NextPlat Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the condensed consolidated financial statements and the notes thereto contained elsewhere in this report. Statements made in this Item 2, “Management’s Discussion and Analysis and Plan of Financial Condition and Results of Operations,” and elsewhere in this quarterly report on Form 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 for the year ended December 31, 2020, filed with the SEC on March 22, 2021, and the Company’s subsequent public filings with the SEC. Corporate Information We are 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. COVID-19 Update In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic prompting government-imposed quarantines, suspension of in-person attendance of academic programs, and cessation of certain travel and business closures. The United States has entered a recession as a result of the COVID-19 pandemic, which may prolong and exacerbate the negative impact on us. Although we expect the availability of vaccines and various treatments with respect to COVID-19 to have an overall positive impact on business conditions in the aggregate over time, the exact timing of these positive developments is uncertain. In December 2020, the United States began distributing two vaccines that, in addition to other vaccines under development, are expected to help to reduce the spread of the coronavirus that causes COVID-19 once they are widely distributed. If the vaccines prove less effective than currently understood by the scientific community and the United States Food and Drug Administration, or if there are problems with the acceptance, availability, timing or other difficulties with widely distributing the vaccines, the pandemic may last longer, and could continue to impact our business for longer, than we currently expect. In response to COVID-19, governmental authorities have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter in place orders and recommendations to practice social distancing. Although many governmental measures have had specific expiration dates, some of those measures have already been extended more than once, and there is considerable uncertainty regarding the duration of such measures and the implementation of any potential future measures, especially if cases increase across the United States, with the potential for additional challenges resulting from the emergence of new variants of COVID-19, some of which may be more transmissible than the initial strain. Such measures have impacted, and may continue to affect, our workforce, operations, suppliers and customers. We reduced the size of our workforce following the onset of COVID-19 and may need to take additional actions to further reduce the size of our workforce in the future; such reductions incur costs, and we can provide no assurance that we will be able to rehire our workforce in the event our business experiences a subsequent recovery. We took steps to curtail our operating expenses and conserve cash. We may elect or need to take additional remedial measures in the future as the information available to us continues to develop, including with respect to our workforce, relationships with our third-party vendors, and our customers. There is no certainty that the remedial measures we have implemented to date, or any additional remedial steps we may take in the future, will be sufficient to mitigate the risks posed by COVID-19. Further, such measures could potentially materially adversely affect our business, financial condition and results of operations and create additional risks for us. Any escalation of COVID-19 cases across many of the markets we serve could have a negative impact on us. Specifically, we could be adversely impacted by limitations on our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring our stores to close or employees to remain at home; limitation of carriers to deliver our product to customers; product shortages; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us in a timely manner. These events could have a material, adverse effect on our results of operations, cash flows and liquidity. 28 The ultimate magnitude of COVID-19, including the full extent of the material negative impact on our financial and operational results, will depend on future developments, such as the duration and severity of the pandemic, the extent of any additional increases in cases across the United States, and the related length of its impact on the global economy, as well as the timing and availability of effective medical treatments and vaccines, which remain uncertain and cannot be predicted at this time. The resumption of our normal business operations may be delayed or constrained by lingering effects of COVID-19 on our customers, suppliers and/or third-party service providers. