UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from ______________to _______________.
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices | (Zip Code) |
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
| ||||
| The
|
Indicate
by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
| Class | Outstanding at May 16, 2022 | |
| Common Stock, $0.0001 par value |
FORM 10-Q
INDEX
| i |
Part I Financial Information
Item 1. Financial Statements
The unaudited financial statements of NextPlat Corp, F/K/A/ Orbsat Corp, (“NextPlat,” the “Company,” “we,” or “our”), for the three months ended March 31, 2022 and for comparable periods in the prior year are included below. The financial statements should be read in conjunction with the notes to financial statements that follow.
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
| March 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Unbilled revenue | ||||||||
| VAT receivable | ||||||||
| Prepaid expenses – current portion | ||||||||
| Other current assets | - | |||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use | ||||||||
| Intangible assets, net | ||||||||
| Prepaid expenses – long term portion | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Contract liabilities | ||||||||
| Note payable Coronavirus loans– current portion | ||||||||
| Due to related party | ||||||||
| Lease liabilities - current | ||||||||
| Provision for income taxes | ||||||||
| Stock subscription payable | - | |||||||
| Liabilities from discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Long term liabilities: | ||||||||
| Note payable Coronavirus loans– long term | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, $ par value; shares authorized | - | - | ||||||
| Common stock, ($ par value; shares authorized, shares issued and outstanding as of March 31, 2022 and outstanding at December 31, 2021, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated (deficit) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHNSIVE LOSS
| Three
Months Ended | Three
Months Ended | |||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | ||||||||
| Salaries, wages and payroll taxes | ||||||||
| Professional fees | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| (Loss) before other expenses and income taxes | ( | ) | ( | ) | ||||
| Interest expense | ||||||||
| Interest earned | ( | ) | - | |||||
| Foreign currency exchange rate variance | ( | ) | ||||||
| Total other income | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Comprehensive (loss) income: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustments | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | ||||||||
| Weighted number of common shares outstanding – basic & diluted | ||||||||
| Basic and diluted net (loss) per share | $ | ( | ) | $ | ( | ) | ||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2022
| Common Stock | Additional | |||||||||||||||
| $0.0001 Par Value | Paid in | Accumulated | ||||||||||||||
| Shares | Amount | Capital | Deficit | |||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | |||||||||||
| Issuance of common related to offering | ||||||||||||||||
| Issuance of common related to restricted stock award | ||||||||||||||||
| Comprehensive loss | - | - | - | |||||||||||||
| Net loss | - | - | - | ( | ) | |||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | |||||||||||
For the Three Months Ended March 31, 2021
| Common Stock | Additional | |||||||||||||||
| $0.0001 Par Value | Paid in | Accumulated | ||||||||||||||
| Shares | Amount | Capital | Deficit | |||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | |||||||||||
| Issuance common stock from convertible debt | - | |||||||||||||||
| Issuance of common related to restricted stock award | - | - | ||||||||||||||
| Beneficial conversion feature of convertible debt | - | - | - | |||||||||||||
| Comprehensive gain | - | - | - | - | ||||||||||||
| Net loss | - | - | - | ( | ) | |||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2022
| Comprehensive | Stockholders’ | |||||||
| Income (Loss) | Equity | |||||||
| Balance, December 31, 2021 | $ | $ | ||||||
| Issuance of common related to offering | - | |||||||
| Issuance of common related to restricted stock award | - | |||||||
| Comprehensive loss | ( | ) | ( | ) | ||||
| Net loss | - | ( | ) | |||||
| Balance, March 31, 2022 | $ | ( | ) | $ | ||||
For the Three Months Ended March 31, 2021
| Comprehensive | Stockholders’ | |||||||
| Income (Loss) | Equity | |||||||
| Balance, December 31, 2020 | $ | ( | ) | $ | ||||
| Issuance common stock from convertible debt | - | |||||||
| Issuance of common related to restricted stock award | - | |||||||
| Beneficial conversion feature of convertible debt | - | |||||||
| Comprehensive gain | ||||||||
| Net loss | - | ( | ) | |||||
| Balance, March 31, 2021 | $ | ( | ) | $ | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
| March 31, 2022 | March 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangible asset | ||||||||
| Amortization of right to use | ||||||||
| Amortization of convertible debt, net | - | |||||||
| Stock based compensation | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Unbilled revenue | ( | ) | ||||||
| Prepaid expense | ( | ) | - | |||||
| Other current assets | ( | ) | ||||||
| VAT receivable | - | |||||||
| Accounts payable and accrued liabilities | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Provision for income taxes | ( | ) | ) | |||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from (repayments to) note payable, related party, net | ( | ) | ||||||
| Proceeds from common stock offering | - | |||||||
| Repayments of note payable | - | ( | ) | |||||
| Repayments to note payable Coronavirus loans | ( | ) | - | |||||
| Proceeds of convertible debt | - | |||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate on cash | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash beginning of period | ||||||||
| Cash end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for | ||||||||
| Interest | $ | $ | ||||||
| Income tax | $ | $ | ||||||
| Non-cash adjustments during the period for | ||||||||
| Common stock issued for stock subscription payable | $ | $ | ||||||
| Beneficial conversion feature on convertible debt | $ | $ | ||||||
| Conversion of convertible debt into common shares | $ | $ | ||||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 6 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The unaudited financial statements for the three months ending March 31, 2022, are not necessarily indicative of the results for the remainder of the fiscal year. The consolidated financial statements as of December 31, 2021, have been audited by an independent registered public accounting firm. The accounting policies and procedures employed in the preparation of these condensed consolidated financial statements have been derived from the audited financial statements of NextPlat Corp F/K/A/ Orbsat Corp (the “Company”) for the year ended December 31, 2021, which are contained in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022. The consolidated balance sheet as of December 31, 2021 was derived from those financial statements.
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.
.
Description of Business
NextPlat Corp, a Nevada corporation (the “Company”), was formerly Orbsat Corp (“NextPlat”). The business of NextPlat has been, and is currently, the provision of a comprehensive array of Satellite Industry communication services, and related equipment sales. As detailed in Online Storefronts and E-Commerce Platforms below, the Company operates two main e-commerce websites as well as 25 third-party e-commerce storefronts such as Alibaba, Amazon and Walmart. These e-commerce venues form an effective global network serving thousands of consumers, enterprises, and governments. NextPlat has announced its intention to broaden its e-commerce platform and is implementing a comprehensive systems upgrade to support this initiative. The Company has also begun the design and development of a next generation platform for digital assets built for Web3 (an internet service built using decentralized blockchains). This new platform (“NextPlat Digital”) is currently in the design and development phase and will enable the use of a range of digital assets, such as non-fungible tokens (“NFTs”), in e-commerce and in community-building activities.
