UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ______________to _______________.

 

Commission File Number 000-25097

 

ORBSAT CORP

(Exact name of registrant as specified in its charter)

 

Nevada   65-0783722

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

18851 NE 29th Avenue, Suite 700

Aventura, FL

  33180
(Address of principal executive offices   (Zip Code)

 

(305)-560-5355

Registrant’s telephone number, including area code

 

ORBITAL TRACKING CORP.

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

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. Yes [X] No [  ]

 

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). Yes [X] No [  ]

 

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 [  ]
Non-accelerated filer [X] Smaller reporting company [X]
  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 [  ] No [X]

 

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 15, 2020
Common Stock, $0.0001 par value   241,892

 

 

 

   
 

 

FORM 10-Q

 

INDEX

 

  Page
   
PART I: FINANCIAL INFORMATION  
   
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 2
   
CONDENSED CONSOLIDATED BALANCE SHEETS 2
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 3
   
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 4
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 10
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
   
ITEM 4. CONTROLS AND PROCEDURES 43
   
PART II. OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 44
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 44
   
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 44
   
ITEM 4. MINE SAFETY DISCLOSURES 44
   
ITEM 5. OTHER INFORMATION 44
   
ITEM 6. EXHIBITS 44
   
SIGNATURES 45

 

 i 
 

 

Part I Financial Information

 

Item 1. Financial Statements

 

The Company’s unaudited financial statements for the three months ended March 31, 2020 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.

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF

 

   March 31, 2020   December 31, 2019 
   (unaudited)     
ASSETS          
Current assets:          
Cash  $138,078   $75,362 
Accounts receivable, net   172,308    244,353 
Inventory   443,984    366,298 
Unbilled revenue   70,683    76,051 
Prepaid expenses   5,944    18,596 
Other current assets   20,177    96,786 
Total current assets   

851,174

    877,446 
           
Property and equipment, net   1,282,216    1,341,187 
Right of use   71,740    83,679 
Intangible assets, net   118,750    125,000 
           
Total assets  $2,323,880   $2,427,312 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued liabilities  $1,284,926   $1,164,217 
Contract liabilities   36,071    41,207 
Related party payable   71,607    51,071 
Line of credit   17,257    24,483 
Lease liabilities - current   27,457    29,237 
Provision for income taxes   20,526    21,856 
Liabilities from discontinued operations   112,397    112,397 
Total current liabilities   1,570,241    1,444,468 
           
Long term liabilities:          

Convertible debt, net of discount, unamortized, $560,496 and

$635,333, respectively

   233,178    169,667 
Note payable   121,848    121,848 
Lease liabilities – long term   41,632    51,620 
Total Liabilities   1,966,899    1,787,603 
           
Stockholders’ Equity:          
Preferred Stock, $0.0001 par value; 3,333,333 shares authorized          
Common stock, ($0.0001 par value; 50,000,000 shares authorized, 234,476 shares issued and outstanding as of March 31, 2020 and 121,216 outstanding at December 31, 2019, respectively)   23    12 
Additional paid-in capital   11,768,342    11,757,027 
Accumulated (deficit)   (11,400,038)   (11,115,178)
Accumulated other comprehensive (income) loss   (11,346)   (2,152)
Total stockholders’ equity   356,981    639,709 
           
Total liabilities and stockholders’ equity  $2,323,880   $2,427,312 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

 2 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHNSIVE LOSS

 

   Three Months
Ended
   Three Months
Ended
 
   March 31, 2020   March 31, 2019 
         
Net sales  $1,468,103   $1,298,371 
           
Cost of sales   1,120,102    1,052,442 
           
Gross profit   348,001    245,929 
           
Operating expenses:          
Selling, general and administrative   157,206    139,003 
Salaries, wages and payroll taxes   195,642    173,319 
Professional fees   114,889    103,195 
Depreciation and amortization   71,504    67,214 
Total operating expenses   539,241    482,731 
           
(Loss) before other expenses and income taxes   (191,240)   (236,802)
           
Change in fair value of derivative instruments, net   -    36,925 
Interest expense   91,253    19,219 
Foreign currency exchange rate variance   2,367    14,677 
Total other income   93,620    70,821 
           
Net loss  $(284,860)  $(307,623)
           
Comprehensive Income:          
Net loss  $(284,860)  $(307,623)
Foreign currency translation adjustments   (9,194)   (181)
Comprehensive loss  $(294,054)  $(307,804)
           
Net loss Per Share - Basic & Diluted  $(2.43)   (3.87)
Weighted average common shares outstanding - Basic & Diluted   121,216    79,540 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

 3 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

    Preferred Stock - Series A      Preferred Stock - Series B        Preferred Stock - Series C   
    $0.0001 Par Value      $0.0001 Par Value      $0.0001 Par Value   
    Shares     Amount     Shares     Amount     Shares     Amount  
Balance, December 31, 2019   -   $-    -   $-    -   $- 
                               
Issuance common stock from convertible debt   -    -    -    -    -    - 
Comprehensive loss   -    -    -    -    -    - 
Net loss   -    -    -    -    -    - 
                               
Balance, March 31, 2020   -   $-    -   $-    -   $- 

 

For the Three Months Ended March 31, 2019

 

   Preferred Stock -
Series A
   Preferred Stock -
Series B
   Preferred Stock -
Series C
 
   $0.0001 Par Value   $0.0001 Par Value   $0.0001 Par Value 
   Shares   Amount   Shares   Amount   Shares   Amount 
Balance, December 31, 2018        -   $        -    222   $       -    127,578   $13 
                               
Exercise of options to common   -    -    -    -    -    - 
Comprehensive loss   -    -    -    -    -    - 
Net loss   -    -    -    -    -    - 
                               
Balance, March 31, 2019   -   $-    222   $-    127,578   $13 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 4 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

      Preferred Stock - Series D         Preferred Stock - Series E           Preferred Stock - Series F    
      $0.0001 Par Value         $0.0001 Par Value         $0.0001 Par Value    
      Shares       Amount       Shares       Amount        Shares        Amount   
Balance, December 31, 2019     -     $ -       -     $ -       -     $ -  
                                                 
Issuance common stock from convertible debt     -       -       -       -       -       -  
Comprehensive loss     -       -       -       -       -       -  
Net loss     -       -       -       -       -       -  
                                                 
Balance, March 31, 2020     -     $ -       -     $ -   $ -     $ -  

 

For the Three Months Ended March 31, 2019

 

   Preferred Stock -
Series D
   Preferred Stock -
Series E
   Preferred Stock -
Series F
 
   $0.0001 Par Value   $0.0001 Par Value   $0.0001 Par Value 
   Shares   Amount   Shares   Amount   Shares   Amount 
Balance, December 31, 2018   192,807   $     19    344,947   $34    23,333   $      2 
                               
Exercise of options to common   -    -    -    -    -    - 
Comprehensive loss   -    -    -    -    -    - 
Net loss   -    -    -    -    -    - 
                               
Balance, March 31, 2019   192,807   $19    344,947   $34   $23,333   $2 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 5 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

      Preferred Stock - Series G         Preferred Stock - Series H           Preferred Stock - Series I    
      $0.0001 Par Value         $0.0001 Par Value         $0.0001 Par Value    
      Shares       Amount       Shares       Amount        Shares        Amount   
Balance, December 31, 2019     -     $ -       -     $ -       -     $ -  
                                                 
Issuance common stock from convertible debt     -       -       -       -       -       -  
Comprehensive loss     -       -       -       -       -       -  
Net loss     -       -       -       -       -       -  
                                                 
Balance, March 31, 2020     -     $ -       -     $ -       -     $ -  

 

For the Three Months Ended March 31, 2019

 

   Preferred Stock -
Series G
   Preferred Stock -
Series H
   Preferred Stock -
Series I
 
   $0.0001 Par Value   $0.0001 Par Value   $0.0001 Par Value 
   Shares   Amount   Shares   Amount   Shares   Amount 
Balance, December 31, 2018   346,840   $35    916   $        -    3,274   $       - 
                               
Exercise of options to common   -    -    -    -    -    - 
Comprehensive loss   -    -    -    -    -    - 
Net loss   -    -    -    -    -    - 
                               
Balance, March 31, 2019   346,840   $35    916   $-    3,274   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 6 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

