Item 2. Management’s Discussion and Analysis
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 GTC 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.
30
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 nine months ended September 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
Reverse Stock Split
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 Board
subsequently approved a 1-for-5 reverse stock split. The Company 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 were 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.
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.
31
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.
Agreement with Alibaba
On
July 13, 2021, the Company announced that its Global Telesat
Communications Limited (“GTC”) unit had entered into an agreement with Alibaba.com, the B2B (Business-to-Business)
e-commerce website owned and operated by Alibaba Group Holding Limited, also known as Alibaba Group (NYSE: BABA; HKEX: 9988), a Chinese
multinational technology company specializing in e-commerce, retail, internet, and technology. GTC will be a Gold-level Supplier on Alibaba.com ,
the world’s largest Business-to-Business (B2B) e-commerce website.
Under
the agreement, GTC significantly expands its 24/7/365 e-commerce presence with the launch of its latest global storefront. Orbsat expects
to launch its new storefront during the third quarter with an extensive range of satellite IoT and connectivity products. These will
include Orbsat’s specialized satellite tracking products, some of which operate using the Company’s many ground station-based
network processors, and can be used to track and monitor the location of cars, trucks, trailers, boats, containers, animals, and
other remote assets. Orbsat’s full catalog of 500+ products and connectivity services will be available on Alibaba.com by the start
of the first quarter of 2022. The Company will pay an annual fee of $5,999 under the agreement. The agreement will continue on a
year-to-year basis.
32
Equity Issuances
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.
On July 6, 2021, the Company
issued 78,500 shares of common stock, for the exercise of 78,500 warrants, at an exercise price of $5.00, for cash consideration of $392,500.
On July 8, 2021, the Company
issued 425,000 shares of common stock, for the exercise of 425,000 warrants, at an exercise price of $5.00, for cash consideration of
$2,125,000.
On July 12, 2021, the Company
issued 2,000 shares of common stock, for the exercise of 2,000 warrants, at an exercise price of $5.00, for cash consideration of $10,000.
On July 13, 2021, the Company
issued 59,853 shares of common stock, for the exercise of 59,853 warrants, at an exercise price of $5.00, for cash consideration of $299,265.
On
July 14, 2021, the Company issued 278,555 shares of common stock, for the exercise of 278,555 warrants, at an exercise price of $5.00,
for cash consideration of $1,392,775.
On
July 15, 2021, the Company issued 5,000 shares of common stock in connection with the exercise of 5,000 options, for cash consideration
of $5,000.
On
July 19, 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.
On
July 30, 2021, the Company issued 80,000 shares of common stock, for the exercise of 80,000 warrants, at an exercise price of $5.00,
for cash consideration of $400,000.
On
September 3, 2021, the Company issued 10,000 shares of common stock in connection with restricted stock awards, with a fair market value
of $5.35 per share, from the date of the award.
On
September 14, 2021, the Company issued 40,000 shares of common stock in connection with restricted stock awards, with a fair market value
of $5.35 per share, from the date of the award.
On
September 22, 2021, the Company issued a total of 12,437 common shares for the exercise of 14,200 options through a cashless exercise
using 2,763 options for the $1.00 exercise price and in connection with a 1,000 restricted stock award.
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 Nine months Ended September 30, 2021, compared to the Three and Nine months Ended September 30, 2020
Revenue .
Net Sales for the nine months ended September 30, 2021, consisted primarily of sales of satellite phones, tracking devices, accessories
and airtime plans. For the nine months ended September 30, 2021, revenues generated were $5,667,966 compared to $4,163,750 of revenues
for the nine months ended September 30, 2020, an increase in total revenues of $1,504,216 or 36.1%. Total net sales for Global Telesat
Communications Limited were $3,897,254 for the nine months ended September 30, 2021, as compared to $2,667,144 for the nine months
ended September 30, 2020, an increase of $1,230,110 or 46.1%. Total net sales for Orbital Satcom Corp. were $1,770,712 for the nine months
ended September 30, 2021, as compared to $1,496,606, for the nine months ended September 30, 2020, an increase of $274,106 or 18.3%.
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 September 30, 2021, consisted primarily of sales of satellite phones, tracking devices, accessories
and airtime plans. For the three months ended September 30, 2021, revenues generated were $2,250,278 compared to $1,475,393 of revenues
for the three months ended September 30, 2020, an increase in total revenues of $774,885 or 52.5%. Total net sales for Global Telesat
Communications Limited. were $1,498,341 for the three months ended September 30, 2021, as compared to $1,003,875 for the three
months ended September 30, 2020, an increase of $494,466 or 49.3%. Total net sales for Orbital Satcom Corp. were $751,937 for the three
months ended September 30, 2021 as compared to $471,518, for the three months ended September 30, 2020, an increase of $280,419 or 59.5%.