The
Company was originally incorporated in 1997 in Florida. On April 21, 2010, the Company merged with and into a wholly-owned subsidiary
for the purpose of changing its state of incorporation to Delaware,
Global Telesat Communications Limited (“GTC”) was formed under the laws of England and Wales in 2008. On February 19, 2015, we entered into a share exchange agreement with GTC and all of the holders of the outstanding equity of GTC pursuant to which GTC became a wholly owned subsidiary of ours.
On
March 28, 2014, we merged with a newly-formed wholly-owned subsidiary of ours solely for the purpose of changing our state of incorporation
to Nevada from Delaware, effecting a
A wholly-owned subsidiary, Orbital Satcom Corp. (“Orbital Satcom”), a Nevada corporation was formed on November 14, 2014.
On January 22, 2015, we changed our name to “Orbital Tracking Corp” from “Great West Resources, Inc.” pursuant to a merger with a newly formed wholly owned subsidiary.
Effective
March 8, 2018, following the approval of a majority of our shareholders, we effected a reverse split of our common stock at a
Also, on August 19, 2019, we changed our name to “Orbsat Corp” from “Orbital Tracking Corp.” pursuant to a merger with a newly formed wholly owned subsidiary.
On
March 24, 2021, the Company’s shareholders via majority shareholder consent authorized a stock split not to exceed 1 for 5 reverse
stock split. A definitive Information Statement relating to the shareholder consent was filed with the SEC on March 13, 2021. The Company’s
Board of Directors subsequently approved a 1-for-5 reverse stock split. The Company has filed a Certificate of Change to its Amended
and Restated Articles of Incorporation to effect a reverse stock split of its issued and outstanding common stock, at a
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.
All information presented in this Quarterly Report on Form 10-Q other than in Company’s consolidated financial statements and the notes thereto assumes a 1-for-5 reverse stock split of Company’s outstanding shares of common stock and unless otherwise indicated, all such amounts and corresponding conversion price or exercise price data set forth in this Quarterly Report on Form 10-Q have been adjusted to give effect to such assumed reverse stock split.
| 7 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. The Company
places its cash with a high credit quality financial institution. The Company’s account at this institution is insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $
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 March 31, 2022, and December 31, 2021, there were no allowances for doubtful accounts.
| 8 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $
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 months ended March 31, 2022, closing rate at
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.
| 9 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
In accordance with ASU No. 2016-12, Revenue from Contracts with Customers (Topic 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. Based on the terms and conditions of the product arrangements, the Company believes that its products and services can be accounted for separately as its products and services have value to the Company’s customers on a stand-alone basis. When a transaction involves more than one product or service, revenue is allocated to each deliverable based on its relative fair value; otherwise, revenue is recognized as products are delivered or as services are provided over the term of the customer contract.
Contract
liabilities is shown separately in the unaudited condensed consolidated balance sheets as current liabilities. At March 31, 2022
and December 31, 2021, we had contract liabilities of approximately $
Cost of Product Sales and Services
Cost of sales consists primarily of materials, airtime and overhead costs incurred internally and amounts incurred to contract manufacturers to produce our products, airtime and other implementation costs incurred to install our products and train customer personnel, and customer service and third-party original equipment manufacturer costs to provide continuing support to our customers. There are certain costs which are deferred and recorded as prepaids, until such revenue is recognized. Refer to revenue recognition above as to what constitutes deferred revenue.
Shipping and handling costs are included as a component of costs of product sales in the Company’s consolidated statements of operations because the Company includes in revenue the related costs that the Company bills its customers.
Intangible assets
Intangible
assets include customer contracts purchased and recorded based on the cost to acquire them. These assets are amortized over
| 10 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
The estimated useful lives of property and equipment are generally as follows:
| Years | ||||
| Office furniture and fixtures | ||||
| Computer equipment | ||||
| Rental equipment | ||||
| Appliques | ||||
| Website development | ||||
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 March 31, 2022 and March 31, 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.
| 11 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 718, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date. Further, ASC Topic 718, provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, such as the repricing of share options, which would revalue those options and the accounting for the cancellation of an equity award whether a replacement award or other valuable consideration is issued in conjunction with the cancellation. If not, the cancellation is viewed as a replacement and not a modification, with a repurchase price of $.
Income Taxes
The Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”) which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
The Company believes its tax positions are all more likely than not to be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25, “Definition of Settlement,” which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they are filed.
Leases
Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right of use asset and lease liability, the Company has elected to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
At
March 31, 2022 and December 31, 2021, the Company had aggregated current and long-term operating lease liabilities of $
The Company continues to account for leases in the prior period financial statements under ASC Topic 840.
| 12 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 three months ended March 31, 2022 and the March
31, 2021, there were
Net income (loss) per common share is calculated in accordance with ASC Topic 260: Earnings per Share (“ASC 260”). Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. In periods where the Company has a net loss, all dilutive securities are excluded.
| March 31, 2022 | March 31, 2021 | |||||||
| Convertible notes payable (1) | - | |||||||
| Stock Options | ||||||||
| Stock Warrants | ||||||||
| Total | ||||||||
| (1) |
Related Party Transactions
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party, (see Note 12).
Recent Accounting Pronouncements
| 13 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
| 14 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
At March 31, 2022 and December 31, 2021, inventories consisted of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Finished goods | $ | $ | ||||||
| Less reserve for obsolete inventory | - | - | ||||||
| Total | $ | $ | ||||||
For the three months ended March 31, 2022 and the year ended December 31, 2021, the Company did not make any change for reserve for obsolete inventory.