      Preferred Stock - Series J         Preferred Stock - Series K           Preferred Stock - Series L    
      $0.0001 Par Value         $0.0001 Par Value         $0.0001 Par Value    
      Shares       Amount       Shares       Amount        Shares        Amount   
Balance, December 31, 2019     -     $ -       -     $ -       -     $ -  
                                                 
Issuance common stock from convertible debt     -       -       -       -       -       -  
Comprehensive loss     -       -       -       -       -       -  
Net loss     -       -       -       -       -       -  
                                                 
Balance, March 31, 2020     -     $ -       -     $ -       -     $ -  

 

For the Three Months Ended March 31, 2019

 

   Preferred Stock –
Series J
   Preferred Stock –
Series K
   Preferred Stock –
Series L
 
   $0.0001 Par Value   $0.0001 Par Value   $0.0001 Par Value 
   Shares   Amount   Shares   Amount   Shares   Amount 
Balance, December 31, 2018   4,313   $         -    77,124   $       8    2,000   $       - 
                               
Exercise of options to common   -    -    -    -    -    - 
Comprehensive loss   -    -    -    -    -    - 
Net loss   -    -    -    -    -    - 
                               
Balance, March 31, 2019   4,313   $-    77,124   $8    2,000   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 7 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

   Common Stock   Additional     
   $0.0001 Par Value   Paid in   Accumulated 
   Shares   Amount   Capital   Deficit 
Balance, December 31, 2019   121,216   $12   $11,757,027   $(11,115,178)
                     
Issuance common stock from convertible debt   113,260    11    11,315    - 
Comprehensive loss   -    -    -    - 
Net loss   -    -    -    (284,860)
                     
Balance, March 31, 2020   234,476   $23   $11,768,342   $(11,400,038)

 

For the Three Months Ended March 31, 2019

 

    Common Stock     Additional        
    $0.0001 Par Value     Paid in     Accumulated  
    Shares     Amount     Capital     Deficit  
Balance, December 31, 2018     62,435     $  6     $  11,120,192     $  (9,735,421 )
                                 
Exercise of options to common     21,619       2       (2)       -  
Comprehensive loss     -       -       -       -  
Net loss     -       -       -       (307,623 )
                                 
Balance, March 31, 2019     84,054     $ 8     $  11,120,190     $ (10,043,044 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 8 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

For the Three Months Ended March 31, 2020

 

   Comprehensive   Stockholders’ 
   Income (Loss)   Equity 
         
Balance, December 31, 2019  $(2,152)  $639,709 
           
Issuance common stock from convertible debt   -    11,326 
Comprehensive loss   (9,194)   (9,194)
Net loss   -    (284,860)
Balance, March 31, 2020  $(11,346)  $356,981 

 

For the Three Months Ended March 31, 2019

 

   Comprehensive   Stockholders’ 
   Income (Loss)   Equity 
         
Balance, December 31, 2018  $(6,172)  $1,378,715 
           
Exercise of options to common   -    - 
Comprehensive loss   (181)   (181)
Net loss   -    (307,623)
Balance, March 31, 2019  $(6,353)  $1,070,911 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 9 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED

 

   March 31, 2020   March 31, 2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(284,860)  $(307,623)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation expense   65,254    60,964 
Amortization of intangible asset   6,250    6,250 
Amortization of right to use   11,939    - 
Amortization of convertible debt, net   74,837    17,595 
Change in fair value of derivative liabilities   -    36,925 
Change in operating assets and liabilities:          
Accounts receivable   72,045    (38,658)
Inventory   (77,686)   (40,502)
Unbilled revenue   5,368    17,085 
Prepaid expense   12,652    1,926 
Other current assets   76,609    (1,472)
Accounts payable and accrued liabilities   120,709    124,264 
Lease liabilities   

(11,939

)    
Provision for income taxes   (1,330)   248 
Contract liabilities   (5,136)   9,161 
Net cash provided by (used in) operating activities   64,712    (113,837)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (10,933)   - 
Net cash used in investing activities   (10,933)   - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayments of note payable, related party, net   20,536    17,134 
Repayments from line of credit   (7,226)   - 
Proceeds of convertible debt   -    65,000 
Net cash provided by financing activities   13,310    82,134 
           
Effect of exchange rate on cash   (4,373)   (1,395)
           
Net increase in cash   62,716    (33,098)
Cash beginning of period   75,362    142,888 
Cash end of period  $138,078   $109,790 
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid during the period for          
Interest  $-   $- 
Income tax  $-   $- 
Non-cash adjustments during the period for          
Beneficial conversion feature on convertible debt  $74,837   $- 
Conversion of convertible debt into common shares  $11,326   $- 
Obtaining right of use asset for lease liability  $11,939   $- 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

 10 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING 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, 2020, are not necessarily indicative of the results for the remainder of the fiscal year. The consolidated financial statements as of December 31, 2019, 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 Orbsat Corp F/K/A/ Orbital Tracking Corp. (the “Company”) for the year ended December 31, 2019, 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 30, 2020. The consolidated balance sheet as of December 31, 2019 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

 

Orbsat Corp (the “Company”) was formerly Great West Resources, Inc., a Nevada corporation. The Company is a provider of satellite-based hardware, airtime and related services both in the United States and internationally. The Company’s principal focus is on growing the Company’s existing satellite-based hardware, airtime and related services business line and developing the Company’s own tracking devices for use by retail customers worldwide.

 

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, effecting a 2:1 forward split of its common stock, and changing its name to EClips Media Technologies, Inc. On April 25, 2011, the Company changed its name to Silver Horn Mining Ltd. pursuant to a merger with a wholly-owned subsidiary.

 

A wholly-owned subsidiary, Orbital Satcom Corp. (“Orbital Satcom”), a Nevada corporation was formed on November 14, 2014.

 

On March 28, 2014, the Company merged with and into a wholly-owned subsidiary of the Company (“Great West”) solely for the purpose of changing its state of incorporation to Nevada from Delaware (the “Reincorporation”), effecting a 1:150 reverse split of its common stock, and changing its name to Great West Resources, Inc. in connection with the plans to enter into the business of potash mining and exploration. During late 2014, the Company abandoned its efforts to enter the potash mining and exploration business. All references in the audited consolidated financial statements and notes thereto have been retroactively restated to reflect the reverse stock split of 1:150.

 

On the effective date of the merger:

 

(a) Each share of the Company’s common stock issued and outstanding immediately prior to the effective date changed and converted into 1/150th fully paid and non-assessable shares of Great West common stock;

 

(b) Each share of the Company’s Series A preferred stock issued and outstanding immediately prior to the effective date changed and converted into 1/150th fully paid and non-assessable shares of the Great West Series A preferred stock;

 

(c) Each share of the Company’s Series D preferred stock issued and outstanding immediately prior to the effective date changed and converted into 1/150th fully paid and non-assessable shares of the Great West Series B preferred stock;

 

 11 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(d) All options to purchase shares of the Company’s common stock issued and outstanding immediately prior to the effective date changed and converted into equivalent options to purchase 1/150th of a share of Great West common stock at an exercise price of $0.0001 per share;

 

(e) All warrants to purchase shares of the Company’s common stock issued and outstanding immediately prior to the effective date changed and converted into equivalent warrants to purchase 1/150th of a share of Great West common stock at 150 times the exercise price of such converted warrants; and

 

(f) Each share of Great West common stock issued and outstanding immediately prior to the effective date were canceled and returned to the status of authorized but unissued Great West common stock.

 

Global Telesat Communications Limited (“GTCL”) was formed under the laws of England and Wales in 2008. On February 19, 2015, the Company entered into a share exchange agreement with GTCL and all of the holders of the outstanding equity of GTCL pursuant to which GTCL became a wholly-owned subsidiary of the Company.

 

For accounting purposes, this transaction was accounted for as a reverse acquisition and has been treated as a recapitalization of the Company with GTCL considered the accounting acquirer, and the financial statements of the accounting acquirer became the financial statements of the registrant. The completion of the Share Exchange resulted in a change of control. The Share Exchange was accounted for as a reverse acquisition and re-capitalization. The GTCL shareholders obtained approximately 39% of voting control on the date of Share Exchange. GTCL was the acquirer for financial reporting purposes and the Company was the acquired company. The consolidated financial statements after the acquisition include the balance sheets of both companies at historical cost, the historical results of GTCL and the results of the Company from the acquisition date. All share and per share information in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the recapitalization. See Note 12 - Stockholders Equity.