33
Cost
of Sales . During the nine months ended September 30, 2021, cost of sales increased to $4,195,823 compared to $3,159,593,
for the nine months ended September 30, 2020, an increase of $1,036,230 or 32.8%. Gross profit margins during the nine months ended September
30, 2021 were 26.0% as compared to 24.1% for the comparable period in the prior year. During the three months ended September 30, 2021,
cost of sales increased to $1,757,142 compared to $1,076,929, for the three months ended September 30, 2020, an increase of $680,213
or 63.2%. Gross profit margins during the three months ended September 30, 2021, were 21.9% as compared to 27.0% for the comparable
period in the prior year. As indicated by the results for the three and nine months, our sales margins have (decreased) increased by
(5.1%) and 1.9%, 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 September 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 nine months ended September 30, 2021 were $4,557,254, an increase of $2,698,242
or 145.14%, from total operating expenses for the nine months ended September 30, 2020 of $1,859,012 . Total operating expenses
for the three months ended September 30, 2021 were $2,729,982, an increase of $1,857,147or 212.77%, from total operating expenses for
the three months ended September 30, 2020 of $872,835 . Factors contributing to the decrease are described below.
Selling,
general and administrative expenses were $962,892 and $486,984 for the nine months ended September 30, 2021 and 2020, respectively,
an increase of $475,908 or 97.73%. Selling, general and administrative expenses were $519,196 and $182,813 for the three months ended
September 30, 2021 and 2020, respectively, an increase of $336,383 or 184.00%. The increase, for the three and nine months ended September
30, 2021, is attributable to certain variable expenses which are related to increase in sales such bank charges, credit card fees, Amazon
fees, and shipping charges that fluctuate with sales volatility, in combination with increased travel, medical and director and officer
insurance and auto expenses related to the increase in personnel, in addition to marketing and information technology expenses related
to growth.
Salaries,
wages and payroll taxes were $1,178,267 and $542,675 for the nine months ended September 30, 2021 and 2020, respectively, an
increase of $635,592, or 117.12%. Salaries, wages and payroll taxes were $490,555 and $196,629 for the three months ended September 30,
2021, and 2020, respectively, an increase of $293,926, or 149.48%. For the three and nine months ended September 30, 2021, the increase
is attributable to an increase in officers from two to six and an increase in overall personnel to support growth, as well as board approved
executive bonuses related to successful up-listing to Nasdaq for the nine months ended September 30, 2021.
Stock
based compensation were $1,321,564 and $130,400 for the three and nine months ended September 30, 2021 and 2020, respectively,
an increase of $1,191,164, or 913.47%. The increase is directly related to employment agreements for two additional officers, during
the three months ended September 30, 2021.
Professional
fees were $869,127 and $480,961 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $388,166,
or 80.71%. Professional fees were $320,211 and $289,296 for the three months ended September 30, 2021 and 2020, respectively, an increase
of $30,915, or 10.7%. The increase during the three and nine months ended September 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 $225,404 and $217,992 for the nine months ended September 30, 2021 and 2020, respectively, an
increase of $7,412 or 3.40%. Depreciation and amortization expenses were $78,456 and $73,697 for the three months ended September 30,
2021 and 2020, respectively, an increase of $4,759 or 6.45%. 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 $1,481,974 compared to $503,890 during the nine months ended
September 30, 2021 and 2020, respectively, an increase of $978,084 or 194.11%. The increase in the nine months ended September 30, 2021,
as compared to the prior year, is attributable to; increases in interest expense of $666,179, interest earned of $3,066 and exchange
rate fluctuations of $34,749 and decreases in gain from extinguishment of debt of $248,429 and other income of $31,793.
Our
total other expense was $68,703 compared to $626,080 during the three months ended September 30, 2021 and 2020, respectively. The decrease
of $557,377 for the three months ended September 30, 2021, as compared to the prior year, is attributable to a decrease in interest expense
$639,075, an increase of exchange rate fluctuations of $84,509, offset by interest earned of $3,079.
Net
Loss . We recorded net loss before income tax of $2,305,549 and $4,567,085 for the three and nine months ended September 30, 2021
as compared to a net loss of $1,100,451 and $1,358,745, for the three and nine months ended September 30, 2020. The increase in the loss
is a result of the factors as described above.