NOTE 3 – VAT RECEIVABLE
On
January 1, 2021, VAT rules relating to imports and exports between the UK and EU changed as a result, of the UK’s departure from
the EU, (“BREXIT”). For the three months ended March 31, 2022 and the year ended December 31, 2021, the Company recorded
a receivable in the amount of $
NOTE 4 – PREPAID EXPENSES
Prepaid
expenses amounted to $
NOTE 5 - PROPERTY AND EQUIPMENT
At March 31, 2022 and December 31, 2021, property and equipment, net of fully depreciated assets, consisted of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Office furniture and fixtures | $ | $ | ||||||
| Computer equipment | ||||||||
| Rental equipment | ||||||||
| Appliques | ||||||||
| Website development | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation
expense was $
NOTE 6 – INTANGIBLE ASSETS
On
December 10, 2014, the Company entered the satellite voice and data equipment sales and service business through the purchase of certain
contracts from Global Telesat Corp. (“GTC”). These contracts permit the Company to utilize the Globalstar, Inc. and Globalstar
LLC (collectively, “Globalstar”) mobile satellite voice and data network. The purchase price for the contracts of $
| 15 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INTANGIBLE ASSETS (continued)
Included in the purchased assets are: (i) the rights and benefits granted to GTC under each of the Globalstar Contracts, subject to certain exclusions, (ii) account and online access to the Globalstar Cody Simplex activation system, (iii) GTC’s existing customers who are serviced pursuant to the Globalstar Contracts (only as to their business directly and exclusively related to the Globalstar Contracts), and (iv) all of GTC’s rights and benefits directly and exclusively related to the Globalstar Contracts.
Amortization
of customer contracts are included in depreciation and amortization. For the three months ended March 31, 2022 and 2021, the Company
amortized $
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total | $ |
For the three months ended March 31, 2022 and 2021, there were no additional expenditures on research and development.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED OTHER LIABILITIES
Accounts payable and accrued other liabilities consisted of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Rental deposits | ||||||||
| Customer deposits payable | ||||||||
| Accrued wages & payroll liabilities | ||||||||
| VAT liability & sales tax payable | ||||||||
| Pre-merger accrued other liabilities | ||||||||
| Accrued interest | - | |||||||
| Accrued other liabilities | ||||||||
| Total | $ | $ | ||||||
| 16 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CORONAVIRUS LOANS
On
April 20, 2020, the Board of Directors the Company (the”Board”), approved for its wholly owned UK subsidiary, Global
Telesat Communications LTD (“GTC”), to apply for a Coronavirus Interruption Loan, offered by the UK government, for an amount
up to £
On
May 8, 2020, NextPlat Corp was approved for the US funded Payroll Protection Program, (“PPP”) loan. The loan was for $and had a term of years, of which the first 6 months are deferred
at an interest rate of %.
On May 23, 2021, BlueVine, the Company’s SBA approved mortgage lender and originator, notified the Company, that the loan in the
amount of $,
had been forgiven. As of December 31, 2021, the Company has recorded $
NOTE 9 - STOCKHOLDERS’ EQUITY
Capital Structure
On March 28, 2014, in connection with the Reincorporation (see Note 1), all share and per share values for all periods presented in the accompanying condensed consolidated financial statements are retroactively restated for the effect of the Reincorporation.
On
March 5, 2016, the Company shareholders voted in favor of an amendment to its Articles of Incorporation to increase the total number
of shares of authorized capital stock to
Effective
March 8, 2018, we conducted a reverse split of our common stock at a
On
July 24, 2019, the Company filed a Certificate of Change (the “Certificate of Change”) with the Nevada Secretary of State.
The Certificate of Change provides for (i) a
| 17 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS’ EQUITY (continued)
On
May 28, 2021, the Company effected a
Listing on the Nasdaq Capital Market
Our common stock and warrants have been trading on the Nasdaq Capital Market under the symbols “NXPL” and “NXPLW,” respectively, since January 21, 2022. Prior to January 21, 2022, our common stock and warrants were traded on the Nasdaq Capital Market under the symbols “OSAT” and “OSATW,” respectively.
The authorized capital of the Company consists of shares of common stock, par value $ per share and shares of preferred stock, par value $ per share. As of March 31, 2022, and December 31, 2021, there were and and shares of common stock and shares of preferred stock issued and outstanding, respectively.
Preferred Stock
As of March 31, 2022, there were shares of Preferred Stock authorized.
As of March 31, 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.
| 18 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS’ EQUITY (continued)
Warrants
As
of March 31, 2022, there were registered warrants to purchase common
stock authorized of which registered warrants were issued and outstanding,
at an exercise price of $
A summary of the status of the Company’s total outstanding warrants and changes during the year ended December 31, 2021 and the three months ended March 31, 2022 is as follows:
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance at January 1, 2021 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | ( | ) | ( | ) | - | |||||||
| Forfeited | - | |||||||||||
| Cancelled | ( | ) | ( | ) | - | |||||||
| Balance outstanding and exercisable at December 31, 2021 | $ | |||||||||||
| Balance at January 1, 2022 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Forfeited | - | |||||||||||
| Cancelled | - | |||||||||||
| Balance outstanding and exercisable at March 31, 2022 | $ | |||||||||||
Common Stock
As of March 31, 2022, there were shares of common stock authorized and shares issued and outstanding.
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 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 $ 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 $
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.
On
January 5, 2022, the Company issued shares of common stock pursuant to a private
placement offering at a per share price of $,
resulting in gross proceeds of $
Restricted Stock Award
On
January 21, 2022, the Company issued shares of common stock in connection with restricted
stock awards, with a fair market value of $per share, on the date of issuance. All shares were fully vested and upon issuance resulted in stock-based compensation of $
| 19 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS’ EQUITY (continued)
Stock Options
| Number
of Options | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Life (Years) | ||||||||||
| Balance at January 1, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Cancelled | ( | ) | ||||||||||
| Balance outstanding and excercisable at December 31, 2021 | $ | |||||||||||
| Balance at January 1, 2022 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Forfeited | ( | ) | - | |||||||||
| Cancelled | - | |||||||||||
| Balance outstanding and excercisable at March 31, 2022 | $ | |||||||||||
NOTE 10 - RELATED PARTY TRANSACTIONS
As
of March 31, 2022, the accounts payable due to related party includes advances for inventory and services due to David Phipps of $
The
Company’s UK subsidiary, GTC had an over-advance line of credit with HSBC, for working capital needs, which was not renewed by
the Company on December 31, 2021. The over-advance limit was £
The
Company employs three individuals who are related to Mr. Phipps. These three individuals earned gross wages totaling $
NOTE 11 - COMMITMENTS AND CONTINGENCIES
COVID-19
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 again 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.
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. 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 three months ended March 31, 2022 and for the years ended December 31, 2021 and 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.