 

On August 19, 2019, we effected a reverse split in 1-for-15 ratio as applied to our common stock and preferred stock, as well as the number of authorized shares for both classes. As of December 31, 2019, we had 121,216 shares issued and outstanding post-split. All share and per share, information in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the most recently completed reverse split. See Note 12 - Stockholders Equity.

 

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.

 

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 $250,000. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.

 

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, 2020, and 2019, there is an allowance for doubtful accounts of $5,300 and $0, respectively.

 

 12 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 $5,944 and $18,596, at March 31, 2020 and December 31, 2019, respectively. Prepaid expenses include prepayments in cash for accounting fees, prepayments in equity instruments and license fees which are being amortized over the terms of their respective agreements and product costs associated with deferred revenue. The current portion consists of costs paid for future services which will occur within a year.

 

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, 2020, closing rate at 1.245481 US$: GBP, quarterly average rate at 1.281097 US$: GBP, for the three months ended March 31, 2019, closing rate at 1.304251 US$: GBP, quarterly average rate at 1.3064 US$: GBP, for the year ended 2019 closing rate at 1.3262 US$: GBP, average rate at 1.276933 US$: 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.

 

 13 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 consolidated balance sheets as current liabilities. At March 31, 2020 and December 31, 2019, we had contract liabilities of approximately $36,071 and $41,207.

 

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 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.

 

Goodwill and other intangible assets

 

In accordance with ASC 350-30-65, “Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Factors the Company considers to be important which could trigger an impairment review include the following:

 

  Significant underperformance relative to expected historical or projected future operating results;
  Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
  Significant negative industry or economic trends.

 

When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company recorded an impairment charge of $0 and $50,000, during the three months ended March 31, 2020 and for the year ended December 31, 2019, respectively.

 

 14 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 were $65,254 and $60,965, respectively.

 

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, 2020 and March 31, 2019, 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.

 

 15 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Stock Based Compensation

 

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 $0.

 

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.

 

Tax positions that meet the more likely than not recognition threshold is measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

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.

 

The Company continues to account for leases in the prior period financial statements under ASC Topic 840.

 

 16 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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. On February 19, 2015, the Company issued 444 of its common stock, par value $0.0001, at $112.61 per share, or $50,000, to a consultant as compensation for the design and delivery of dual mode gsm/Globalstar Simplex tracking devices and related hardware and intellectual property. For the year ended December 31, 2019, the Company recorded an impairment charge of $50,000 for the above-mentioned other asset, due to the delay in its launch to our existing product lines. For the three months ended March 31, 2020 and 2019, there were no additional expenditures on research and development.

 

Earnings per Common Share

 

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.

 

The following are dilutive common stock equivalents during the year ended:

 

   March 31, 2020   March 31, 2019 
Convertible preferred stock   -    147,649 
Convertible notes payable (1)   7,936,740    - 
Stock Options   39,044    79,044 
Stock Warrants   4,000    4,000 
Total   7,979,784    230,693 

 

(1) 7,936,740 shares of our common stock issuable upon conversion of $793,674 of Convertible Notes Payable as of March 31, 2020, not accounting for 4.99% beneficial ownership limitations.

 

On April 30, 2019, the Company exchanged preferred shares to promissory notes and is treated as extinguishment of preferred shares. In accordance with ASC 260-10-S99, such extinguishment on preferred shares considered as redemptions of preferred shares and the difference between the fair value of the consideration and the carrying amount of the preferred shares will adjust the net income (loss) available to common stockholders in the calculation of earnings per shares. The following are the adjustment to the net income (loss) available to common stockholders during the period ended:

 

   Three Months Ended
March 31, 2020
   Year Ended
December 31, 2019
 
Net loss  $(284,860)  $(1,379,756)
Preferred shares redemption adjustment  $-   $201,924 
Net loss available to common shareholders  $(284,860)  $(1,177,832)
           
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS          
Weighted number of common shares outstanding – basic & diluted   121,216    106,175 
Loss applicable to common shareholders per share  $(2.43)  $(11.09)

 

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.

 

Recent Accounting Pronouncements

 

In May 2016, the FASB issued 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.

 

 17 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. There was no impact as a result of adopting this ASU on the financial statements and related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which 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 0. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 and did not have a material impact on the Company’s financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging, which changes the accounting and earnings per share for certain instruments with down round features. The amendments in this ASU are applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment to each period presented and is effective for annual periods beginning after December 15, 2018, and interim periods within those periods.

 

On December 22, 2017 the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “TCJA”). SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied this guidance to its consolidated financial statements.

 

In November 2018, the FASB amended Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 with ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for us on January 1, 2019, however the Company did not have any leases that met the criteria as established above, until July 24, 2019, when the Company entered into a three year lease for its UK office and warehouse for annual rent of £25,536 or GBP: USD using exchange rate close for the three months ended March 31, 2020, for liability of 1.245481 or $31,805. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

 

At March 31, 2020, the Company had current and long-term operating lease liabilities of $27,457 and $41,632, respectively, and right of use assets of $71,740.

 

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.

 

 18 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - GOING CONCERN CONSIDERATIONS

 

The accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern. At March 31, 2020, the Company had an accumulated deficit of $11,400,038, negative working capital of $719,067 and net loss of $284,860 during the three months ended March 31, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the Company to continue as a going concern is dependent upon obtaining additional capital and financing. Management intends to attempt to raise additional funds by way of a public or private offering. While the Company believes in the viability of its strategy to raise additional funds, there can be no assurances to that effect. Without additional capital, we will be unable to achieve our business objectives, and may be forced to curtail our operations, reduce headcount, and/or temporarily cease our operations until requisite capital is secured. The consolidated financial statements do not include any adjustments relating to classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 3 - INVENTORIES

 

At March 31, 2020 and December 31, 2019, inventories consisted of the following:

 

   March 31, 2020   December 31, 2019 
Finished goods  $443,984   $366,298 
Less reserve for obsolete inventory   -    - 
Total  $443,984   $366,298 

 

For the three months ended March 31, 2020 and the year ended December 31, 2019, the Company did not make any change for reserve for obsolete inventory.

 

NOTE 4 – PREPAID EXPENSES

 

Prepaid expenses amounted to $5,944 at March 31, 2020 and $18,596 at December 31, 2019, respectively. Prepaid expenses include prepayments in cash for accounting fees, prepayments in equity instruments, which are being amortized over the terms of their respective agreements, as well as cost associated with certain contract liabilities. The current portion consists of costs paid for future services which will occur within a year.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

At March 31, 2020 and December 31, 2019, property and equipment, net of fully depreciated assets, consisted of the following:

 

   March 31, 2020   December 31, 2019 
Office furniture and fixtures  $9,453   $10,066 
Computer equipment   36,581    47,646 
Rental equipment   58,698    75,470 
Appliques   2,160,096    2,160,096 
Website development   44,851    36,279 
           
Less accumulated depreciation   (1,027,463)   (988,370)
           
Total  $1,282,216   $1,341,187 

 

Depreciation expense was $65,254 and $60,965 for the three months ended March 31, 2020 and 2019, respectively.

 

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 $250,000 was paid by the Company under an asset purchase agreement by and among the Company, its wholly owned subsidiary, Orbital Satcom, GTC and World Surveillance Group, Inc.

 

 19 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2020 and 2019, the Company amortized $6,250, respectively. Future amortization of intangible assets is as follows:

 

2020   18,750 
2021   25,000 
2022   25,000 
2023   25,000 
2024 and thereafter   25,000 
Total  $118,750 

 

On February 19, 2015, the Company issued 444 of its common stock, par value $0.0001, at $112.50 per share, or $50,000, to a consultant as compensation for the design and delivery of dual mode gsm/Globalstar Simplex tracking devices and related hardware and intellectual property. For the year ended December 31, 2019, the Company recorded an impairment charge of $50,000 for the above-mentioned other asset, due to the delay in its launch to our existing product lines. For the three months ended March 31, 2020 and 2019, 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, 2020   December 31, 2019 
Accounts payable  $1,028,760   $901,244 
Rental deposits   9,243    14,381 
Customer deposits payable   46,618    46,089 
Accrued wages & payroll liabilities   1,927    1,965 
Property tax payable   -    2,770 
VAT liability & sales tax payable   50,964    64,051 
Pre-merger accrued other liabilities   65,948    65,948 
Accrued interest   51,466    35,462 
Accrued other liabilities   30,000    32,307 
Total  $

1,284,926

   $1,164,217 

 

NOTE 8 – LINE OF CREDIT

 

On October 9, 2019, Orbital Satcom Corp., entered into a short-term loan agreement for $29,000, with Amazon. The one-year term loan is paid monthly, has an interest rate of 9.72%, with late payment penalty interest of 11.72%. For the three months ended March 31, 2020 and 2019, the Company recorded interest expense of $467 and $0, respectively. The short-term line of credit balance as of March 31, 2020 and 2019, was $17,257 and $0.