34
Comprehensive
Income (Loss) . We recorded a gain for foreign currency translation adjustments for the three and nine months ended
September 30, 2021 of $55,584 and $42,850. For the three and nine months ended September 30, 2020 we recorded a
gain of $5,602 and a loss of $19,840.
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, 2021, we had a cash balance of $17,138,644. Our working capital is a positive $17,768,275
at September 30, 2021.
Our
current assets at September 30, 2021 increased $17,640,784 or 1,285% from December 31, 2020 and included cash, accounts receivable,
VAT receivable, prepaid expenses, unbilled revenue, inventory and other current assets.
Our
current liabilities at September 30, 2021 decreased $271,549 or 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
September 30, 2021, the Company had an accumulated deficit of $18,445,638, positive working capital of approximately $17,768,275
and net loss of approximately $4,567,085 during the nine months ended September 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 $144,055 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 nine months ended September 30, 2021 amounted to $2,997,644 and were primarily
attributable to our net loss of $4,567,085, total amortization expense of $18,750 and depreciation of $206,654, amortization of discount
on debt of $1,425,365, amortization of right to use of $24,948 gain on extinguishment of debt of $20,832, stock based compensation of
$1,321,564 and net change in assets and liabilities of $1,421,208, primarily attributable to an increase in accounts receivable
of $132,808, an increase in inventory of $621,487, an increase in unbilled revenue of $22,353, an increase in VAT receivable of
$446,657, an increase in other current assets of $728, decrease in accounts payable of $168,557, an increase in contract liabilities
of $4,252, a decrease in lease liabilities of $24,898, and an increase in provision for income taxes of $37,603.
Net
cash flows provided by operating activities for the nine months ended September 30, 2020 amounted to $504,800 and were primarily
attributable to our net loss of $1,358,745, total amortization expense of $18,750 and depreciation of $199,242, amortization of discount
on debt of $752,130, stock based compensation of $130,400, stock issued for services of $62,750, amortization on right to use of $23,773, gain on extinguishment of debt of $269,261 and net change in assets and liabilities
of $63,839, primarily attributable to a decrease in accounts receivable of $81,739, an increase in inventory of $135,648, decrease in
prepaid expenses of $16,812, a decrease in unbilled revenue of $877, a decrease in other current assets of $57,800, decrease in accounts
payable of $61,747, a decrease in contract liabilities of $780, a decrease in lease liabilities of $21,562, and a decrease in provision
for income taxes of $1,330.
Investing
Activities
Net
cash flows used in investing activities were $95,598 and $30,752 for the nine months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021 and September 30, 2020, we purchased property and equipment of $95,598 and $30,752, respectively.
35
Financing
Activities
Net
cash flows provided by financing activities were $19,466,289 for the nine months ended September 30, 2021 and were for, proceeds
from; a convertible note payable of $350,000, related party payable of $34,238, the June Offering, of $14,649,573, proceeds of warrant
exercise of $4,629,540 which was offset by repayments of notes payable for $121,848, proceeds of options exercised of $5,000,
payments of coronavirus interruption loan of $11,189 and repayments to related party payable of $69,025.
Net
cash flows provided by financing activities were $1,296,333 for the nine months ended September 30, 2020 and were for
proceeds from convertible notes payable of $958,000, proceeds from note payable of $343,907, proceeds from exercise of options
of $33,000, offset by repayments to related party payable of $18,889 and repayments of line of credit for
$19,685.
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.
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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 September 30, 2021, and December 31, 2020, there is
an allowance for doubtful accounts of $15,782 and $15,596, 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 nine months ended September 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, GTC, 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 three and nine months ended September 30, 2021, closing rate at 1.342642 US$:
GBP, quarterly average rate at 1.3784972 US$: GBP and yearly average rate at 1.3853499 US$: GBP, for the three and nine months
ended September 30, 2020, closing rate at 1.2923 US$: GBP, quarterly average rate at 1.293173 US$: GBP and yearly average rate of 1.271713.
For the year ended December 31, 2020 closing rate at 1.260983 US$: GBP, average rate
at 1.260983 US$: 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.
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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 September 30, 2021, we had contract
liabilities of approximately $40,956. 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.
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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 September 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).
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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 nine months ended September 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
September 30, 2021, the Company had current and long-term operating lease liabilities of $27,801 and $0, respectively, and right of use
assets of $30,658.
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.