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not currently ascertainable. Due to the daily evolution of the COVID-19 pandemic and the responses to curb its spread, we cannot predict the full impact of the COVID-19 pandemic on our business and results of operations, but our business, financial condition, results of operations and cash flows have already been materially adversely impacted, and we anticipate they will continue to be adversely affected by the COVID-19 pandemic and its negative effects on global economic conditions. Any recovery from the COVID-19 pandemic and related economic impact may also be slowed or reversed by a variety of factors, such as any increase in COVID-19 infections. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of its national and, to some extent, global economic impact, including the current recession and any recession that may occur in the future. The success of our business depends on our global operations, including our supply chain and consumer demand, among other things. As a result of COVID-19, we have experienced shortages in inventory due to manufacturing issues, a reduction in the volume of sales in some parts of our business, such as rental sales and direct website sales, and a reduction in personnel due to lockdown related issues. Our results of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 reflect this impact; however, we expect that this trend may continue and the full extent of the impact is unknown. In recent months, some governmental agencies in the US and Europe, where we produce the largest percentage of our sales, have lifted certain restrictions. However, if customer demand continues to be low, our future equipment sales, subscriber activations and sales margin will be impacted. We have implemented several measures to minimize the impact on our operations and sustain our liquidity position, including receiving support through the US payroll protection program loan (“PPP”), a low interest, fixed rate loan provided under the UK’s Coronavirus Business Interruption Loan (“CBILS”) and the deferral of certain UK taxes. Recent Events As of June 30, 2021, there were 50,000,000 shares of common stock authorized and 5,476,918 shares issued and outstanding. On February 19, 2021, the Board of Directors of the Company unanimously adopted an amendment to the Company’s Articles of Incorporation to effect, a reverse stock split at a ratio of (i) no less than 1-for-2 shares of Common Stock, and (ii) no more than 1-for-5 shares of Common Stock, the exact ratio to be determined in the sole discretion of the Board of Directors, at any time before August 31, 2021. The Board of Directors has obtained (by written consent) the approval of the Company’s stockholders who, in the aggregate, own 2,686,337 shares of Common Stock, or 63.5% of the outstanding shares of Common Stock of the Company prior to the Reverse Split Action. On January 12, 2021, the Company issued an aggregate of 30,000 common stock upon the conversion of $30,000 of its convertible debt, at the conversion rate of $1.00 per share. 29 On February 23, 2021, the Company issued an aggregate of 80,289 common stock upon the conversion of $80,289 of its convertible debt, at the conversion rate of $1.00 per share. On February 23, 2021, the Company issued an aggregate of 120,000 common stock upon the conversion of $150,000 of its convertible debt, at the conversion rate of $1.25 per share. On February 23, 2021, the Company issued an aggregate of 1,000 common stock for services in the amount of $14,200. On March 1, 2021, the Company issued an aggregate of 149,532 common stock upon the conversion of $149,532 of its convertible debt, at the conversion rate of $1.00 per share. On March 1, 2021, the Company issued an aggregate of 38,616 common stock upon the conversion of $48,270 of its convertible debt, at the conversion rate of $1.25 per share. On March 24, 2021, the Company’s shareholders via majority shareholder consent authorized a stock split not to exceed 1 for 5 reverse stock split. A definitive Information Statement relating to the shareholder consent was filed with the SEC on March 13, 2021. The Company’s Board of Directors subsequently approved a 1-for-5 reverse stock split. The Company has filed a Certificate of Change to its Amended and Restated Articles of Incorporation to effect a reverse stock split of its issued and outstanding common stock, at a ratio of 1-for-5. The effective time of the reverse stock split was 12:01 a.m. ET on May 28, 2021. The Company’s common stock began trading on a split-adjusted basis commencing upon market open on May 28, 2021. The common stock has been assigned a new CUSIP number, 68557F 209. The warrants were assigned the CUSIP number, 68557F 118. No fractional shares of common stock will be issued as a result of the reverse stock split. Stockholders of record who would otherwise be entitled to receive a fractional share received a whole share. On May 20, 2021, the Company issued an aggregate of 29,800 common stock upon the conversion of $29,800 of its convertible debt, at the conversion rate of $1.00 per share. On May 27, 2021, the Company issued an aggregate of 897,231 common stock upon the conversion of $1,156,377 of its convertible debt, at a weighted average conversion rate of $1.28 Listing on the Nasdaq Capital Market On Nasdaq on May 28, 2021, our common stock and Warrants commenced trading on Nasdaq under the symbols “OSAT” and “OSATW,” respectively. 