 

 20 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – NOTE EXCHANGE AGREEMENT

 

On April 30, 2019, the Company entered into a Shares for Note Exchange Agreement (each, an “Agreement” and collectively, the “Agreements”) with certain holders of the Company’s preferred stock (the “Converting Stockholders”). Pursuant to the terms of the Agreements, the Company agreed to exchange the preferred shares held by the respective Converting Stockholders for promissory notes as follows:

 

Series of
Preferred
Stock
  No. of
Converting
Holders of
Preferred
Stock
   Aggregate
No. of
Shares Held
by
Converting
Stockholders
   Aggregate
Principal
Amount of
Notes into
which
Shares
Converted
 
B   1    222   $11 
C   1    123,526   $12,353 
D   3    147,577   $29,516 
E          $ 
F   1    23,333   $233 
G   2    346,840   $3,468 
H   3    916   $916 
I   3    3,241   $3,241 
J   5    4,296   $42,961 
K   7    70,571   $70,571 
L   3    1,333   $5,000 
    TOTAL:    721,855   $168,270 

 

In exchange for the above-referenced shares of preferred stock, the Company issued a promissory note (each, a “Note” and collectively, the “Notes”) to each of the Converting Stockholders on April 30, 2019. Each Note bears interest at a rate of 6% per annum and is due on the second anniversary of the issuance date. Interest accrues on a simple interest, non-compounded basis and will be added to the principal amount on the maturity date. In the event that any amount due under a Note is not paid as and when due, such amounts will accrue interest at the rate of 12% per year, simple interest, non-compounding, until paid. The Company may prepay the Notes at any time.

 

During the fiscal year ended December 31, 2019, the Company repaid $46,422 of the notes, leaving a balance of $121,848 as long-term notes payable. For the three months ended March 31, 2020, the Company recorded interest in relation to the note of $1,836.

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE

 

Convertible Notes Payable – current portion

 

On January 14, 2019, under the terms of a Securities Purchase Agreement, we issued a Convertible Promissory Note in the amount of $65,000 (the “Note”) to Power Up Lending Group Ltd. (“Power Up”). The Note bears interest at a rate of twelve percent (12%) per year and is due one (1) year from the date of issue. Beginning 180 days from the issue date, the Note is convertible to our common stock at a price equal to 61% of the Market Price, which is defined as the lowest trading price for our common stock during the 15 trading days prior to the conversion notice. Conversions under the Note are limited such that the holder may not convert the Note to the extent that the number of shares of common stock issuable upon the conversion would result in beneficial ownership by the holder and its affiliates of more than 4.99% of our outstanding shares of common stock. In the event of any default, the Note will bear interest at a rate of 22% per year. The Note may be pre-paid at a premium for the first 150 days after issue, with the pre-payment amount ranging from 115% of the balance to 140% of the balance. After 150 days from issue, pre-payment of the Note is not allowed. On May 14, 2019, the Company repaid the convertible note payable, an aggregate of $87,778, representing principal of $65,000, prepayment penalty of $20,257 and accrued interest of $2,522. The Company has paid the debenture in cash and not converted the note to its common stock, any note amortization and derivative liabilities have been reversed. The interest and the prepayment penalty are reflected on the statement of operations as interest expense.

 

 21 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2020, and 2019, outstanding balance of the current portion of original issue discount convertible notes payable was $0 and $84,500, respectively, which includes a $20,257 pre-payment penalty. The amortization of the debt discount amounted to $17,595 for the three months ended March 31, 2019 and is recorded on the statement of operations as interest expense.

 

Convertible notes payable – long term

 

On May 14, 2019 (the “Issue Date”), the Company entered into a Note Purchase Agreement (the “NPA”) by and among the Company and the lenders set forth on the lender schedule to the NPA (the “Lenders”), as amended by that certain Amendment to Note Purchase Agreement (the “Amendment,” and, together with the NPA, the “Agreement”) by and among the Company and the Lenders. In total, pursuant to the Agreement, the Company issued an aggregate principal amount of $805,000 of its convertible promissory notes (the “Notes”).

 

The Notes bear interest at a rate of 6% per annum, simple interest, and mature on the third anniversary of the Issue Date (the “Maturity Date”), to the extent that the Notes and the principal amounts and any interest accrued thereunder (the “Indebtedness”) have not been converted into shares of common stock of the Company. Interest on the Notes will accrue on a simple interest, non-compounded basis and will be added to the principal amounts on the Maturity Date or such earlier date as may be due upon an Event of Default (as defined below), at which time all Indebtedness will be due and payable, unless earlier converted into Conversion Shares (as defined below). In the event that any amount due under the Notes is not paid as and when due, such amounts will accrue interest at the rate of 12% per year, simple interest, non-compounding, until paid. The Company may not pre-pay or redeem the Notes other than as required by the Agreement. The Notes are general, unsecured obligations of the Company. The proceeds of the Notes will be used to repay certain outstanding indebtedness of the Company and for general corporate purposes. For the three months ended March 31, 2020 and 2019, the Company recorded simple interest expense of $14,113 and $0, respectively.

 

The holders of the Notes (the “Holders”) have an optional right of conversion. A Holder may elect to convert its Note, and all of the Indebtedness outstanding as of such time, into the number of fully paid and non-assessable shares of Common Stock (the “Conversion Shares”) as determined by dividing the Indebtedness by $0.10, subject to certain adjustments, but excluding adjustment for a reserve stock split of no more than 1:20 contemplated by the Company at the Issue Date. The optional right of conversion is subject to a beneficial ownership limitation of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion. For the three months ended March 31, 2020, the Holders converted $11,326 of the convertible debt to common stock, resulting in an issuance of 113,260 common shares and the balance of the convertible notes $793,674.

 

The Agreement contains customary representations and warranties and customary affirmative and negative covenants. These covenants include, among other things, certain limitations on the ability of the Company to: (i) pay dividends on its capital stock; (ii) make distributions in respect of its capital stock; (iii) acquire shares of capital stock; and, (iv) sell, lease or dispose of assets. Pursuant to the Agreement, the Holders are granted demand registration rights and pre-emptive rights as set forth in the Agreement. The Agreement includes customary events of default, including, among others: (i) non-payment of amounts due thereunder, (ii) non-compliance with covenants thereunder, (iii) bankruptcy or insolvency (each, an “Event of Default”). Upon the occurrence of an Event of Default, a majority of the Holders may accelerate the maturity of the Indebtedness.

 

In comparison to the fair market value of the common stock on May 14, 2019, and the fixed effective conversion rate of $0.10 per common share, the lesser amount of the conversion feature or debt was $805,000 and presented a beneficial conversion feature. Thus, the Company recorded a discount on the debt of $805,000 with a corresponding increase to additional paid in capital. For the year ended December 31, 2019, we amortized the discount on the debt, to interest expense of $169,668, resulting in a balance of unamortized discount notes payable of $635,333.

 

For the three months ended March 31, 2020 and 2019, we amortized the discount on the debt, to interest expense of $74,837 and $0, resulting in a balance of unamortized discount notes payable of $560,496.

 

 22 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – DERIVATIVE LIABILITIES

 

The current portion of the convertible notes were accounted for as liabilities at the date of issuance and adjusted to fair value through earnings for the three months ended March 31, 2019. On May 14, 2019, due to the cash repayment any derivative liability was fair valued at repayment date and a gain was recorded for the reversal of derivative liability.

 

   Conversion
feature
derivative
liability
 
Balance at January 1, 2019   - 
Derivative liability   65,000 
Change in fair value included in earnings   36,925 
Balance at March 31, 2019  $101,925 
Change in fair value included in earnings   32,752 
Derivative liability reversed   (134,677)
Balance at March 31, 2020  $- 

 

The Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes option pricing model:

 

   December 31, 2019 
Expected volatility   328%
Expected term - years   0.79 
Risk-free interest rate   2.57%
Expected dividend yield   -%

 

NOTE 12 - 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 800,000,000 shares consisting of (i) 750,000,000 shares of common stock and (ii) 50,000,000 shares of preferred stock from 220,000,000 shares consisting of (i) 200,000,000 shares of common stock and (ii) 20,000,000 shares of preferred stock.

