NextPlat Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Irrespective of a particular NFT’s status as a security, we will need to assess whether we needed to comply with other applicable regulations and laws (including but not limited to AML and CFT regulations). If we are deemed to be involved in the exchange or transmission of value that substitutes for currency, or fall under other evolving requirements, we may be deemed to be a “money transmitter” and will be subject to AML and CFT regulations. Depending on the particular attributes of an NFT, the manner in which it is marketed, and the nature of the clientele, we could be subject to other legal and regulatory regimes as well. We will endeavor to comply with all applicable laws in connection with our NextPlat Digital business, but the uncertain application of those laws to our proposed business may create substantial risk to the Company. When onboarding new users, we intend to utilize third-party tools to proactively screen for high-risk crypto wallets, including explicitly sanctioned addresses and addresses associated with sanctioned entities. Crypto wallets protect the identity of the owner of the wallet, store the owner’s private keys, secure and provide access by the owner to the cryptocurrency owned by it and allow the owner to send, receive, and transact business with cryptocurrencies. Such wallets by their nature obfuscate the identity of the owner of the wallet and limit access to the transaction history of that wallet and its owner. Consequently, crypto wallets and cryptocurrencies may be used by persons seeking to avoid legal oversight and to violate the law. For example, they can be used to launder money and to promote terrorism. The applicable legal requirements and our compliance obligations will vary depending on the nature of the client, the service or product provided and jurisdiction. For example, if we engage, form or acquire a broker dealer in order to post, trade or sell NFTs or other digital assets that are securities, we will attempt to fully comply with all applicable KYC, AML and CFT compliance requirements. If, on the other hand, we facilitate the distribution of free promotional corporate collectable NFTs that are not deemed to be securities, our compliance requirements will be significantly less. In either event there can be no assurance that our efforts to fully comply with applicable law will be successful. In determining to engage in transactions in an NFT, we will attempt to comply with all applicable laws. However, given the substantial legal uncertainties that may presented by those laws and given the informational constraints presented by crypto wallets we may not be successful in our efforts. As a consequence, we may be exposed to regulatory enforcement and civil or criminal sanction should a legal authority determine that our approach is inadequate or inappropriate, as well as to claims asserting civil liability. Moreover, governmental agencies may seek to apply laws to our NextPlat Digital business that we believe are inapplicable and may seek sanctions relating to our alleged failure to comply with those laws. Investment in Progressive Care Inc. On September 2, 2022, we closed a transaction with Progressive Care Inc. (OTCQB: RXMD) (“Progressive Care”), pursuant to which we purchased 3,000 newly issued units of securities from Progressive Care (the “Units”) at a price per Unit of $2,000 for an aggregate purchase price of $6 million (the “Unit Purchase”). Each Unit consists of one share of Series B Convertible Preferred Stock of Progressive Care (“Series B Preferred Stock”) and one warrant to purchase a share of Series B Preferred Stock (“RXMD Warrants”). Each share of Series B Preferred Stock votes as a class with the common stock of Progressive Care, and has 100,000 votes per share. Likewise, each share of Series B Preferred Stock is convertible into 100,000 shares of Progressive common stock. In addition, the Series B Preferred Stock has a liquidation and dividend preference. The RXMD Warrants have a five-year term, and are immediately exercisable, in whole or in part, and contain cashless exercise provisions. Each Warrant is exercisable at $2,000 per share of Series B Preferred Stock. Following the consummation of the Unit Purchase, our Chairman and Chief Executive Officer, Charles M. Fernandez, and our board member, Rodney Barreto, were appointed to Progressive Care’s Board of Directors, with Mr. Fernandez appointed to serve as Chairman of Progressive Care’s Board of Directors and Mr. Barreto appointed to serve as a Vice Chairman of Progressive Care’s Board of Directors. On November 11, 2022, the Progressive Care Board of Directors elected Mr. Fernandez to serve as the Chief Executive Officer of Progressive Care. In addition, on September 2, 2022, NextPlat, Charles Fernandez, Rodney Barreto and certain other purchasers purchased from Iliad Research and Trading, L.P. (“Iliad”) a Secured Convertible Promissory Note, dated March 6, 2019, made by Progressive Care to Iliad (the “Note”). The accrued and unpaid principal and interest under the note at the time of the purchase was approximately $2.79 million. The aggregate purchase price paid to Iliad for the Note was $2.3 Million of which NextPlat contributed $1 million and Messrs. Fernandez and Barreto contributed $400,000 each (the “Note Purchase”). In connection with the Note Purchase, NextPlat, Messrs. Fernandez and Barreto and the other purchasers of the Note entered into a Debt Modification Agreement with Progressive Care. Pursuant to the Debt Modification Agreement, the interest rate under the Note was reduced from 10% to 5% per annum and the maturity date was extended to May 31, 2027. In addition, the conversion price under the note was changed to $0.02 per share of Common Stock. Pursuant to the Debt Modification Agreement, NextPlat, Messrs. Fernandez and Barreto and the other purchasers of the Note have the right, exercisable at any time, to redeem all or any portion of the Note. The Debt