30 June Public Offering On May 28, 2021, Company, entered into an Underwriting Agreement with Maxim Group LLC (the “Underwriter”) pursuant to which the Company agreed to issue and sell to the Underwriter in an underwritten public offering (the June Offering) 2,880,000 units consisting of one share of common stock and one warrant exercisable for one share of common stock at a public offering price of $5.00 per unit (after giving effect to a 1-for-5 reverse stock split, discussed above) for aggregate gross proceeds of approximately $14,400,000 before deducting underwriting discounts, commissions, and other offering expenses. The common stock and warrants were immediately separable and were issued separately. The common stock and warrants began trading on the Nasdaq Capital Market, on May 28, 2021, under the symbols “OSAT” and “OSATW,” respectively. In addition, the Company granted the Underwriter a 45-day option to purchase an additional 432,000 shares of common stock and/or warrants to purchase up to an aggregate of 432,000 shares of common stock, in any combination thereof, at the public offering price per security, less the underwriting discounts and commissions, to cover over-allotments, if any. The June Offering closed on June 2, 2021. In connection with closing of the June Offering, the Underwriter partially exercised its overallotment option and purchased an additional 432,000 warrants at $0.01 per warrant for additional gross proceeds to the Company of $4,320. On June 28, 2021, the Underwriter, upon the exercise in full of the balance of its over-allotment option, purchased 432,000 additional shares of the common stock for additional gross proceeds to the Company of $2,155,680. We have issued to the Underwriter warrants to purchase up to a total of 144,000 shares of common stock (5% of the shares of common stock included in the Units, excluding the over-allotment, if any) (the “Underwriter Warrants”). The Underwriter Warrants are exercisable at any time, and from time to time, in whole or in part, during the period commencing 180 days from the effective date of the registration statement, and expire five years from the effective date of the offering, which period is in compliance with FINRA Rule 5110(e). The Underwriter Warrants are exercisable at a per share price equal to $5.50 per share, or 110% of the public offering price per unit in the offering. The Underwriter Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The underwriter (or permitted assignees under Rule 5110(e)(2)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the effective date of the registration statement. In addition, the warrants provide for certain piggyback registration rights. The piggyback registration rights provided will not be greater than five years from the effective date of the registration statement in compliance with FINRA Rule 5110(g)(8). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the Underwriter Warrants. The exercise price and number of shares issuable upon exercise of the Underwriter Warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price. On June 10, 2021, the Company issued 1,000 shares of common stock, for the exercise of 1,000 warrants, at an exercise price of $5.00, for cash consideration of $5,000. Enterprise Resource Planning System (ERP) On August 10, 2021, the Company signed an agreement with NetSuite to purchase and implement an enterprise resource planning ERP system to replace our legacy business applications. The new ERP platform will provide better support for our changing business needs and plans for future growth. The project includes software, external implementation assistance, testing, training, and support. The entire cost of the ERP software and implementation will be deferred until 2022. We anticipate that approximately 40% of the cost will be expensed in the period incurred and 60% will be capitalized and depreciated over its useful life. Results of Operations for the Three and Six Months Ended June 30, 2021, compared to the Three and Six Months Ended June 30, 2020 Revenue . Net Sales for the six months ended June 30, 2021, consisted primarily of sales of satellite phones, tracking devices, accessories and airtime plans. For the six months ended June 30, 2021, revenues generated were $3,417,688 compared to $2,688,357 of revenues for the six months ended June 30, 2020, an increase in total revenues of $729,331 or 27.14%. Total net sales for Global Telesat Communications Ltd. were $2,398,012 for the six months ended June 30, 2021, as compared to $1,666,937 for the six months ended June 30, 2020, an increase of $731,075 or 43.9%. Total net sales for Orbital Satcom Corp. were $1,018,776 for the six months ended June 30, 2021, as compared to $1,021,420, for the six months ended June 30, 2020, a decrease of $2,642 or 0.2%. The Company attributes the changes in revenue to new product lines and significant increases in US Amazon sales, offset by the change in exchange rates from GBP:USD. Net sales for the three months ended June 30, 2021, consisted primarily of sales of satellite phones, tracking devices, accessories and airtime plans. For the three months ended June 30, 2021, revenues generated were $1,956,260 compared to $1,220,254 of revenues for the three months ended June 30, 2020, a increase in total revenues of $736,005 or 60.3%. Total net sales for Global Telesat Communications Ltd. were $1,392,322 for the three months ended June 30, 2021, as compared to $716,820 for the three months ended June 30, 2020, an increase of $675,502 or 94.3%. Total net sales for Orbital Satcom Corp. were $563,938 for the three months ended June 30, 2021 as compared to $503,434, for the three months ended June 30, 2020, an increase of $60,504 or 12.0%. 