolidated with us under
which we have
●
|
an obligation under a guarantee contract, although we do have
obligations under certain sales arrangements including purchase
obligations to vendors
|
●
|
a retained or contingent interest in assets transferred to the
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such
assets,
|
●
|
any obligation, including a contingent obligation, under a contract
that would be accounted for as a derivative instrument,
or
|
●
|
any obligation, including a contingent obligation, arising out of a
variable interest in an unconsolidated entity that is held by us
and material to us where such entity provides financing, liquidity,
market risk or credit risk support to, or engages in leasing,
hedging or research and development services with
us.
|
Plan of Operation
Critical Accounting Policies and Estimates
Critical
accounting estimates are those that management deems to be most
important to the portrayal of our financial condition and results
of operations, and that require management’s most difficult,
subjective or complex judgments, due to the need to make estimates
about the effects of matters that are inherently uncertain. We have
identified our critical accounting estimates which are discussed
below.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and revenue and
expenses during the reporting period. Actual results could differ
from those estimates. The Company’s significant estimates
include the valuation of stock based charges, the valuation of
derivatives and the valuation of inventory reserves.
Basis of Presentation and Principles of Consolidation
The
unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP") and the
rules and regulations of the U.S Securities and Exchange Commission
for Interim Financial Information. All intercompany transactions
and balances have been eliminated. All adjustments (consisting of
normal recurring items) necessary to present fairly the Company's
financial position as of September 30, 2016, and the results of
operations and cash flows for the nine months ended September 30,
2016 have been included. The results of operations for the nine
months ended September 30, 2016 are not necessarily indicative of
the results to be expected for the full year.
Accounts Receivable
The
Company extends credit to its customers based upon a written credit
policy. Accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for
doubtful accounts is the Company’s best estimate for the
amount of probable credit losses in the Company’s existing
accounts receivable. The Company establishes an
allowance of doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends, and other
information. Receivable balances are reviewed on an aged
basis and account balances are charged off against the allowance
after all means of collection have been exhausted and the potential
for recovery is considered remote. The Company does not require
collateral on accounts receivable. As of September 30, 2016 and
December 31, 2015, there is an allowance for doubtful accounts
of $11,229 and $0, respectively.
Accounting for Derivative Instruments
Derivatives
are required to be recorded on the balance sheet at fair value.
These derivatives, including embedded derivatives in the
Company’s structured borrowings, are separately valued and
accounted for on the Company’s balance sheet. Fair values for
exchange traded securities and derivatives are based on quoted
market prices. Where market prices are not readily available, fair
values are determined using market based pricing models
incorporating readily observable market data and requiring judgment
and estimates
Research and Development
Research
and Development ("R&D") expenses are charged to expense when
incurred. The Company has consulting arrangements which are
typically based upon a fee paid monthly or quarterly. Samples are
purchased that are used in testing, and are expensed when
purchased. R&D costs also include salaries and related
personnel expenses, direct materials, laboratory supplies,
equipment expenses and administrative expenses that are allocated
to R&D based upon personnel costs.
Foreign Currency Translation
The
Company’s reporting currency is US Dollars. The accounts of
one of the Company’s subsidiaries is maintained using the
appropriate local currency, (Great British Pound) GTCL as the
functional currency. All assets and liabilities are translated into
U.S. Dollars at balance sheet date, shareholders' equity is
translated at historical rates and revenue and expense accounts are
translated at the average exchange rate for the year or the
reporting period. The translation adjustments are deferred as a
separate component of stockholders’ equity, captioned as
accumulated other comprehensive (loss) gain. Transaction gains and
losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are
included in the statements of operations.
The
relevant translation rates are as follows: for the three and nine
months ended September 30, 2016 closing rate at 1.29820 US$: GBP,
average rate at 1.31320 and 1.39353 US$: GBP, for the three and
nine months ended September 30, 2015 closing rate at 1.5164 US$:
GBP, average rate at 1.55048 and 1.5322
and for the year ended 2015 closing rate at
1.47373 US$: GBP.
Revenue Recognition and Unearned Revenue
The
Company recognizes revenue from satellite services when earned, as
services are rendered or delivered to customers. Equipment
sales revenue is recognized when the equipment is delivered to and
accepted by the customer. Only equipment sales are subject to
warranty. Historically, the Company has not incurred significant
expenses for warranties.