Modification Agreement also provides that the Note will automatically convert upon the later to occur of: (a) the completion by Progressive Care of a reverse stock split, and (b) the listing of Progressive Care’s common stock on a national exchange. In consideration of the concessions in the Debt Modification Agreement, Progressive Care issued 21,000,000 shares of its common stock to the purchasers of the Note, of which NextPlat, Charles Fernandez and Rodney Barreto, received 9,130,435, 3,652,174, and 3,652,174 shares, respectively. January 2022 Private Placement of Common Stock On December 31, 2021, after markets closed, a securities purchase agreement (the “Purchase Agreement”) was circulated to, and signatures were received from, certain institutional and accredited investors (the “December Investors”) in connection with the sale in a private placement by the Company of 2,229,950 shares of the Company’s common stock (the “December Offering”). On January 2, 2022, the Company delivered to December Investors a fully executed Purchase Agreement, which was dated December 31, 2021. The purchase price for the common stock sold in the December Offering was $3.24 per share, the closing transaction price reported by Nasdaq on December 31, 2021. The closing of the December Offering occurred on January 5, 2022. The Company received gross proceeds from the sale of the common stock in the December Offering of approximately $7.2 million. The Company intends to use the proceeds from the December Offering for general corporate purposes, including potential acquisitions and joint ventures. Approximately 73% of funds raised in the December Offering were secured from existing shareholders and from the members of the Company’s senior management and Board of Directors. In connection with the December Offering, the Company entered into a registration rights agreement with the December Investors (the “Registration Rights Agreement”), pursuant to which, among other things, the Company agreed to prepare and file with the SEC a registration statement to register for resale the shares of the Company’s common stock sold in the Offering. The shares of common stock offered and sold in the December Offering were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act and corresponding provisions of state securities or “blue sky” laws. The terms of the transaction disclosed above, including the provisions of the Purchase Agreement and Registration Rights Agreement, were approved by the Board of Directors and because some of the securities were offered and sold to officers and directors of the Company, such terms were separately reviewed and approved by the Audit Committee of the Board of Directors. 35 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. On July 22, 2022, pursuant to Mr. Fernandez employment agreement, the “June Agreement”, see Note 13, the Company issued 200,000 restricted shares and recorded stock-based compensation in the amount of $805,246 to eAperion Partners LLC, of which Mr. Fernandez is managing director. This amount is valued from the date of the award May 28, 2021 to September 30, 2022. The value of the award for the year ended December 31, 2021 was $356,712 and for the nine months ended September 30, 2022, $448,534. 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 August 4, 2022, the Company issued 15,000 restricted shares to Andrew Cohen, pursuant to a restricted stock award which became fully vested upon his resignation, see Note 13. The award resulted in stock based compensation of $76,950 and was valued as of the date of the award on October 8, 2021. On September 20, 2022, the Company issued 116,000 restricted shares of common stock to eAperion Partners LLC, of which Charles M. Fernandez is managing partner, pursuant to a restricted stock award, “RSA,” under the Company’s 2020 Equity Incentive Plan. The shares were fully vested upon issuance. The shares were valued at the market close of issuance date of $2.52 per share, resulting in stock-based compensation of $292,320. On September 28, 2022, the Company issued 20,000 restricted shares to Douglas Ellenoff, pursuant to such award as granted on August 24, 2021, using the fair market value as of date of the award of $5.37 per share, resulting in stock-based compensation of $107,400. Also, on September 28, 2022, the Company issued 5,000 restricted shares to Paul Thomson, pursuant to such award as granted on August 24, 2021, using the fair market value as of date of the award of $5.37 per share, resulting in stock-based compensation of $26,850. 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 nine months ended September 30, 2022, approximately 27% of the cost was expensed in the period incurred to SGA and 73% was capitalized and depreciated over its useful life. The Company intends to maintain dual accounting systems, until such time it is deemed acceptable, which we estimate to be in the first quarter of 2023. 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 September 30, 2022, there were 50,000,000 shares of common stock authorized and 9,649,096 shares issued and outstanding. As of September 30, 2022, there were 3,312,000 registered warrants to purchase common stock authorized and 2,836,092 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 September 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 $2,731,076 during the nine months ended September 30, 2022. At September 30, 2022, we had working capital of $13,378,221. Additionally, at September 30, 2022, we had an accumulated deficit of $30,205,435 and stockholder’s equity of $18,192,649. Results of Operations for the Three and Nine months Ended September 30, 2022, compared to the Three and Nine months Ended September 30, 2021 Revenue . Net Sales for the nine months ended September 30, 2022, consisted primarily of sales of satellite phones, tracking devices, accessories and airtime plans. For the nine months ended September 30, 2022, revenues generated were $9,080,083 compared to $5,667,966 of revenues for the nine months