NextPlat Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) January 2022 Name Change On January 18, 2022, the Company filed a Certificate of Amendment of the Amended and Restated Articles of Incorporation of the Company with the Secretary of State of the State of Nevada in order to change the Company’s corporate name from Orbsat Corp to NextPlat Corp. This name change was effective as of January 21, 2022. The name change was approved by the Company’s stockholders at the 2021 annual meeting of stockholders held on December 16, 2021. Restricted Stock Award On January 21, 2022, the Company issued 10,000 shares of common stock, pursuant to a restricted stock award, “RSA” granted on January 7, 2022 and effective on January 20, 2022. The award is for 20,000 restricted shares of common, which vest in two equal installments, the first on effective date and the remaining on the one year anniversary of the effective date, with a fair market value of $3.48 per share, on the date of issuance. All shares were fully vested and upon issuance resulted in stock-based compensation of $34,800. Shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as there was no general solicitation, and the transaction did not involve a public offering. For the six months ended June 30, 2022, pursuant to Mr. Fernandez employment agreement, the “June Agreement”, see Note 12, the Company recorded stock-based compensation and additional paid in capital, in the amount of $654,246. This amount is valued from the date of the award May 28, 2021 to June 30, 2022. The value of the award for the year ended December 31, 2021 was $356,712 and for the six months ended June 30, 2022, $297,534. The award is valued over the service period of the June Agreement, five years from the date of grant, May 28, 2021. On June 2, 2022, 200,000 of the RSA or one third of the award, became vested and issuable. On July 22, 2022, the Company issued 200,000 of restricted common stock, see Note 14. Enterprise Resource Planning System (ERP) On April 1, 2022, the Company commenced with its implementation of 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. For the six months ended June 30, 2022, approximately 26% of the cost was expensed in the period incurred to SGA and 74% was capitalized and depreciated over its useful life. The Company intends to maintain dual accounting systems, until such time it is deemed acceptable. On June 22, 2022, the Company formed NextPlat B.V., a Netherlands limited liability company, as a wholly-owned subsidiary. At present, NextPlat B.V., has no active operations. As of June 30, 2022, there were 50,000,000 shares of common stock authorized and 9,293,096 shares issued and outstanding. As of June 30, 2022, there were 2,836,092 registered warrants to purchase common stock authorized and 2,530,092 registered warrants issued and outstanding, at an exercise price of $5.00, and 144,000 unregistered underwriter warrants issued and outstanding, at an exercise price of $5.50. The warrants expire in June of 2026. As of June 30, 2022, there were no shares of Series A, B, C, D, E, F, G, H, I, J, K and L Convertible Preferred Stock authorized, and no shares issued and outstanding. We had net cash used in operations of $1,888,252 during the six months ended June 30, 2022. At June 30, 2022, we had working capital of $21,324,348. Additionally, at June 30, 2022, we had an accumulated deficit of $24,492,159 and stockholder’s equity of $22,698,841. Results of Operations for the Three and Six Months Ended June 30, 2022, compared to the Three and Six Months Ended June 30, 2021 Revenue . Net Sales for the six months ended June 30, 2022, consisted primarily of sales of satellite phones, tracking devices, accessories and airtime plans. For the six months ended June 30, 2022, revenues generated were $6,499,257 compared to $3,417,688 of revenues for the six months ended June 30, 2021, an increase in total revenues of $3,031,569 or 88.7%. Total net sales for Global Telesat Communications Ltd. were $4,542,671 for the six months ended June 30, 2022, as compared to $2,398,912 for the six months ended June 30, 2021, an increase of $2,143,759 or 89.4%. Total net sales for Global Telesat Communications Ltd as valued in its home currency of GBP was £3,496,302, for the six months ended June 30, 2022, as compared to £1,728,190, for the six months ended June 30, 2021, an increase of £1,768,112 or 102.3%. The net effect of the exchange rate GBP:USD on revenue for the six months ended June 30, 2022, was reduced by $310,570, using GBP:USD exchange rate yearly average of 1.299279 for the six months ended June 30, 2022 as compared to GBP:USD 1.38811 for the six months ended June 30, 2021. Total net sales for Orbital Satcom Corp. were $1,906,586 for the six months ended June 30, 2022, as compared to $1,018,776, for the six months ended June 30, 2021, an increase of $887,810 or 87.1%. Net sales for the three months ended June 30, 2022, consisted primarily of sales of satellite phones, tracking devices, accessories, and airtime plans. For the three months ended June 30, 2022, revenues generated were $2,871,479 compared to $1,956,260 of revenues for the three months ended June 30, 2021, an increase in total revenues of $915,219 or 46.8%. Total sales for Global Telesat Communications Ltd. were $1,946,831 for the three months ended June 30, 2022, as compared to $1,392,609 for the three months ended June 30, 2021, an increase of $554,221 or 39.8%. Total sales for Orbital Satcom Corp. were $924,648 for the three months ended June 30, 2022 as compared to $563,650, for the three months ended June 30, 2021, an increase of $360,998 or 64.0%. The Company attributes the changes in revenue to new product lines, increased inventory, and additional e-commerce storefronts, offset by disruption of sales due to economic sanctions imposed on Russia. 