Appointment of Director; Compensatory Arrangements of Director
On January 7, 2022, the Board appointed Rodney Barreto as a new director to the Board, effective January 20, 2022. No decision has been made with respect to the naming of Mr. Barreto to any regular committees of the Board.
In
connection with Mr. Barreto’s appointment to the Board, the Company executed a Director Services Agreement (the “Director
Agreement”) with Mr. Barreto on January 11, 2022. The Director Agreement has a -year term (subject to the director’s nomination
and election) and provides for a cash retainer of $
| 20 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
Employment Agreements
2021 Phipps Employment Agreement
On June 5, 2021, the Company entered into a three year employment agreement with Mr. Phipps that was effective as of June 2, 2021, (the “2021 Phipps Employment Agreement”). Under the terms of the 2021 Phipps Employment Agreement, Mr. Phipps serves as the serve as President of the Company and Chief Executive Officer of Global Operations. The term will be automatically extended for additional one-year terms thereafter unless terminated by the Company or Mr. Phipps by written notice. Mr. Phipps’ annual base compensation under the 2021 Phipps Employment Agreement is an aggregate of $350,000. The Company may increase (but not decrease) his compensation during its term. In addition, Mr. Phipps is entitled to receive an annual cash bonus if the Company meets or exceeds criteria adopted by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Mr. Phipps is also entitled to participate in any other executive compensation plans adopted by the Board of Directors, and is eligible for such grants of awards under stock option or other equity incentive plans as the Compensation Committee may from time to time determine (the “Share Awards”). Share Awards will be subject to the applicable Plan terms and conditions, provided, however, that Share Awards will be subject to any additional terms and conditions as are provided in the granting documents or in any award certificate(s), which shall supersede any conflicting provisions governing Share Awards provided under the equity incentive plan. The Company is required to pay or to reimburse Mr. Phipps for all reasonable out-of-pocket expenses actually incurred or paid by Mr. Phipps in the course of his employment, consistent with the Company’s policy. Mr. Phipps will be entitled to participate in such pension, profit sharing, group insurance, hospitalization, and group health and benefit plans and all other benefits and plans, including perquisites, if any, as the Company provides to its senior employees. The 2021 Phipps Employment Agreement may be terminated based on death or disability of Mr. Phipps, for cause or without good reason, for cause or with good reason, and as a result of the change of control of the Company. The 2021 Phipps Employment Agreement also contains certain provisions that are customary for agreements of this nature, including, without limitation, non-competition and non-solicitation covenants, indemnification provisions, etc. On August 7, 2021, the 2021 Phipps Employment Agreement was amended in order to, among other things, (i) increase Mr. Phipps’ compensation to include a car allowance of $1,000 a month and (ii) clarify Mr. Phipps position to be President of NextPlat Corp and the Chief Executive Officer of Global Operations.
Fernandez Employment Agreements
On May 23, 2021, the Company entered into a three (3) year Employment Agreement (the “May Agreement”) with Mr. Charles M. Fernandez to serve as Chairman of the Board.
However, two weeks later on June 2, 2021, the Company entered into a new employment agreement (the “June Agreement”) with Mr. Fernandez, which superseded and replaced “the May Agreement.” The June Agreement has an initial term of years effective on May 28, 2021. Under the June Agreement, Mr. Fernandez will serve as the Chairman and Chief Executive Officer of the Company. The June Agreement will be automatically extended for additional one-year terms unless terminated by the Company or Mr. Fernandez by written notice. Mr. Fernandez’s annual base compensation under the June Agreement is $per year. The Company may increase (but not decrease) his compensation during the June Agreement’s term. In addition, Mr. Fernandez is entitled to receive an annual cash bonus if the Company meets or exceeds criteria adopted by the Compensation Committee. Mr. Fernandez is also entitled to participate in any other executive compensation plans adopted by the Board and is eligible for such grants of Share Awards. Share Awards will be subject to the applicable Plan terms and conditions, provided, however, that Share Awards will be subject to any additional terms and conditions as are provided therein or in any award certificate(s), which will supersede any conflicting provisions governing Share Awards provided under the equity incentive plan. The Company is required to pay or to reimburse Mr. Fernandez for all reasonable out-of-pocket expenses actually incurred or paid by Mr. Fernandez in the course of his employment, consistent with the Company’s policy.
Mr. Fernandez is entitled to participate in such pension, profit sharing, group insurance, hospitalization, and group health and benefit plans and all other benefits and plans, including perquisites, if any, as the Company provides to its senior employees. The June Agreement may be terminated based on death or disability of Mr. Fernandez, for cause or without good reason, for cause or with good reason, as a result of the change of control of the Company and at the option of Mr. Fernandez with or without cause. The June Agreement also contains certain provisions that are customary for agreements of this nature, including, without limitation, non-competition and non-solicitation covenants, indemnification provisions, etc.
| 21 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
The
Company will also reimburse Mr. Fernandez for any and all premium payments made by him to obtain and continue personal catastrophe and
disability insurance coverages for himself, which policy will have policy limits not to exceed one hundred percent (
In addition, the June Agreement (which repeats, but not duplicates, a grant of restricted stock made under the May Agreement), Mr. Fernandez received an award of restricted stock with a grant date fair value equal to $ determined at the per unit offering price in the June Offering ($ per Unit) (the “RSA”), which RSA will vest 1/3 at each of the three anniversaries of the grant date. The Grant Date for the RSA is May 28, 2021, as determined pursuant to the May Agreement. Notwithstanding the vesting schedule, full vesting will occur upon a Change in Control, as that term is defined in the Restricted Stock Agreement pursuant to which the RSA was made (the “May Restricted Stock Agreement”). The Company at its sole expense is obligated to register for reoffer and resale by Mr. Fernandez the securities granted to him pursuant to the May Restricted Stock Agreement.
If Mr. Fernandez’s employment is terminated for any reason at any time by the Company prior to the full vesting of the RSA without “Cause” (as that term is defined in the June Agreement), the RSA will vest and Mr. Fernandez will receive all right, title and interest in the balance of the securities granted to him in the RSA.
During the term of the June Agreement and so long as Mr. Fernandez is employed by the Company, he may nominate two directors to the Company’s Board of Directors. The appointment of these directors to the Board is subject to approval by the Board of Directors.