ended September 30, 2021, an increase in total revenues of $3,412,117 or 60.2%. Total net sales for Global Telesat Communications Ltd. were $6,449,399 for the nine months ended September 30, 2022, as compared to $3,897,254 for the nine months ended September 30, 2021, an increase of $2,552,145 or 65.5%. Total net sales for Global Telesat Communications Ltd as valued in its home currency of GBP was £5,125,142, for the nine months ended September 30, 2022, as compared to £2,813,191, for the nine months ended September 30, 2021, an increase of £2,311,951 or 82.2%. The net effect of the exchange rate GBP:USD on revenue for the nine months ended September 30, 2022, was reduced by $650,716, using GBP:USD exchange rate yearly average of 1.25838 for the nine months ended September 30, 2022 as compared to GBP:USD 1.38534 for the nine months ended September 30, 2021. Total net sales for Orbital Satcom Corp. were $2,630,684 for the nine months ended September 30, 2022, as compared to $1,770,712, for the nine months ended September 30, 2021, an increase of $859,972 or 48.6%. Net sales for the three months ended September 30, 2022, consisted primarily of sales of satellite phones, tracking devices, accessories, and airtime plans. For the three months ended September 30, 2022, revenues generated were $2,630,826 compared to $2,250,278 of revenues for the three months ended September 30, 2021, an increase in total revenues of $380,548 or 16.9%. Total sales for Global Telesat Communications Ltd. were $1,906,728 for the three months ended September 30, 2022, as compared to $1,498,341 for the three months ended September 30, 2021, an increase of $408,387 or 27.3%. Total sales for Orbital Satcom Corp. were $724,098 for the three months ended September 30, 2022 as compared to $751,937, for the three months ended September 30, 2021, a decrease of $27,839 or 3.7%. 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. 36 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Cost of Sales . During the nine months ended September 30, 2022, cost of sales increased to $7,032,847 compared to $4,195,823, for the nine months ended September 30, 2021, an increase of $2,837,024 or 67.6%. Gross profit margins during the nine months ended September 30, 2022 were 22.5%, as compared to 26.0% for the comparable period in the prior year. During the three months ended September 30, 2022, cost of sales increased to $1,952,072 compared to $1,757,142, for the three months ended September 30, 2021, an increase of $194,930 or 11.1%. Gross profit margins during the three months ended September 30, 2022, were 25.8% as compared to 21.9% for the comparable period in the prior year. As indicated by the results for the three and nine months, our gross profit margins have increased by 3.89% and decreased by 3.4%, respectively. The increase for the quarter was due to increased high margin airtime sales offsetting the decrease for the nine month period ended, September 30, 2022 which continued 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 nine months ended September 30, 2022 were $6,580,039, an increase of $2,022,785 or 44.4%, from total operating expenses for the nine months ended September 30, 2021 of $4,557,254 . Total operating expenses for the three months ended September 30, 2022 were $2,843,693, an increase of $113,711 or 4.2%, from total operating expenses for the three months ended September 30, 2021 of $2,729,982 . Factors contributing to the decrease are described below. Selling, general and administrative expenses were $3,434,916 and $2,284,456 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $1,150,460 or 50.4%. Selling, general and administrative expenses were $1,699,711 and $1,840,760 for the three months ended September 30, 2022 and 2021, respectively, a decrease of $141,049 or 7.7%. The decrease for the three months ended September 30, 2022, is attributable to a reclass of approximately $103,000 to professional fees from advertising. For the nine months ended September 30, 2022, is attributable to an increase in non-cash stock-based compensation of $642,201, 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, of $74,759 and $84,166, respectively. Salaries, wages and payroll taxes were $1,957,592 and $1,178,267 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $779,325, or 66.1%. Salaries, wages and payroll taxes were $651,219 and $490,555 for the three months ended September 30, 2022, and 2021, respectively, an increase of $160,664, or 32.8%. The increase is a result of executive management additions, adjusted salaries and an increase in personnel. Professional fees were $839,509 and $869,127 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $29,618, or 3.4%. Professional fees were $356,306 and $320,211 for the three months ended September 30, 2022 and 2021, respectively, an increase of $36,095, or 11.3%. The increase during the three months ended September 30, 2022 as compared to the same period in 2021, is attributable to the quarter reclass of advertising initiatives. For the nine months ended September 30, 2022, the decrease is attributable to 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 $348,022 and $225,404 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $122,618 or 54.4%. Depreciation and amortization expenses were $136,457 and $78,456 for the three months ended September 30, 2022 and 2021, respectively, an increase of $58,001 or 73.9%. The increase was primarily attributable to capitalized expenditures for software and website development and equipment and leasehold improvements 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 $231,981, compared to $1,481,974 during the nine months ended September 30, 2022 and 2021, respectively, a decrease of $1,249,993 or 84.3%. Our total other expense was $93,901 compared to $68,703 during the three months ended September 30, 2022 and 2021, respectively. The decrease and increase for the three and nine months ended September 30, 2022, as compared to the prior year, is attributable to the reduction in interest expense from the prior year of $1,448,337, an increase in interest earned of $10,275, offset by an increase in foreign exchange rate of $187,787. The decrease in interest expense is relative to the elimination of all debt, except for the balance of $324,472, representing the coronavirus loan debt from the prior year. Net Loss Before Income Tax & Equity of Affiliate . We recorded net loss before income tax and equity net loss of affiliate of $2,258,840 and $4,764,784 for the three and nine months ended September 30, 2022 as compared net loss of $2,305,549 and a net loss of $4,567,085, for the three and nine months ended September 30, 2021. For the three months ended September 30, 2022 the decrease in the loss and the increase in the loss for the nine months ended September 30. 