37 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Cost of Sales . During the six months ended June 30, 2022, cost of sales increased to $5,080,775 compared to $2,438,681, for the six months ended June 30, 2021, an increase of $2,642,094 or 108.3%. Gross profit margins during the six months ended June 30, 2022 were 21.2%, as compared to 28.7% for the comparable period in the prior year. During the three months ended June 30, 2022, cost of sales increased to $2,304,090 compared to $1,414,770, for the three months ended June 30, 2021, an increase of $889,320 or 62.9%. Gross profit margins during the three months ended June 30, 2022, were 19.8% as compared to 27.69% for the comparable period in the prior year. As indicated by the results for the three and six months, our gross profit margins have decreased by 7.9% and 7.4%, respectively. The decrease is primarily due to significant increases in the cost of inventory and freight, an increase in sales to distributors which attract lower percentage profits, as well as, selling some items at a discounted rate to charities for use in Ukraine. Operating Expenses . Total operating expenses for the six months ended June 30, 2022 were $3,736,346, an increase of $1,909,074 or 104.5%, from total operating expenses for the six months ended June 30, 2021 of $1,827,272 . Total operating expenses for the three months ended June 30, 2022 were $2,100,638, an increase of $1,009,812 or 92.6%, from total operating expenses for the three months ended June 30, 2021 of $1,090,826 . Factors contributing to the decrease are described below. Selling, general and administrative expenses were $1,735,205 and $443,696 for the six months ended June 30, 2022 and 2021, respectively, an increase of $1,291,509 or 291.1%. Selling, general and administrative expenses were $1,160,855 and $282,006 for the three months ended June 30, 2022 and 2021, respectively, an increase of $878,849 or 311.6%. The increase, for the three and six months ended June 30, 2022, is attributable to an increase in non-cash stock-based compensation of $689,046, certain SG&A expenses such bank charges, credit card fees, Amazon fees, and shipping charges that fluctuate with sales volatility, an increase in medical, liability and D&O insurance and an increase in marketing initiatives. Salaries, wages and payroll taxes were $1,306,373 and $687,712 for the six months ended June 30, 2022 and 2021, respectively, an increase of $618,661, or 90.0%. Salaries, wages and payroll taxes were $670,797 and $479,538 for the three months ended June 30, 2022, and 2021, respectively, an increase of $191,259, or 39.9%. The increase is a result of executive management additions, adjusted salaries and an increase in personnel. Professional fees were $483,203 and $548,916 for the six months ended June 30, 2022 and 2021, respectively, a decrease of $65,713, or 12.0%. Professional fees were $156,990 and $256,034 for the three months ended June 30, 2022 and 2021, respectively, a decrease of $99,044, or 38.7%. The decrease during the three and six months ended June 30, 2022 as compared to the same period in 2021, is attributable to the higher fees in the same period of 2021, that were associated with capital raising efforts and up-listing to Nasdaq. Depreciation and amortization expenses were $211,565 and $146,948 for the six months ended June 30, 2022 and 2021, respectively, an increase of $64,617 or 44.0%. Depreciation and amortization expenses were $111,996 and $73,248 for the three months ended June 30, 2022 and 2021, respectively, an increase of $38,748 or 52.9%. The increase was primarily attributable capitalized expenditures for software and website development and equipment and leaseholds for the new corporate office space in Florida. We expect our expenses in each of these areas to continue to increase during fiscal 2022 and beyond as we expand our operations and begin generating additional revenues under our current business. We are unable at this time to estimate the amount of the expected increases. Total Other Expense . Our total other expense was $138,080, compared to $1,413,271 during the six months ended June 30, 2022 and 2021, respectively, a decrease of $1,275,191 or 90.2%. Our total other expense was $122,612 compared to $909,058 during the three months ended June 30, 2022 and 2021, respectively. The decrease for the three and six months ended June 30, 2022, as compared to the prior year, is attributable to the reduction in interest expense from the prior year of $1,454,677, offset by an increase in foreign exchange rate of $168,226 and an increase in interest earned of $9,572. The decrease in interest expense is relative to the elimination of all debt, except for the balance of $248,369, representing the coronavirus loan debt from the prior year. Net Loss . We recorded net loss before income tax of $1,655,861 and $2,505,944 for the three and six months ended June 30, 2022 as compared net loss of $1,458,394 and a net loss of $2,261,536, for the three and six months ended June 30, 2021. The increase in the loss is a result of the factors as described above. Comprehensive Loss We recorded a loss for foreign currency translation adjustments for the three and six months ended June 30, 2022 of $4,788 and $20,118. For the three and six months ended June 30, 2021 we recorded a loss of $14,345 and a loss of $12,734. 38 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At June 30, 2022, we had a cash balance of $20,467,722. Our working capital is $21,324,348 at June 30, 2022. Our current assets at June 30, 2022 increased $3,455,859 or 18% from December 31, 2021 and included cash, accounts receivable, VAT receivable, prepaid expenses, unbilled revenue, inventory and other current assets. Our current liabilities at June 30, 2022 decreased $1,274,282 or 45.8% from December 31, 2021 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, 2022, the Company had an accumulated deficit of $24,492,159, working capital of $21,324,348 and net loss of $2,505,944 during the six months ended June 30, 2022. 