On
August 7, 2021, the June Agreement was amended in order to, among other things, increase Mr. Fernandez’s compensation by (i) providing
for medical plan coverage for Mr. Fernandez and his family at the expense of the Company, and (ii) providing for an auto allowance $
Ellenoff Employment Agreement
On August 24, 2021, Douglas S. Ellenoff was appointed to the positions of Chief Business Development Strategist of the “Company” and Vice Chairman of the Board of Directors of the Company. The appointment was made on the approval and recommendation of the Nominating Committee of the Board. Mr. Ellenoff was not appointed to any committees of the Board.
In
connection with Mr. Ellenoff’s appointment to the position of Chief Business Development Strategist of the Company, Mr. Ellenoff
and the Company entered into a three year Employment Agreement, dated August 24, 2021 (the “Ellenoff Agreement”). Mr.
Ellenoff will be nominated and renominated to serve on the Board during the term of the agreement. Under the terms of the Ellenoff Agreement,
| 22 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
Carlise Employment Agreement
On
June 22, 2021, the Company appointed Theresa Carlise as Controller, Treasurer and Secretary. In connection with Ms. Carlise’s
appointment, Ms. Carlise and the Company entered into an employment agreement (the “Carlise Agreement”) with an initial term
of one year The term of the Carlise Agreement will be automatically extended for additional one-year terms unless terminated
by the Company or Ms. Carlise by written notice. Ms. Carlise’s annual base compensation is $.
The Carlise Agreement provides for medical plan coverage and an auto allowance. The Company may increase (but not decrease) her compensation
during its term. In addition, Ms. Carlise will be entitled to receive an annual cash bonus if the Company meets or exceeds criteria adopted
by the Compensation Committee of the Board of Directors. Ms. Carlise is also entitled to participate in any other executive compensation
plans adopted by the Board of Directors and is eligible for such grants of awards under stock option or other equity incentive plans
as the Compensation Committee of the Company may from time to time determine. The Company is required to pay or to reimburse Ms. Carlise
for all reasonable out-of-pocket expenses actually incurred or paid by Ms. Carlise in the course of her employment, consistent with the
Company’s policy. Ms. Carlise shall be entitled to participate in such pension, profit sharing, group insurance, hospitalization,
and group health and benefit plans and all other benefits and plans, including perquisites, if any, as the Company provides to its senior
Employees. The Carlise Agreement may be terminated based on death or disability of the executive, for cause or without good reason,
for cause or with good reason, and as a result of the change of control of the Company. The Carlise Agreement also contains certain
provisions that are customary for agreements of this nature, including, without limitation, non-competition and non-solicitation covenants,
indemnification provisions, etc. On August 7, 2021, on the approval and recommendation of the Compensation Committee, the Company entered
into the Carlise Agreement to, among other things, change Ms. Carlise’s title to “Chief Accounting Officer, Secretary
and Treasurer. On October 8, 2021, on the approval and recommendation of the Compensation Committee, and following the subsequent approval
of the Board, the Company entered into an amendment to Carlise, the Company’s
Chief Accounting Officer, Treasurer and Secretary, to extend the initial term of her employment agreement from
| 23 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
Thomson Employment Agreement
On August 24, 2021, Paul R. Thomson was appointed to the position of Executive Vice President of the Company. Mr. Thomson’s appointment as Executive Vice President was effective on August 24, 2021, the date of that certain Employment Agreement between Mr. Thomson and the Company (the “Thomson Agreement”). The Thomson Agreement has an initial term of (3) years and will be automatically extended for additional 1-year term unless terminated by the Company or Mr. Thomson by written notice. Mr. Thomson’s annual base compensation is $. The Company may increase (but not decrease) his compensation during its term. In addition, Mr. Thomson will be entitled to receive an annual cash bonus if the Company meets or exceeds criteria adopted by the Compensation Committee of the Board. Mr. Thomson is also entitled to participate in any other executive compensation plans adopted by the Board and is eligible for such grants of awards under stock option or other equity incentive plans as the Compensation Committee of the Company may from time to time determine (the “Share Awards”).
In
connection with Mr. Thomson’s employment, and as a material inducement to enter into the Thomson Agreements,
Cohen Employment Agreement
On October 7, 2021, the Board appointed Andrew Cohen as Senior Vice President of Operations of the Company, effective October 8, 2021. In connection with Mr. Cohen’s appointment, the Company entered into an employment agreement, dated October 8, 2021 (the “Cohen Agreement”), that sets forth the terms of his employment.
The
Cohen Agreement has an initial term of three (
In
connection with Mr. Cohen’s employment, and as a material inducement to enter into the Cohen Agreement,
Lease Agreement
On
December 2, 2021, the Company entered into a 62-month lease for
Effective
July 24, 2019, a three-year lease was signed for
The UK lease does not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not have any leases classified as financing leases.
Amortization expenses
for the three months ended March 31, 2022, and 2021 were $
| 24 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
At
March 31, 2022, the Company had current and long-term operating lease liabilities of $
Net
rent expense for the three months ended March 31, 2022 and 2021 were $
Litigation
On June 22, 2021, Thomas Seifert’s employment as the Company’s Chief Financial Officer was terminated for cause. Mr. Seifert asserts that the termination was not for cause and that he is owed all compensation payable under his employment agreement executed in June 2021. The Company’s position is that Mr. Seifert is not owed any additional consideration or compensation relating to his prior service with the Company or arising under any employment agreement. The Company and Mr. Seifert are currently engaged in litigation over the matter of his employment and termination. The Company believes it has adequate defenses to Mr. Seifert’s claims and has advanced claims against Mr. Seifert including, but not limited to, breach of the employment agreement, breach of the fiduciary, fraud in the inducement in connection with the employment agreement, fraudulent misrepresentation, and constructive fraud. The Company does not expect to seek substantial monetary relief in the litigation.
From time to time, the Company may become involved in litigation relating to claims arising out of our operations in the normal course of business. The Company is not currently involved in any pending legal proceeding or litigation, and to the best of our knowledge, no governmental authority is contemplating any proceeding to which the Company is a party or to which any of the Company’s properties is subject, which would reasonably be likely to have a material adverse effect on the Company’s business, financial condition and operating results.