 

Effective March 8, 2018, we conducted a reverse split of our common stock at a ratio of 1 for 150. All share and per share information in the accompanying condensed consolidated financial statements and footnotes has been retroactively restated to reflect the reverse split.

 

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 1-for-15 reverse split (the “Reverse Split”) of the Company’s common stock, $0.0001 par value per share, and the Company’s preferred stock, $0.0001 par value per share, (ii) a reduction in the number of authorized shares of common stock in direct proportion to the Reverse Split (i.e. from 750,000,000 shares to 50,000,000 shares), and (iii) a reduction in the number of authorized shares of preferred stock in direct proportion to the Reverse Split (i.e. from 50,000,000 shares to 3,333,333 shares). No fractional shares will be issued in connection with the Reverse Split. Stockholders who otherwise would be entitled to receive fractional shares of common stock or preferred stock, as the case may be, will have the number of post-Reverse Split shares to which they are entitled rounded up to the nearest whole number of shares. No stockholders will receive cash in lieu of fractional shares. The Reverse Split was approved by FINRA on August 19, 2019.

 

 23 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The authorized capital of the Company consists of 50,000,000 shares of common stock, par value $0.0001 per share and 3,333,333 shares of preferred stock, par value $0.0001 per share, as of March 31, 2020.

 

Preferred Stock

 

As of March 30, 2020, there were 3,333,333 shares of Preferred Stock authorized.

 

On December 5, 2017, pursuant to the approval of our board of directors and a majority of the shareholders in each class, we amended the Certificates of Designation for our Series C, D, E, H, I, J, and K Preferred Stock. The amendments changed the conversion rights of these classes of preferred stock such that the Maximum Conversion as defined in each such Certificate of Designation was increased from 4.99% to 9.99% of our outstanding shares of common stock.

 

On May 20, 2019, following the approval on May 14, 2019, of the board of directors the Company and a majority of the shareholders of the Series E preferred stock, the Company filed an Amended and Restated Certificate of Designations for the Company’s Series E preferred stock. The amendments had the effect of changing the conversion rights such that the 9.99% blocker was eliminated

 

On July 12, 2019, pursuant to the approval of our board of directors and a majority of the shareholders in each class, we amended the Certificates of Designation for our Series E, I and L Preferred Stock. The amendments had the effect of authorizing the Company’s Board to require the conversion of the Series E, I and L preferred stock into common stock of the Company at the then-applicable conversion ratio, without the approval of any holders of Series E, I and L preferred stock.

 

Also on July 12, 2019, the Company filed Certificates of Withdrawal of Certificate of Designations for the Company’s Series A, B, C, D, F, G, H and J preferred stock, pursuant to which the Series A, B, C, D, F, G, H and J preferred stock was cancelled.

 

On July 15, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designations (the “Series K Certificate”) for the Company’s Series K preferred stock, pursuant to which the Series K preferred stock was cancelled.

 

On July 18, 2019, the Company filed Certificates of Withdrawal of Designations for the Company’s Series E, I and L preferred stock, pursuant to which the Series E, I and L preferred stock was cancelled.

 

As of March 31, 2020, 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.

 

 24 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Common Stock

 

As of March 31, 2020, there were 50,000,000 shares of common stock authorized and 234,476 shares issued and outstanding.

 

On January 30, 2020, the Company issued an aggregate of 18,147 common stock upon the conversion of $1,815 of its convertible debt, at the conversion rate of $0.10 per share.

 

On January 31, 2020, the Company issued an aggregate of 18,147 common stock upon the conversion of $1,815 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 10, 2020, the Company issued an aggregate of 25,421 common stock upon the conversion of $2,542 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 11, 2020, the Company issued an aggregate of 23,580 common stock upon the conversion of $2,358 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 18, 2020, the Company issued an aggregate of 13,192 common stock upon the conversion of $1,319 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 19, 2020, the Company issued an aggregate of 4,468 common stock upon the conversion of $446 of its convertible debt, at the conversion rate of $0.10 per share.

 

On March 9, 2020, the Company issued an aggregate of 10,305 common stock upon the conversion of $1,031 of its convertible debt, at the conversion rate of $0.10 per share.

 

Stock Options

 

2018 Incentive Plan

 

On June 14, 2018, our Board of Directors approved the 2018 Incentive Plan (the “Plan”). The 2014 Equity Incentive Plan was closed and superseded by the 2018 Incentive Plan. The purpose of the Plan is to provide a means for the Company to continue to attract, motivate and retain management, key employees, consultants and other independent contractors, and to provide these individuals with greater incentive for their service to the Company by linking their interests in the Company’s success with those of the Company and its shareholders. An Award may also be granted to any consultant, agent, advisor or independent contractor for bona fide services rendered to the Company or any Related Company that; are not in connection with the offer and sale of the Company’s securities in a capital raising transaction, and do not directly or indirectly promote or maintain a market for the Company’s securities. The Plan shall be administered by the Board or its Compensation Committee and may grant Options designated as Incentive Stock Options or Nonqualified Stock Options. The Plan provides that up to a maximum of 66,667 shares of the Company’s common stock (subject to adjustment) are available for issuance under the Plan. Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Incentive Stock Option shall not exceed ten years, and in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, shall not exceed five years. Any portion of an Option that is not vested and exercisable on the date of a Participant’s Termination of Service shall expire on such date. In the event of a Change in Control; all outstanding Awards, other than Performance Shares and Performance Units, shall become fully and immediately exercisable, and all applicable deferral and restriction limitations or forfeiture provisions shall lapse, immediately prior to the Change in Control and shall terminate at the effective time of the Change in Control; provided, however, that with respect to a Change in Control that is a Company Transaction, such Awards shall become fully and immediately exercisable, and all applicable deferral and restriction limitations or forfeiture provisions shall lapse, only if and to the extent such Awards are not converted, assumed or replaced by the Successor Company.

 

 25 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The exercise price of an Incentive Stock Option shall be at least 100% of the Fair Market Value of the Common Stock on the Grant Date, and in the case of an Incentive Stock Option granted to a Participant who owns more than 10% of the total combined voting power of all classes of the stock of the Company or of its parent or subsidiary corporations (a “Ten Percent Stockholder”), shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date. As of December 31, 2018, Mr. David Phipps, is a Ten Percent Stockholder. The determination of more than 10% ownership shall be made in accordance with Section 422 of the Code. To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which a Participant’s Incentive Stock Options become exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such portion in excess of $100,000 shall be treated as a Nonqualified Stock Option.

 

On June 14, 2018, we issued 18,333 new stock options to our executives and directors under the 2018 Incentive Plan. All options issued have an exercise price of $22.50 per share, with the exception of David Phipps, a Ten Percent Stockholder, whose exercise price is $24.00, vest in equal quarterly installments starting July 1, 2018 over the next two years and expire on July 1, 2021. For the year ended December 31, 2018, the amount of vested options was 4,583. On July 1, 2018, 2,292 options were fully vested and valued on the vesting date at approximately $20.70 per option or a total of $47,422 using a Black-Scholes option pricing model with the following assumptions: strike price of 22.50 stock price of $20.70 per share (based on the market price at close on July 1, 2018) volatility of 718%, expected term of 3 years, and a risk-free interest rate of 2.69%. On October 1, 2018, an additional 2,292 options were fully vested and valued on the vesting date at approximately $20.70 per option or a total of $47,422 using a Black-Scholes option pricing model with the following assumptions: stock price of $20.70 per share (based on the market price close at grant date on June 14, 2018) volatility of 607%, expected term of 3 years, and a risk-free interest rate of 2.64%. In reference to this grant, the company recorded stock-based compensation of $81,698 for the year ended December 31, 2018.

 

On December 18, 2018, the Company cancelled the unvested portion of options previously granted on June 14, 2018, under the 2018 Incentive Plan totaling 13,750. The grants cancelled will be returned to the Plan.

 

The number of options cancelled to our officers and directors were as follows:

 

David Phipps, President, CEO, and Director   (5,000)
Theresa Carlise, CFO   (2,500)
Hector Delgado, Director   (1,250)

 

In addition, we cancelled options to purchase a total of (5,000) shares to two key employees.