2022, is a result of the factors as described above. Equity in Net Losses of Affiliate . We recorded a net loss in equity of affiliate of $3,454,436 and $3,454,436, for the three and nine months ended September 30, 2022, see Note 7. For the three and nine months ended September 30, 2021, there were no losses or income. Net Loss . We recorded a net loss of $5,713,276 and $8,219,220, for the three and nine months ended September 30, 2022. We recorded a net loss of $2,305,549 and $4,567,085, for the three and nine months ended September 30, 2021. Comprehensive (Loss) Income. We recorded a loss for foreign currency translation adjustments for the three and nine months ended September 30, 2022 of $67,635 and $87,753. For the three and nine months ended September 30, 2021 we recorded income of $55,584 and $42,850. 37 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 September 30, 2022, we had a cash balance of $12,469,607. Our working capital is $13,378,221 at September 30, 2022. Our current assets at September 30, 2022 decreased $4,530,091 or 23% from December 31, 2021 and included cash, accounts receivable, VAT receivable, prepaid expenses, unbilled revenue, inventory and other current assets. Our current liabilities at September 30, 2022 decreased $1,314,105 or 47.3% 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 September 30, 2022, the Company had an accumulated deficit of $30,205,435 working capital of $13,378,221 and net loss of $8,219,220 during the nine months ended September 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 nine months ended September 30, 2022 amounted to $2,731,076 and were primarily attributable to our net loss of $8,219,220, total amortization expense of $18,750 and depreciation of $329,272, stock based compensation in relation to restricted stock awards $1,343,566 an stock based compensation for the fair value of options granted of $620,199, amortization of right of use of $58,284, share of loss from equity method investment of 3,454,436 and net change in assets and liabilities of $336,363, primarily attributable to an increase in accounts receivable of $339,258, an increase in inventory of 118,594, an increase in unbilled revenue of $19,937, a decrease in prepaid expense of $37,170, a decrease in VAT receivable of $136,299, a decrease in other current assets of $48,539, an increase in operating lease liabilities of $61,213, an increase in accounts payable of $23,700, a decrease in contract liabilities of $1,756, and decrease in provision for income taxes of $41,313. 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. Investing Activities Net cash flows used in investing activities were $7,471,118 and $95,598 for the nine months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022 and September 30, 2021, we purchased equipment, website development and leaseholds of $471,118 and $95,598, respectively. On September 2, 2022, we purchased an equity method investment of $7,000,000, see Note 7. 38 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 $5,534,318 and $19,466,289 for the nine months ended September 30, 2022 and 2021, respectively. Net cash flows provided by financing activities were $5,534,318 for the nine months ended September 30, 2022 and were primarily attributed to proceeds from common stock offering of $5,605,038, offset by repayments of notes payable for $51,104 and repayments of related party payable $19,616. 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, proceeds from 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. 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. 39 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 September 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 $109,765 and $146,935, at September 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. Investments The Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income resulting from these investments is reported under the line item captioned “equity method investment income” in our condensed consolidated statements of operations. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Management reviewed the underlying net assets of the investees as of September 30, 2022 and determined that the Company’s proportionate economic interest in the investees indicate that the investments were not impaired. The carrying value of our equity method investment is reported as “Equity method investment in Progressive Care, Inc. and Subsidiaries” on the condensed consolidated balance sheets. Note 7 contains additional information on our equity method investment. 40 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 three and nine months ended September 30, 2022, closing rate at 1.1150 US$: GBP, quarterly average rate at 1.176596 US$: GBP and yearly average rate at 1.258384444 US$: GBP, 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$: GBP, for the year ended 2021 closing rate at 1.353372 US$: 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. 41 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. 42 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 September 30, 2022 and September 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. 43 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.