31 Cost of Sales . During the six months ended June 30, 2021, cost of sales increased to $2,438,681 compared to $2,082,664, for the six months ended June 30, 2020, an increase of $356,017 or 17.09%. Gross profit margins during the six months ended June 30, 2021 were 28.65% as compared to 22.53% for the comparable period in the prior year. During the three months ended June 30, 2021, cost of sales increased to $1,414,770 compared to $962,562, for the three months ended June 30, 2020, an increase of $452,208 or 46.98%. Gross profit margins during the three months ended June 30, 2021, were 27.69% as compared to 21.12% for the comparable period in the prior year. As indicated by the results for the three and six months, our sales margins have increased by 6.57% and 6.12%, respectively. However, we cannot be certain that we can maintain the increased margin levels. The increase is primarily due to a greater percentage of high margin sales in the second quarter ended June 30, 2021, as compared to the same period in 2020, as well to as an increase in margins on certain sales that resulted from customers bearing value added tax (VAT) that was previously borne by the Company. Operating Expenses . Total operating expenses for the six months ended June 30, 2021 were $1,827,272, an increase of $841,096 or 85.29%, from total operating expenses for the six months ended June 30, 2020 of $986,177 . Total operating expenses for the three months ended June 30, 2021 were $1,090,826, an increase of $643,890 or 144.07%, from total operating expenses for the three months ended June 30, 2020 of $446,936 . Factors contributing to the decrease are described below. Selling, general and administrative expenses were $443,696 and $304,171 for the six months ended June 30, 2021 and 2020, respectively, an increase of $139,525 or 45.87%. Selling, general and administrative expenses were $282,006 and $146,965 for the three months ended June 30, 2021 and 2020, respectively, an increase of $135,041 or 91.89%. The increase, for the three and six months ended June 30, 2021, is attributable to certain SG&A expenses such bank charges, credit card fees, Amazon fees, and shipping charges that fluctuate with sales volatility. Salaries, wages and payroll taxes were $687,712 and $346,046 for the six months ended June 30, 2021 and 2020, respectively, an increase of $341,666, or 98.73%. Salaries, wages and payroll taxes were $479,538 and $150,404 for the three months ended June 30, 2021, and 2020, respectively, an increase of $329,134, or 218.83%. The increase is a result of executive management adjusted salaries, increased regular staff, and the payment of executive bonuses related to successful up-listing to Nasdaq approved by the board, for the three and six months ended June 30, 2021. Professional fees were $548,916 and $191,665 for the six months ended June 30, 2021 and 2020, respectively, an increase of $357,251, or 186.39%. Professional fees were $256,034 and $76,776 for the three months ended June 30, 2021 and 2020, respectively, an increase of $179,258, or 233.48%. The increase during the three and six months ended June 30, 2021 as compared to the same period in 2020, is attributable to an increase in board members, increased investor relations and other professional fees to assist in capital raising efforts as well as up-listing to Nasdaq. Depreciation and amortization expenses were $146,948 and $144,295 for the six months ended June 30, 2021 and 2020, respectively, an increase of $2,653 or 1.84%. Depreciation and amortization expenses were $73,248 and $72,791 for the three months ended June 30, 2021 and 2020, respectively, an increase of $457 or 0.63%. The increase was primarily attributable to the addition of fixed assets offset by fully amortized assets, as compared to the same period in the prior year. We expect our expenses in each of these areas to continue to increase during fiscal 2021 and beyond as we expand our operations and begin generating additional revenues under our current business. Similarly, we are unable at this time to estimate the amount of the expected increases. Total Other (Income) Expense . Our total other expense (income) were $1,413,271 compared to $(122,190) during the six months ended June 30, 2021 and 2020, respectively, an increase of $1,535,461 or 1,256.62%. Our total other expense was $909,058 compared to income of $(215,810) during the three months ended June 30, 2021 and 2020, respectively. The increase in the three and six months ended June 30, 2021, as compared to the prior year, is attributable to increased in interest expense $940,907 and $1,461,601, respectively, relating the beneficial conversion feature for the convertible debt. Net Loss . We recorded net loss before income tax of $1,458,394 and $2,261,536 for the three and six months ended June 30, 2021 as compared to a net income of $26,566 and a net loss of $258,294, for the three and six months ended June 30, 2020. The increase in the loss is a result of the factors as described above. 