 

On December 18, 2018, we issued 55,417 new stock options to our executives and directors under the 2018 Incentive Plan. All options issued have an exercise price of $2.25 per share, with the exception of David Phipps, a Ten Percent Stockholder, whose exercise price is $2.55, are fully vested and expire on December 17, 2023. The options were valued on the grant date at approximately $2.25 per option or a total of $124,674 using a Black-Scholes option pricing model with the following assumptions: strike price of $2.25 stock price of $2.25 per share (based on the market price at close on December 17, 2018) volatility of 773%, expected term of 5 years, and a risk-free interest rate of 2.69%.

 

On January 18, 2019, David Phipps exercised 21,667 options via a cashless exercise. Additionally, on January 18, 2019, two employees exercised 18,333 options through a cashless exercise. The Company withheld newly acquired shares pursuant to the exercise of the Option. The amount of common stock issued is calculated by using [Number of Options Exercising] minus [Exercise Price] * [Number of Options Exercising] divided by [Prior Close OSAT Market Price]. As a result of the exercise 21,619 shares of common stock were issued.

 

   Options
Exercised
   Exercise
Price
   Market
Price
   Shares
withheld as
Payment
   Common
Stock
Issued
 
David Phipps   21,667   $2.55   $5.25    10,524    11,143 
Other   18,333   $2.25   $5.25    7,857    10,476 
    40,000              18,381    21,619 

 

 26 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Options Issued Outside of Plan

 

On February 19, 2015, the Company issued to Mr. Rector, the former Chief Executive Officer, Chief Financial Officer and director of the Company, a seven-year option to purchase 956 shares of common stock as compensation for services provided to the Company. The options have an exercise price of $112.50 per share, were fully vested on the date of grant and shall expire in February 2022. The 956 options were valued on the grant date at approximately $112.50 per option or a total of $107,500 using a Black-Scholes option pricing model with the following assumptions: stock price of $112.50 per share (based on the sale of common stock in a private placement), volatility of 380%, expected term of 7 years, and a risk-free interest rate of 1.58%. In connection with the stock option grant, the Company recorded stock-based compensation for the year ended December 31, 2015 of $107,500, respectively.

 

On December 28, 2015, the Company issued Ms. Carlise, Chief Financial Officer, a ten-year option to purchase 222 shares of common stock as compensation for services provided to the Company. The options have an exercise price of $112.50 per share, were fully vested on the date of grant and shall expire in December 2025. The 222 options were valued on the grant date at approximately $2,925.29 per option or a total of $650,000 using a Black-Scholes option pricing model with the following assumptions: stock price of 2,925.29 per share (based on the closing price of the Company’s common stock of the date of issuance), volatility of 992%, expected term of 10 years, and a risk-free interest rate of 1.05%. In connection with the stock option grant, the Company recorded stock-based compensation for the year ended December 31, 2015 of $650,000, respectively.

 

Also, on December 28, 2015, the Company issued Mr. Delgado, its Director, a ten-year option to purchase 89 shares of common stock as compensation for services provided to the Company. The options have an exercise price of $112.50 per share, were fully vested on the date of grant and shall expire in December 2025. The 89 options were valued on the grant date at approximately $2,925.73 per option or a total of $260,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $2,925.73 per share (based on the closing price of the Company’s common stock of the date of issuance), volatility of 992%, expected term of 10 years, and a risk-free interest rate of 1.05%. In connection with the stock option grant, the Company recorded stock-based compensation for the year ended December 31, 2015 of $260,000, respectively.

 

On December 16, 2016, the Company issued options to Mr. Phipps, to purchase up to 4,444 shares of common stock. The options were issued outside of the Company’s 2014 Equity Incentive Plan and are not governed by the 2014 Plan. The options have an exercise price of $122.50 per share, vest immediately, and have a term of ten years. The 4,444 options were valued on the grant date at approximately $42.75 per option or a total of $190,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $42.75 per share (based on the closing price of the Company’s common stock of the date of issuance), volatility of 872%, expected term of 10 years, and a risk-free interest rate of 1.0500%. In connection with the stock option grant, the Company recorded stock-based compensation for the year ended December 31, 2016 of $190,000, respectively.

 

On May 26, 2017, the Company issued 2,222 options to Mr. Phipps, 1,667 options to Theresa Carlise, 556 options to Hector Delgado, its Director and 8,889 options to certain employees of the Company. The employees are the adult children of our Chief Executive Officer. The options were issued outside of the Company’s 2014 Equity Incentive Plan and are not governed by the 2014 Plan. The options have an exercise price of $122.50 per share, vest immediately, and have a term of ten years. The 13,333 options were valued on the grant date at approximately $45.00 per option or a total of $600,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $45.00 per share (based on the closing price of the Company’s common stock of the date of issuance), volatility of 736%, expected term of 10 years, and a risk-free interest rate of 1.30%. In connection with the stock option grant, for the years ended December 31, 2017, the Company recorded stock-based compensation of $600,000. For the year ended December 31, 2019 and 2018 the Company recorded stock-based compensation of $219,518 and $0, respectively.

 

For the three months ended March 31, 2020 and 2019, the Company recorded no stock-based compensation, respectively.

 

Stock options outstanding at March 31, 2020, as disclosed in the below table, have approximately $110,105 of intrinsic value at the end of the period.

 

 27 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the status of the Company’s outstanding stock options and changes during the three months ended March 31, 2020 is as follows:

 

   Number of
Options
   Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
(Years)
 
Balance at January 1, 2020   39,044   $17.49    5.16 
Granted   -    -    - 
Exercised   -    -    - 
Forfeited   -    -    - 
Cancelled   -   -    - 
Balance outstanding at March 31, 2020   39,044   $ 17.49    4.91 
Options exercisable at March 31, 2020   39,044           

 

A summary of the status of the Company’s outstanding warrants and changes during the three months ended March 31, 2020 is as follows:

 

   Number of
Warrants
   Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
(Years)
 
Balance at January 1, 2020   4,000   $60.00    1.37 
Granted   -    -    - 
Exercised   -    -    - 
Forfeited   -    -    - 
Cancelled   -    -    - 
Balance outstanding and exercisable at March 31, 2020   4,000   $60.00    1.12 

 

As of March 31, 2020, and December 31, 2019, there were 4,000 warrants outstanding, respectively.

 

NOTE 13 - RELATED PARTY TRANSACTIONS

 

As of March 30, 2020, the accounts payable due to related party includes advances for inventory and services due to David Phipps of $56,065, accrued director fees of $10,000 due to Hector Delgado, Director and service and fees due to Theresa Carlise of $5,542. Total related party payments due as of March 31, 2020 and December 31, 2019 are $71,607 and $51,071, respectively. Those related party payable are non-interest bearing and due on demand.

 

The Company employs three individuals who are related to Mr. Phipps, of which earned gross wages totaling $24,741 and $18,117 for the three months ended March 31, 2020 and 2019, respectively.

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

 

On June 14, 2018, the Company entered into a two (2) year Employment Agreement (the “Phipps Agreement”) with Mr. Phipps, with an automatic one (1) year extension. Under the Phipps Agreement, Mr. Phipps will serve as the Company’s Chief Executive Officer and President and will receive an annual base salary equal to the sum of $170,000 and £48,000 to be paid through our operating subsidiary, GTCL. For the year ended December 31, 2018, the £48,000 equivalent to USD is $62,219 and the yearly conversion rate is 1.296229. The Phipps Agreement provides for a performance bonus based on exceeding our annual revenue goals and on our ability to attract new investment. The Phipps Agreement also provides for medical plan coverage, an auto allowance, paid vacation, and discretionary stock grants and option awards. In the event of termination without cause, termination as a result of a change in control, or resignation with good reason (as defined in the Phipps Agreement), Mr. Phipps will be entitled to a severance equal to twice his base salary, the immediate vesting of all unvested options, and other benefits. The Phipps Agreement terminates and supersedes the Original Phipps Agreement (as defined below) and any subsequent amendments, effective as of the June 14, 2018.