The
Company’s customers generally purchase a combination of our
products and services as part of a multiple element arrangement.
The Company’s assessment of which revenue recognition
guidance is appropriate to account for each element in an
arrangement can involve significant judgment. This assessment has a
significant impact on the amount and timing of revenue
recognition.
Revenue
is recognized when all of the following criteria have been
met:
●
Persuasive
evidence of an arrangement exists. Contracts and customer purchase
orders are generally used to determine the existence of an
arrangement.
●
Delivery
has occurred. Shipping documents and customer acceptance, when
applicable, are used to verify delivery.
●
The
fee is fixed or determinable. We assess whether the fee is fixed or
determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or
adjustment.
●
Collectability
is reasonably assured. We assess collectability based primarily on
the creditworthiness of the customer as determined by credit checks
and analysis, as well as the customer’s payment
history.
In accordance with ASC 605-25,
Revenue Recognition
—
Multiple-Element
Arrangements,
based on the
terms and conditions of the product arrangements, the Company
believes that its products and services can be accounted for
separately as its products and services have value to the
Company’s customers on a stand-alone basis. When a
transaction involves more than one product or service, revenue is
allocated to each deliverable based on its relative fair value;
otherwise, revenue is recognized as products are delivered or as
services are provided over the term of the customer
contract.
Property and Equipment
Property
and equipment are carried at historical cost less accumulated
depreciation. Depreciation is based on the estimated service lives
of the depreciable assets and is calculated using the straight-line
method. Expenditures that increase the value or productive capacity
of assets are capitalized. Fully depreciated assets are retained in
the property and equipment, and accumulated depreciation accounts
until they are removed from service. When property and equipment
are retired, sold or otherwise disposed of, the asset’s
carrying amount and related accumulated depreciation are removed
from the accounts and any gain or loss is included in operations.
Repairs and maintenance are expensed as incurred.
The
estimated useful lives of property and equipment are generally as
follows:
|
|
Office
furniture and fixtures
|
4
|
Computer
equipment
|
4
|
Appliques
|
10
|
Website
development
|
2
|
Impairment of long-lived assets
The
Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable, or at least annually. The
Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of
the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value.
The Company did not consider it necessary to record any impairment
charges during the periods ended September 30, 2016 and December
31, 2015, respectively.
Fair value of financial instruments
The
Company adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) 820, “Fair Value Measurements and
Disclosures”, for assets and liabilities measured at fair
value on a recurring basis. ASC 820 establishes a common definition
for fair value to be applied to existing US GAAP that require the
use of fair value measurements which establishes a framework for
measuring fair value and expands disclosure about such fair value
measurements.
ASC
820 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally,
ASC 820 requires the use of valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable
inputs. These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active
markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that
are corroborated by market data
Level 3: Unobservable inputs for which there is little or no market
data, which require the use of the reporting entity’s own
assumptions.
The
following table presents a reconciliation of the derivative
liability measured at fair value on a recurring basis using
significant unobservable input (Level 3) from January 1, 2016 to
September 30, 2016:
|
Conversion
feature
Derivative
Liability
|
|
|
Balance
at January 1, 2016
|
$
614,036
|
$
4,355
|
$
618,391
|
Change
in fair value included in earnings
|
(422,974
)
|
(2,815
)
|
(425,789
)
|
Net
effect on additional paid in capital
|
(191,062
)
|
-
|
(191,062
)
|
Balance
at September 30, 2016
|
$
-
|
$
1,540
|
$
1,540
|
The
Company did not identify any other assets or liabilities that are
required to be presented on the consolidated balance sheets at fair
value in accordance with the accounting guidance. The carrying
amounts reported in the balance sheet for cash, accounts payable,
and accrued expenses approximate their estimated fair market value
based on the short-term maturity of the instruments.
Share-Based Payments
Compensation
cost relating to share based payment transactions be recognized in
the financial statements. The cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized
as an expense over the employee’s requisite service period
(generally the vesting period of the equity award).
Recent Accounting Pronouncements
The
Company does not believe that any recently issued accounting
pronouncements will have a material impact on its financial
statements.