NOTE 12 - CONCENTRATIONS
Customers:
Amazon
accounted for
| 25 |
NEXTPLAT CORP AND SUBSIDIARIES
FKA: ORBSAT CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – CONCENTRATIONS (continued)
Suppliers:
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the three months ended March 31, 2022 and 2021.
| March 31, 2022 | March 31, 2021 | |||||||||||||||
| Globalstar Europe | $ | % | $ | % | ||||||||||||
| Garmin | $ | % | $ | % | ||||||||||||
| Network Innovations | $ | % | $ | % | ||||||||||||
| Cygnus Telecom | $ | % | $ | % | ||||||||||||
| Satcom Global | $ | % | $ | % | ||||||||||||
Geographic:
The following table sets forth revenue as to each geographic location, for the three months ended March 31, 2022 and 2021:
| March 31, 2022 | March 31, 2021 | |||||||||||||||
| Europe | $ | % | $ | % | ||||||||||||
| North America | % | % | ||||||||||||||
| South America | % | % | ||||||||||||||
| Asia & Pacific | % | % | ||||||||||||||
| Africa | % | % | ||||||||||||||
| $ | $ | |||||||||||||||
NOTE 13 - SUBSEQUENT EVENTS
None.
| 26 |
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, 2021, filed with the SEC on March 31, 2022, and the Company’s subsequent public filings with the SEC.
Corporate Information
NextPlat Corp, formerly Orbsat Corp (“NextPlat”), is a Nevada corporation. Our headquarters and principal executive offices are located at 3250 Mary St., Suite 410, Coconut Grove, FL 33133. Our telephone number is (305) 560-5355, and our corporate website is www.nextplat.com. Unless the context requires otherwise, in this report the terms “the Company,” “we,” “us,” and, “our” refer to NextPlat and our wholly owned subsidiaries.
| 27 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 may have a material, adverse effect on our results of operations, cash flows and liquidity.
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.
| 28 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 year ended December 31, 2020 reflected this impact. Recently, some governmental agencies in the US and Europe, where we produce the largest percentage of our sales, have lifted certain restrictions. We have incurred strong increases in sales outside of our Amazon marketplaces for the three months ended March 31, 2022. However due to uncertainties related to variants of COVID-19, we are uncertain as to the continuation of the increases to revenue.
Recent Events
Expanding beyond our current global network of online storefronts serving thousands of consumers, enterprises, and governments, we intend to develop a next generation platform for digital assets built for Web3, an internet service built using decentralized blockchains. Our new platform (“NextPlat Digital”), which is currently in the design and development phase in collaboration with consultants and contracted developers, will initially enable the use of non-fungible tokens (“NFTs”), in e-commerce and in community-building activities. NextPlat Digital may in the future also enable the posting and use of other digital or “crypto” assets once applicable legal and regulatory requirements are addressed. As currently contemplated, NextPlat Digital will facilitate the creation/minting, purchase and sale of a broad range of non-yield-generating and non-fractionalized NFT products, including, but not limited to, art, music, collectables, digital real estate, video games, game items and certificates of authenticity. We also anticipated developing and deploying NFTs for use in tokenizing data for use in brand loyalty programs.
NextPlat Digital, as currently planned, will be used by us to create both (a) public marketplaces, for us and third-parties, where anyone with a crypto wallet or credit card can buy an NFT from an authorized user, or, if authorized, sell their own NFTs, and (b) private market places that only allow a particular company or entity to sell their own NFTs within a branded market (such as for the promotion of a particular brand or product). We anticipate that NextPlat Digital will be substantially complete within the next six to nine months.
| 29 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In determining if and how an NFT can be posted on our platform, we will follow an internally developed model that will permit us to make a risk-based assessment regarding the likelihood that a particular NFT could be deemed a “security” within the meaning of the U.S. federal securities laws. This process will involve employees trained to identify the indicia of a “security” who will also work with outside legal counsel experienced in crypto asset regulatory matters to make a determination with respect to each NFT, or category of NFT, proposed to be posted on our platform. These processes and procedures are risk based assessments and are not a legal standard or binding on regulators or courts. In the event an NFT or other digital asset is deemed by us, pursuant to the above analysis, to possess a reasonable likelihood of being deemed a security, we will (a) comply with applicable laws and regulations by forming, acquiring or engaging a licensed broker-dealer authorized to act as an trading system for those digital assets, or (b) transact in such digital assets offshore in a way that complies with applicable laws and regulations; or (c) not transact in the subject NFT. We do not currently intend to undertake or participate in “initial coin offerings”, the minting of “coins” or cryptocurrencies.
Our creation and operation of NextPlat Digital will also present a number of new regulatory and legal compliance obligations for the Company. For example, 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 Anti-Money Laundering (AML) rules, as well as U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) requirements and state licensing requirements. In connection with complying with applicable regulations and laws (including Know-Your-Customer (KYC), Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations) when onboarding new users, we intend to utilize third-party tools to proactively screen for high-risk wallets, including explicitly sanctioned addresses and addresses associated with sanctioned entities. The applicable 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 form or acquire a broker dealer in order to post, trade or sell NFTs or other digital assets that are securities, we will 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.
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.
| 30 |
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 in connection with restricted stock awards, 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.
Enterprise Resource Planning System (ERP)
On April 1, 2022, the Company went live 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. 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. The Company intends to maintain dual accounting systems, until such time it is deemed acceptable.
As of March 31, 2022, there were 50,000,000 shares of common stock authorized and 9,293,096 shares issued and outstanding.
As of March 31, 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 March 31, 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 $868,558 during the three months ended March 31, 2022. At March 31, 2022, we had working capital of $22,766,775. Additionally, at March 31, 2022, we had an accumulated deficit of $22,836,298 and stockholder’s equity of $23,705,244.
Results of Operations for the Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021
Revenue. Sales for the three months ended March 31, 2022, consisted primarily of sales of satellite phones, tracking devices, accessories, and airtime plans. For the three months ended March 31, 2022, revenues generated were $3,577,778 compared to $1,461,428 of revenues for the three months ended March 31, 2021, an increase in total revenues of $2,116,350 or 144.8%. Total sales for Global Telesat Communications Ltd. were $2,595,840 for the three months ended March 31, 2022, as compared to $1,013,435 for the three months ended March 31, 2021, an increase of $1,582,405 or 156.1%. Total sales for Orbital Satcom Corp. were $981,938 for the three months ended March 31, 2022 as compared to $447,993, for the three months ended March 31, 2021, an increase of $533,945 or 119.2%. The Company attributes the changes in revenue to new product lines, increased inventory, and additional e-commerce storefronts.