 

Previously the Company had a two-year Executive Employment Agreement with Mr. Phipps, effective January 1, 2016 (the “Original Phipps Agreement”). Under the Original Phipps Agreement, Mr. Phipps agreed to serve as the Company’s Chief Executive Officer and President and received an annual base salary equal to the sum of $144,000 and £48,000, or $61,833 at the yearly conversion rate of 1.288190. Mr. Phipps was also eligible for bonus compensation in an amount equal to up to fifty (50%) percent of his then-current base salary if the Company meets or exceeds criteria adopted by the Compensation Committee, if any, or Board and equity awards as may be approved in the discretion of the Compensation Committee or Board. On January 1, 2018, the Original Phipps Agreement automatically renewed for another year.

 

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ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Also, on June 14, 2018, we entered into a new Employment Agreement (“Carlise Agreement”) with our Chief Financial Officer, Theresa Carlise. The Carlise Agreement is for a period of two (2) years, with an automatic one (1) year extension. Ms. Carlise’s base salary is $150,000 per year. The Carlise Agreement provides for performance bonuses based on exceeding our annual revenue goals and on our ability to attract new investment. The Carlise Agreement also provides for medical plan coverage, an auto allowance, paid vacation, and discretionary stock grants and option awards. In the event of termination without cause, termination as a result of a change in control, or resignation with good reason (as defined in the Carlise Agreement), Ms. Carlise will be entitled to a severance equal to twice her base salary, the immediate vesting of all unvested options, and other benefits. The Carlise Agreement terminates and supersedes the Original Carlise Agreement (as defined below) and any subsequent amendments, effective as of the June 14, 2018.

 

Prior to June 14, 2018, the Company had a one-year agreement with Ms. Carlise, as its Chief Financial Officer, Treasurer and Secretary (the “Original Carlise Agreement”). The Original Carlise Agreement provided for an annual compensation of $140,000 as well as medical benefits. The Original Carlise Agreement was effective December 1, 2016 and had an automatic renewal clause pursuant to which the Original Carlise Agreement renews itself for another year, if not cancelled by the Company previously. The Original Carlise Agreement had been automatically extended for an additional term of one year on December 1, 2017. In addition to the base salary of $140,000 annually, Ms. Carlise was eligible to receive an annual cash bonus if the Company meets or exceeds criteria adopted by the Compensation Committee of the Board of Directors and shall be eligible for grants of awards under stock option or other equity incentive plans of the Company.

 

On March 13, 2020, the Company and David Phipps and Theresa Carlise, the Company’s Chief Executive Officer and Chief Financial Officer, respectively, executed waivers of the provisions in their respective employment agreement requiring prior written notice of non-renewal to the other party. As a result, their respective employment terms with the Company will not be automatically extended as set forth in such employment agreements and will terminate as of June 14, 2020.

 

Consulting Agreements

 

On May 13, 2019, the Company entered into two consulting agreements (each, a “Consulting Agreement” and together, the “Consulting Agreements”) with unrelated third parties to provide capital raising advisory services and business growth and development services, each for a term of nine months. In exchange for such services, each consultant will receive (i) a Note in the amount of $44,000 issued pursuant to the Agreement, (ii) a Note in the amount of $12,500 with a maturity of three years bearing interest at a rate of 6% per annum with an optional right of conversion, (iii) payment of a retainer ranging from $10,000 to $30,000, and (iv) monthly payments ranging from $5,000 to $10,000 for nine months. On August 29, 2019, one of the consulting agreements was extended for another three months to expire on February 13, 2020 and the other was extended on September 1, 2019 for another two months and expired on January 13, 2020. For the three months ended March 31, 2020 and 2019, the Company recorded professional fees of $16,290 and $0, respectively, relating to the Consulting Agreements.

 

Lease Agreement

 

Effective July 24, 2019, a three-year lease was signed for 2,660 square feet for £25,536 annually, for our facilities in Poole, England for £2,128 per month, or $2,717 per month at the yearly average conversion rate of 1.276933, or $2,822 using exchange rate close at December 31, 2019 of 1.3262. The lease has been renewed until July 23, 2022.

 

Such leases do 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.

 

 29 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The rate implicit in each lease is not readily determinable, and we therefore use our incremental borrowing rate to determine the present value of the lease payments. The weighted average incremental borrowing rate used to determine the initial value of right of use (ROU) assets and lease liabilities during the year ended December 31, 2019 was 6.00%, derived from borrowing rate, as obtained from the Company’s current lenders. Right of use assets for operating leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize. As of December 31, 2019, we have not recognized any impairment losses for our ROU assets.

 

We monitor for events or changes in circumstances that require a reassessment of one of our leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

 

At March 31, 2020, the Company had current and long-term operating lease liabilities of $27,457 and $41,632, respectively, and right of use assets of $71,740.

 

Future minimum lease payments under these leases are as follows, in thousands, (unaudited):

 

   Minimum 
   Lease 
Years Ending December 31,  Payment 
Remainder of 2020  $30 
2021   31 
2022   18 
Total undiscounted future non-cancelable minimum lease payments   79 
Less: Imputed interest   - 
Present value of lease liabilities  $79 
Weighted average remaining term   2.3 

 

In the Company’s financial statements for periods prior to January 1, 2019, the Company accounts for leases under ASC 840, and provides for rent expense on a straight-line basis over the lease terms. Net rent expense for the three months ended March 31, 2020 and 2019 were $8,075 and $8,231, respectively.

 

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 15 - CONCENTRATIONS

 

Customers:

 

Amazon accounted for 56.6% and 36.2% of the Company’s revenues during the three months ended March 31, 2020 and 2019, respectively. No other customer accounted for 10% or more of the Company’s revenues for either period.

 

 30 
 

 

ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2020 and 2019.

 

   March 31, 2020       March 31, 2019     
                 
Globalstar Europe  $136,661    12.0%  $140,736    13.5%
Garmin  $131,266    11.4%  $134,778    13.0%
Network Innovations  $334,292    28.9%  $309,450    29.8%
Cygnus Telecom  $136,761    11.8%  $127,917    12.3%

 

Geographic:

 

The following table sets forth revenue as to each geographic location, for the three months ended March 31, 2020 and 2019:

 

   March 31, 2020       March 31, 2019     
                 
Europe  $999,191    68.1%  $998,854    77.0%
North America   355,781    25.0%   189,466    14.6%
South America   11,127    0.8%   19,791    1.5%
Asia & Pacific   93,504    6.6%   77,949    6.0%
Africa   8,500    0.6%   11,312    0.9%
   $1,468,103        $1,298,371      

 

NOTE 16 - SUBSEQUENT EVENTS

 

On April 1, 2020, the Company’s UK based subsidiary, GTCL furloughed 6 employees. Under the “Corona Virus Job Retention Scheme”, the furloughed employees will be paid through the Company, reimbursable in an amount equal to 80% of the employees’ wages thru the UK government until June 30, 2020.

 

On April 20, 2020, the Board of Directors of Orbsat Corp approved for the Corporation’s wholly owned UK subsidiary, Global Telesat Communications Limited, “GTCL”, to enter into a promissory agreement, “COVID Loan”, as offered by the UK government, Coronavirus Business Interruption Loan Scheme, “CBILS” for working capital assistance, for a six year term, with no payments and 0% interest in the first twelve months, interest thereafter at 4% of the Bank of England Base Rate or which is currently 0.10%. 

 

On May 4, 2020, the BCP Council, has awarded a grant of £25,000 to GTCL, under its COVID 19 relief scheme, “Retail, Leisure and Hospitality Relief”. The grant is not a loan and is not to be repaid.

 

Additionally, on May 5, 2020, the BCP Council, waived the 2020 business rates, for the period starting April 1, 2020 thru March 31, 2021, of approximately £13,224 or $16,941, at the quarterly average exchange rate at March 31, 2020 of 1.281097.

 

On May 8, 2020, Orbsat Corp, has been approved for the Payroll Protection Program, (“PPP”) loan. The loan is for $20,832 and has a term of 2 years, of which the first 6 months are deferred, at an interest rate of 1%.

 

 31 
 

 

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, 2019, filed with the SEC on March 30, 2020, and the Company’s subsequent public filings with the SEC.

 

Corporate Information

 

We are a provider of satellite-based hardware, airtime and related services both in the United States and internationally. We sell equipment and airtime for use on all of the major satellite networks including Globalstar, Inmarsat, Iridium and Thuraya and operate a short-term rental service for customers who desire to use our equipment for a limited time period. Our acquisition of GTCL in February 2015 expanded our global satellite-based infrastructure and business, which was first launched in December 2014 through the purchase of certain contracts.