32 Comprehensive Gain (Loss) . We recorded a loss for foreign currency translation adjustments for the three and six months ended June 30, 2021 of $14,345 and $12,734. For the three and six months ended June 30, 2020 we recorded a gain of $5,602 and a loss of $8,866. 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 June 30, 2021, we had a cash balance of $14,415,649. Our working capital is a positive $14,118,502 at June 30, 2021. Our current assets at June 30, 2021 increased $14,932,625 or 1,088% from December 31, 2020 and included cash, accounts receivable, VAT receivable, prepaid expenses, unbilled revenue, inventory and other current assets. Our current liabilities at June 30, 2021 increased $670,065 or 44.18% from December 31, 2020 and included our accounts payable, due to related party, provision for income taxes, contract liabilities, lease liabilities and other liabilities in the ordinary course of our business. At June 30, 2021, the Company had an accumulated deficit of $16,140,089, positive working capital of approximately $14,118,502 and net loss of approximately $2,261,536 during the six months ended June 30, 2021. For the year ended December 31, 2020, the auditors’ opinion contained a going concern paragraph, which stated that the Company had an accumulated deficit of $13,878,553, negative working capital of $567,022 and net loss of $2,763,375, during the year ended December 31, 2020. As of the date of this report, the Company’s existing cash resources and existing borrowing availability are sufficient to support planned operations for the next 12 months. As a result, management believes that the Company’s existing financial resources are sufficient to continue operating activities for at least one year past the issuance date of the financial statements. These financial statements have been prepared by management in accordance with GAAP and this basis assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. These financial statements do not include any adjustments that may result from the outcome of this uncertainty. Operating Activities Net cash flows used by operating activities for the six months ended June 30, 2021 amounted to $1,270,837 and were primarily attributable to our net loss of $2,261,536, total amortization expense of $12,500 and depreciation of $134,448, amortization of discount on debt of $1,425,365, amortization of right to use of $15,476 gain on extinguishment of debt of $20,832, stock based compensation of $14,200 and net change in assets and liabilities of $590,459, primarily attributable to an increase in accounts receivable of $158,079, an increase in inventory of $790,536, an increase in unbilled revenue of $10,171, an increase in VAT receivable of $279,215, an increase in other current assets of $3,664, increase in accounts payable of $662,022, an increase in contract liabilities of $4,469, a decrease in lease liabilities of $15,512, and an increase in provision for income taxes of $227. Net cash flows provided by operating activities for the six months ended June 30, 2020 amounted to $47,890 and were primarily attributable to our net loss of $258,294, total amortization expense of $12,500 and depreciation of $131,795, amortization of discount on debt of $128,702 gain on extinguishment of debt of $269,261 and net change in assets and liabilities of $283,285, primarily attributable to a decrease in accounts receivable of $91,738, a decrease in inventory of $7,877, decrease in prepaid expenses of $14,506, a decrease in unbilled revenue of $11,114, a decrease in right of use of $19,163, a decrease in other current assets of $72,392, increase in accounts payable of $109,681, a decrease in contract liabilities of $5,493, a decrease in lease liabilities of $17,200, and a decrease in provision for income taxes of $1,330. Investing Activities Net cash flows used in investing activities were $27,248 and $26,159 for the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021 and June 30, 2020, we purchased property and equipment of $27,248 and $26,159, respectively. 