Cost of Sales. During the three months ended March 31, 2022, cost of revenues increased to $2,776,685 compared to $1,023,911, for the three months ended March 31, 2021, an increase of $1,752,774 or 171.2%. Gross profit margins during the three months ended March 31, 2022 were 22.4% as compared to 29.9% for the comparable period in the prior year. The decrease is primarily due to a lower percentage of high margin sales int the first quarter ended March 31, 2022 as compared to the same period in 2021.
| 31 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating Expenses. Total operating expenses for the three months ended March 31, 2022, were $1,635,708, an increase of $899,262 or 122.1%, from total operating expenses for the three months ended March 31, 2021, of $736,446. Factors contributing to the decrease are described below.
Selling, general and administrative expenses were $574,350 and $175,890 for the three months ended March 31, 2022 and 2021, respectively, an increase of $398,460 or 226.5%. The fluctuations in the increase, for the three months ended March 31, 2022, are attributable to certain SG&A expenses that fluctuate with sales volatility, as well as, an increase in marketing expenses, stock-based compensation, D&O and medical insurance, recruiting expenses and other costs associated with an increase in personnel.
Salaries, wages and payroll taxes were $635,576 and $208,174, for the three months ended March 31, 2022 and 2021, respectively, an increase of $427,402, or 205.3%. The increase is a result of an increase in personnel, for the three months ended March 31, 2022.
Professional fees were $326,213 and $292,882 for the three months ended March 31, 2022 and 2021, respectively, an increase of $33,331, or 11.4%. The increase during the three months ended March 31, 2022 as compared to the same period in 2021, is attributable to increase in director fees, accounting and legal fees, offset by a reduction in professional fees related to the public offering from the quarter ended March 31, 2021.
Depreciation and amortization expenses were $99,569 and $73,700 for the three months ended March 31, 2022 and 2021, respectively, an increase of $25,869 or 35.1%. 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 2022 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 Expense. Our total other expenses were $15,468 compared to $504,213 during the three months ended March 31, 2022 and 2021, respectively, a decrease of $488,745. The decrease is attributable to interest expense incurred in the same period of the prior year.
Net Loss. We recorded net loss before income tax of $850,083 for the three months ended March 31, 2022 as compared to a net loss of $803,142, for the three months ended March 31, 2021. The increase in the loss is a result of the factors as described above.
| 32 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comprehensive Gain (Loss). We recorded a loss for foreign currency translation adjustments for the three months ended March 31, 2022 of $15,330 and a gain of $1,611 for the three months ended March 31, 2021. The fluctuations of the increase/decrease are primarily attributed to the increase/decrease recognized due to exchange rate variances.
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 March 31, 2022, we had a cash balance of $21,907,935. Our working capital is $22,766,775 at March 31, 2022.
Our current assets at March 31, 2022 increased 26% from December 31, 2021 and included cash, accounts receivable, prepaid expenses, unbilled revenue, right of use, inventory and other current assets.
Our current liabilities at March 31, 2022 decreased 38.6% 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 March 31, 2022, the Company had an accumulated deficit of $22,836,298, working capital of $22,766,775 and net loss of $850,083 during the three months ended March 31, 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 three months ended March 31, 2022 amounted to $868,558 and were primarily attributable to our net loss of $850,083, total amortization expense of $6,250 and depreciation of $93,319, amortization of right of use of $8,803, stock based compensation of $34,800 and net change in assets and liabilities of $161,647, primarily attributable to an increase in accounts receivable of $70,307, an increase in inventory of $453,496, a decrease in unbilled revenue of $8,278, an increase in prepaid expense of $26,232, a decrease in VAT receivable of $33,044, a decrease in other current assets of $48,539, an increase in accounts payable of $352,201, a decrease in contract liabilities of $6,401, a decrease in lease liabilities of $8,718, and decrease in provision for income taxes of $38,555.
Net cash flows used by operating activities for the three months ended March 31, 2021 amounted to $459,764 and were primarily attributable to our net loss of $803,142, total amortization expense of $6,250 and depreciation of $67,250, amortization of discount on debt of $501,164, increase in stock based compensation of $14,200, a decrease in right of use of $7,563 and net change in assets and liabilities of $253,249, primarily attributable to an increase in accounts receivable of $94,176, an increase in inventory of $239,490, an increase in unbilled revenue of $2,067, , an increase in other current assets of $19,195, increase in accounts payable of $114,261, a decrease in contract liabilities of $5,157, a decrease in lease liabilities of $7,589, and an increase in provision for income taxes of $164.
Investing Activities
Net cash flows used in investing activities were $67,997 and $459 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022 and March 31, 2021, we purchased property and equipment of $0 and $459, respectively.
| 33 |
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 $5,608,353 and $289,131 for the three months ended March 31, 2022 and 2021, respectively. Net cash flows provided by financing activities were $5,608,353 for the three months ended March 31, 2022 and were primarily attributed to proceeds from common stock offering of $5,605,038, proceeds from related party of $19,737 and offset by repayments of notes payable for $16,422.
Net cash flows provided by financing activities were $289,131 for the three months ended March 31, 2021 and were for proceeds from a convertible note payable of $350,000 and offset by repayments of notes payable for $60,643.
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.
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. and Global Telesat Communications Ltd. All material intercompany balances and transactions have been eliminated in consolidation.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 March 31, 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 $172,950 and $146,935, at March 31, 2022 and December 31, 2021, respectively. Prepaid expenses include prepayments in cash for rent, insurance, pre-payments associated with the Company’s new office and software license fees which are being amortized over the terms of the respective agreement. The current portion consists of costs paid for future services which will occur within a year.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Foreign Currency Translation
The Company’s reporting currency is U.S. Dollars. The accounts of one of the Company’s subsidiaries, GTCL, is maintained using the appropriate local currency, Great British Pound, as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet date, shareholders’ equity is translated at historical rates and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as follows: for the three months ended March 31, 2022, closing rate at 1.3138 US$: GBP, quarterly average rate at 1.3419173 US$: GBP, for the three months ended March 31, 2021, closing rate at 1.3783 US$: GBP, quarterly average rate at 1.379068 US$: GBP, for the year ended 2021 closing rate at 1.353372 US$: GBP, 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.
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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.
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 | |||
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.
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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 March 31, 2022 and March 31, 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).
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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.
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.
ITEM 4. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2021, management identified significant deficiencies related to (i) our internal audit functions and (ii) a lack of segregation of duties within accounting functions. Therefore, our internal controls over financial reporting were not effective as of March 31, 2022.