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 existing financial resources are sufficient to continue operating activities for at least one year past the issuance date of the financial statements. Operating Activities Net cash flows used by operating activities for the six months ended June 30, 2022 amounted to $1,888,252 and were primarily attributable to our net loss of $2,505,944, total amortization expense of $12,500 and depreciation of $199,065, stock based compensation of $689,046 and net change in assets and liabilities of $282,919, primarily attributable to decrease in accounts receivable of $4,921, an increase in inventory of $350,729, an increase in unbilled revenue of $20,394, a decrease in prepaid expense of $39,988, a decrease in VAT receivable of $31,876, a decrease in other current assets of $45,666, a decrease in operating lease liabilities of $7,041, an increase in accounts payable of $22,354, a decrease in contract liabilities of $9,655, and decrease in provision for income taxes of $39,905. 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 $1,425,366, 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. Investing Activities Net cash flows used in investing activities were $395,245 and $27,248 for the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022 and June 30, 2021, we purchased equipment, website development and leaseholds of $395,245 and $27,248, respectively. 39 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Financing Activities Net cash flows provided by financing activities were $5,539,317 and $14,997,706 for the six months ended June 30, 2022 and 2021, respectively. Net cash flows provided by financing activities were $5,539,317 for the six months ended June 30, 2022 and were primarily attributed to proceeds from common stock offering of $5,605,038, offset by repayments of notes payable for $30,413 and repayments of related party payable $35,308. 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. 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 guaranteed 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. 40 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Reclassification Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. 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, Global Telesat Communications Ltd. and NextPlat B.V. All material intercompany balances and transactions have been eliminated in consolidation. Accounts receivable and allowance for doubtful accounts 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, 2022, and 2021, there were no allowances for doubtful accounts. 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. Prepaid expenses Prepaid expenses amounted to $106,947 and $146,935, at June 30, 2022 and December 31, 2021, respectively. Prepaid expenses include prepayments in cash for rent, insurance and software license fees which are being amortized over the terms of the respective agreement. The current portion consists of costs paid for future services which will occur within a year. 41 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Foreign Currency Translation The Company’s reporting currency is U.S. Dollars. The accounts of one of the Company’s subsidiaries, GTCL, is maintained using the appropriate local currency, Great British Pound, as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet date, shareholders’ equity is translated at historical rates and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations. The relevant translation rates are as follows: for the six months ended June 30, 2022, closing rate at 1.2165 US$: GBP, quarterly average rate at 1.256640 US$: GBP and yearly average rate at 1.29979 US$: GBP, 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$: GBP, for the year ended 2021 closing rate at 1.353372 US$: GBP, yearly average rate at 1.375083 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. Equipment sales which have been prepaid, before the goods are shipped are recorded as contract liabilities and once shipped is recognized as revenue. The Company also records as contract liabilities, certain annual plans for airtime, which are paid in advance. Once airtime services are incurred, they are recognized as revenue. Unbilled revenue is recognized for airtime plans whereby the customer is invoiced for its data usage the following month after services are incurred. 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. 42 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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. Leasehold improvements have an estimated service life of the term of the respective lease. The estimated useful lives of property and equipment are generally as follows: Years Office furniture and fixtures 4 Computer equipment 4 Rental equipment 4 Leasehold improvements 5 Appliques 10 Website development 2 Intangible assets Intangible assets include customer contracts purchased and recorded based on the cost to acquire them. These assets are amortized over 10 years. Useful lives of intangible assets are periodically evaluated for reasonableness and the assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable. 43 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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, 2022 and June 30, 2021, respectively. Accounting for Derivative Instruments Derivatives are required to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market-based pricing models incorporating readily observable market data and requiring judgment and estimates. The Company did not identify any 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). Recent Accounting Pronouncements Accounting Pronouncements Recently Adopted In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU provides guidance to clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. ASU 2021-04 is effective for annual beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements. 44 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In October 2021, the FASB issued guidance which requires companies to apply Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. Public entities must adopt the new guidance for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact and timing of adoption of this guidance Any new accounting standards, not disclosed above, 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. 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.