33 Financing Activities Net cash flows provided by financing activities were $14,997,706 for the six months ended June 30, 2021 and were for, proceeds from; a convertible note payable of $350,000, related party payable of $114,981, the June Offering, of $14,649,573, proceeds of warrant exercise of $5,000 which was offset by repayments of notes payable for $121,848. Net cash flows provided by financing activities were $225,201 and $602,691, for the six months ended June 30, 2020 and 2019, respectively. Net cash flows provided by financing activities were $225,201 for the six months ended June 30, 2020 and were for proceeds from related party payable of $58,917, proceeds from convertible notes payable of $157,500, proceeds from note payable provided by the US Payroll Protection Program (“PPP”) of $20,832 and offset by repayments of line of credit for $12,048. 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. 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 In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the assumptions used to calculate stock-based compensation, derivative liabilities and common stock issued for services. Basis of Presentation and Principles of Consolidation The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries, Orbital Satcom Corp. and Global Telesat Communications Ltd. All material intercompany balances and transactions have been eliminated in consolidation. 34 Accounts Receivable The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are offset against sales and relieved from accounts receivable, after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2021, and 2020, there is an allowance for doubtful accounts of $15,782 and $14,155, respectively. Inventories Inventories are valued at the lower of cost or net realizable value, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold. Research and Development The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. For the six months ended June 30, 2021 and 2020, there were no additional expenditures on research and development. Foreign Currency Translation The Company’s reporting currency is U.S. Dollars. The accounts of one of the Company’s subsidiaries, GTCL, is maintained using the appropriate local currency, Great British Pound, 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 reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations 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 six months ended June 30, 2021, closing rate at 1.382800 US$: GBP, quarterly average rate at 1.397146 US$: GBP and yearly average rate at 1.388107 US$: GBP, for the six months ended June 30, 2020, closing rate at 1.245481 US$: GBP, quarterly average rate at 1.281097 US$: GBP, for the year ended 2020 closing rate at 1.3665 US$: GBP, average rate at 1.286618 US$: 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. 35 The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, : Narrow-Scope Improvements and Practical Expedient , which is to (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact as a result of adopting this ASU on the financial statements and related disclosures. The Company provides product warranties with varying lengths of time and terms. The product warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company has historically experienced a low rate of product returns under the warranty program. A variety of technical services can be contracted by our customers for a designated period of time. The service contracts allow customers to call the Company for technical support, replace defective parts and to have onsite service provided by the Company’s third-party contract service provider. The Company records revenues for contract services at the amount of the service contract, but such amount is deferred at the beginning of the service term and amortized prorated over the life of the contract. 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. Contract liabilities is shown separately in the condensed consolidated balance sheets as current liabilities. At June 30, 2021, we had contract liabilities of approximately $41,173. At December 31, 2020, we had contract liabilities of approximately $36,704. 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. 36 The estimated useful lives of property and equipment are generally as follows: Years Office furniture and fixtures 4 Computer equipment 4 Rental 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 June 30, 2021 and December 31, 2020, respectively. Fair value of financial instruments The Company adopted FASB 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 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 are 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). 37 Recent Accounting Pronouncements In November 2018, the FASB amended Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 with ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for us on January 1, 2019, however the Company did not have any leases that met the criteria as established above, until July 24, 2019, when the Company entered into a three-year lease for its UK office and warehouse for annual rent of £25,536 or GBP: USD using exchange rate close for the six months ended June 30, 2021, for liability of 1.3828 or $35,311. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. At June 30, 2021, the Company had current and long-term operating lease liabilities of $30,484 and $6,703, respectively, and right of use assets of $40,130. Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this Item.