Management has determined that our internal audit function is significantly deficient due to insufficient qualified resources to perform internal audit functions.
Due to our size and nature, segregation of all conflicting duties may not always be possible or economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.
We believe that the foregoing steps will remediate the significant deficiency identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. Due to the nature of this significant deficiency in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur that would not be prevented or detected.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 22, 2021, Thomas Seifert’s employment as the Company’s Chief Financial Officer was terminated for cause. Mr. Seifert asserts that the termination was not for cause and that he is owed all compensation payable under his employment agreement executed in June 2021. The Company’s position is that Mr. Seifert is not owed any additional consideration or compensation relating to his prior service with the Company or arising under any employment agreement. The Company and Mr. Seifert are currently engaged in litigation over the matter of his employment and termination. The Company believes it has adequate defenses to Mr. Seifert’s claims and has advanced claims against Mr. Seifert including, but not limited to, breach of the employment agreement, breach of the fiduciary, fraud in the inducement in connection with the employment agreement, fraudulent misrepresentation, and constructive fraud. The Company does not expect to seek substantial monetary relief in the litigation.
From time to time, the Company may become involved in litigation relating to claims arising out of our operations in the normal course of business. The Company is not currently involved in any pending legal proceeding or litigation, and to the best of our knowledge, no governmental authority is contemplating any proceeding to which the Company is a party or to which any of the Company’s properties is subject, which would reasonably be likely to have a material adverse effect on the Company’s business, financial condition and operating results.
Item 1A. Risk Factors.
This Quarterly Report on Form 10-Q should be read in conjunction with our 2021 Form 10-K, which describes various material risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, results of operations, financial condition, liquidity, or cash flows and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make.
Material changes from the risk factors set forth in our 2021 Form 10-K are set forth below:
Whether a particular non-fungible token (NFT) or other digital or “crypto” asset is a “security” is subject to a high degree of uncertainty, and if we are unable to properly characterize an NFT or other digital asset, we may be subject to regulatory scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition.
The SEC and its staff have taken the position that certain digital or “crypto” assets (which includes NFTs) fall within the definition of a “security” under the U.S. federal securities laws. The legal test for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.
Several foreign jurisdictions have taken a broad-based approach to classifying digital assets as “securities,” while certain other foreign jurisdictions have adopted a narrower approach. As a result, certain digital assets may be deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization of digital assets as “securities.”
The classification of a digital asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer and sale of such assets. For example, a digital asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in digital assets that are securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers and sellers to trade digital assets that are securities in the United States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system (ATS) in compliance with rules for ATSs. Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency. Foreign jurisdictions may have similar licensing, registration, and qualification requirements.
We have policies and processes to analyze whether each NFT that we seek to facilitate posting and sale on our platform could be deemed to be a “security” under applicable laws. Our policies and processes do not constitute a legal standard but rather represent our company-developed model, which permits us to make a risk-based assessment regarding the likelihood that a particular NFT could be deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a state or foreign regulatory authority, or a court were to determine that an NFT posted and sold on our platform is a “security” under applicable laws. Because our platform is not registered or licensed with the SEC or foreign authorities as a broker-dealer, national securities exchange, or ATS (or foreign equivalents), and we do not seek to register or rely on an exemption from such registration or license to facilitate the offer and sale of NFTs on our platform, we only permit posting on our platform of those NFTs for which we determine there are reasonably strong arguments to conclude that the NFT is not a security. We believe that our process reflects a comprehensive and thoughtful analysis and is reasonably designed to facilitate consistent application of available legal guidance to digital assets to facilitate informed risk-based business judgment. However, we recognize that the application of securities laws to the specific facts and circumstances of digital assets may be complex and subject to change, and that a posting determination does not guarantee any conclusion under the U.S. federal securities laws. We expect our risk assessment policies and to continuously evolve to take into account case law, facts, and developments in technology.
There can be no assurances that we will properly characterize any given NFT as a security or non-security for purposes of determining whether our platform will allow the posting of such NFT, or that the SEC, foreign regulatory authority, or a court, if the question was presented to it, would agree with our assessment. If the SEC, state or foreign regulatory authority, or a court were to determine that NFTs offered or sold on our platform are securities, we would not be able to offer such NFTs until we are able to do so in a compliant manner. A determination by the SEC, a state or foreign regulatory authority, or a court that an NFT posted and sold on our platform was a security may also result in us determining that it is advisable to remove NFTs from our platform that have similar characteristics to the NFT that was determined to be a security. In addition, we could be subject to judicial or administrative sanctions for failing to offer or sell the NFT in compliance with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Customers that purchased such NFTs on our platform and suffered losses could also seek to rescind a transaction that we facilitated as the basis that it was conducted in violation of applicable law, which could subject us to significant liability. We may also be required to cease facilitating transactions in other similar NFTs, which could negatively impact our business, operating results, and financial condition.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 5, 2022, the Company issued 2,229,950 shares of common stock pursuant to a private placement offering at a per share price of $3.24, resulting in gross proceeds of $7,225,038. Legal and registration fees amounted to $220,000, resulting in net proceeds of $7,005,038. Prior to the private placement close, proceeds of $1,400,000, were received and recorded as a stock subscription payable, for the year ended December 31, 2021.
On January 21, 2022, the Company issued 10,000 shares of common stock in connection with restricted stock awards, 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 February 15, 2022, the Company filed Form S3, to register 2,269,950 shares of common stock. On March 22, 2022 and April 22, 2022, the Company filed a Form S-3/A Amendment No. 1 and 2, respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.ins | Inline XBRL Instance Document | |
| 101.sch | Inline XBRL Taxonomy Schema Document | |
| 101.cal | Inline XBRL Taxonomy Calculation Document | |
| 101.def | Inline XBRL Taxonomy Linkbase Document | |
| 101.lab | Inline XBRL Taxonomy Label Linkbase Document | |
| 101.pre | Inline XBRL Taxonomy Presentation Linkbase Document |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: May 16, 2022 | NEXTPLAT CORP | |
| By: | /s/ Charles M. Fernandez | |
| Charles M. Fernandez | ||
| Chairman and Chief Executive Officer | ||
| (principal executive officer) | ||
| /s/ Paul R. Thomson | ||
| Chief Financial Officer | ||
| (principal financial officer) | ||
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