 

 32 
 

 

Recent Events

 

As of March 31, 2020, there were 50,000,000 shares of common stock authorized and 234,476 shares issued and outstanding.

 

On January 30, 2020, the Company issued an aggregate of 18,147 common stock upon the conversion of $1,815 of its convertible debt, at the conversion rate of $0.10 per share.

 

On January 31, 2020, the Company issued an aggregate of 18,147 common stock upon the conversion of $1,815 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 10, 2020, the Company issued an aggregate of 25,421 common stock upon the conversion of $2,542 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 11, 2020, the Company issued an aggregate of 23,580 common stock upon the conversion of $2,358 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 18, 2020, the Company issued an aggregate of 13,192 common stock upon the conversion of $1,319 of its convertible debt, at the conversion rate of $0.10 per share.

 

On February 19, 2020, the Company issued an aggregate of 4,468 common stock upon the conversion of $446 of its convertible debt, at the conversion rate of $0.10 per share.

 

On March 9, 2020, the Company issued an aggregate of 10,305 common stock upon the conversion of $1,031 of its convertible debt, at the conversion rate of $0.10 per share.

 

As of March 31, 2020, 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.

 

 33 
 

 

We had net cash provided by operations of approximately $64,712 during the three months ended March 31, 2020. At March 31, 2020, we had negative working capital of approximately $719,067. Additionally, at March 31, 2020, we had an accumulated deficit of approximately $11,400,038 and stockholder’s equity of $356,981. These matters and our expected needs for capital investments required to support operational growth raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.

 

The Company may incur significant delays and/or expenses in addition to, impairing its ability to secure additional financing, relating to the worldwide COVID-19 (coronavirus) pandemic. Beginning in late 2019, there have been reports of the COVID-19 (coronavirus) outbreak originating in China, prompting government-imposed quarantines, closures of certain travel and businesses, which outbreak evolved into a worldwide pandemic in March 2020. It is presently unknown whether and to what extent the Company’s supply chains may be affected if the pandemic persists for an extended period of time. The Company may incur significant delays or expenses relating to such events outside of its control, which could have a material adverse impact on its business, operating results and financial condition. The Company’s reliance on securing additional capital for its public company expenses may be impaired due to the effect on the U.S. financial markets. The inability to obtain appropriate financing, may affect its compliance requirements as a public company. The Company has been using its working capital from its operating subsidiaries, to support its public company expenses. The continued drain on its working capital have forced the Company to incur cutbacks, which may affect its future operating revenue as well as, its ability to continue operations. On April 1, 2020, the Company’s UK based subsidiary, GTCL furloughed 6 employees. Under the “Corona Virus Job Retention Scheme”, the furloughed employees will be paid through the Company, reimbursable in an amount equal to 80% of the employees’ wages thru the UK government until June 30, 2020. On May 4, 2020, the Bournemouth, Christchurch and Poole Council, has awarded a grant of £25,000 to GTCL, under its COVID-19 relief scheme, “Retail, Leisure and Hospitality Relief”. The grant is not a loan and is not to be repaid. Additionally, on May 5, 2020, the Bournemouth, Christchurch and Poole Council, waived the 2020 business rates for the period starting April 1, 2020 thru March 31, 2021, of approximately £13,224 or $16,941, at the quarterly average exchange rate at March 31, 2020 of 1.281097. On May 8, 2020, Orbsat Corp was approved for the Payroll Protection Program, (“PPP”) loan. The loan is for $20,832 and has a term of 2 years, of which the first 6 months are deferred at an interest rate of 1%. The Company anticipates that the continued demands to provide working capital may require the Company to engage in various cost-cutting measures, including, without limitation, temporary or permanent cutbacks to its personnel, curtailing portion(s) of its operations, etc., which measures are likely to adversely affect the Company's future operations, revenue as well as its ability to continue its current operations.

 

Results of Operations for the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019

 

Revenue. Sales for the three months ended March 31, 2020, consisted primarily of sales of satellite phones, tracking devices, accessories and airtime plans. For the three months ended March 31, 2020, revenues generated were approximately $1,468,103 compared to approximately $1,298,371 of revenues for the three months ended March 31, 2019, an increase in total revenues of $169,732 or 13.1%. Total sales for Global Telesat Communications Ltd. were $953,820 for the three months ended March 31, 2020, as compared to $976,240 for the three months ended March 31, 2019, a decrease of $22,420 or 2.3%. Total sales for Orbital Satcom Corp. were $514,283 for the three months ended March 31, 2020 as compared to $322,131, for the three months ended March 31, 2019, an increase of $192,152 or 59.7%. The Company attributes the increases in revenue to new product lines and significant increases in US Amazon sales, offset by the decrease in exchange rates from GBP:USD.

 

Cost of Sales. During the three months ended March 31, 2020, cost of revenues increased to $1,120,102 compared to $1,052,442, for the three months ended March 31, 2019, an increase of $67,660 or 6.4%. Gross profit margins during the three months ended March 31, 2020 were 23.7% as compared to 18.9% for the comparable period in the prior year. As indicated by the results for the quarter, our sales margins have increased by 4.8%. However, we cannot be certain that we can maintain the increased margin levels. We expect our cost of revenues as compared with sales growth to continue to increase during fiscal 2020 and beyond, as we expand our operations and begin generating additional revenues under our current business. However, to the extent costs will so increase, we are unable at this time to estimate the amount of the expected increases.

 

 34 
 

 

Operating Expenses. Total operating expenses for the three months ended March 31, 2020, were $539,241, an increase of $56,510 or 11.7%, from total operating expenses for the three months ended March 31, 2019, of $482,731. Factors contributing to the decrease are described below.

 

Selling, general and administrative expenses were $157,206 and $139,003 for the three months ended March 31, 2020 and 2019, respectively, an increase of $18,203 or 13.1%. The fluctuations in the increase, for the three months ended March 31, 2020, are attributable to certain SG&A expenses that fluctuate with sales volatility, increase in Amazon fees as a percentage of sales of 0.9% or $13,673, as well as, an increase in administrative expenses.

 

Salaries, wages and payroll taxes were $195,642 and $173,319, for the three months ended March 31, 2020 and 2019, respectively, an increase of $22,323, or 12.9%. The increase is a result of an increase in staff and part time employees, for the three months ended March 31, 2020.

 

Professional fees were $114,889 and $103,195 for the three months ended March 31, 2020 and 2019, respectively, an increase of $11,694, or 11.3%. The increase during the three months ended March 31, 2020 as compared to the same period in 2019, is attributable to professional fees, see Note 14, Commitments and Contingencies, of which agreements expired on February 13, 2020.

 

Depreciation and amortization expenses were $71,504 and $67,214 for the three months ended March 31, 2020 and 2019, respectively, an increase of $4,290 or 6.4%. The increase was primarily attributable to the addition of fixed assets, from the year ended December 31, 2019 of $70,194, and $10,933 for the three months ended March 31, 2020, 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 2020 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 $93,620 compared to $70,821 during the three months ended March 31, 2020 and 2019, respectively, an increase of $22,799 or 32.2%. The increase is attributable to an increase in interest expense offset by foreign currency exchange variance and change in fair value of derivatives.

 

Net Loss. We recorded net loss before income tax of $284,860 for the three months ended March 31, 2020 as compared to a net loss of $307,623, for the three months ended March 31, 2019. The increase in the loss is a result of the factors as described above.

 

 35 
 

 

Comprehensive Loss. We recorded a loss for foreign currency translation adjustments for the three months ended March 31, 2020 and 2019, of $9,194 and $181, respectively. The fluctuations of the increase/decrease are primarily attributed to the 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, 2020, we had a cash balance of $138,078. Our working capital is a negative $(719,067) at March 31, 2020.

 

Our current assets at March 31, 2020 decreased 3.0% from December 31, 2019 and included cash, accounts receivable, prepaid expenses, unbilled revenue, right of use, inventory and other current assets.

 

Our current liabilities at March 31, 2020 increased 8.7% from December 31, 2019 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, 2020, the Company had an accumulated deficit of approximately $11,400,038, negative working capital of approximately $719,067 and net loss of approximately $284,860 during the three months ended March 31, 2020. For the year ended December 31, 2019, the auditors’ opinion contained a going concern paragraph, which stated that the Company had an accumulated deficit of approximately $11,115,178, negative working capital of approximately $567,022 and net loss of approximately $1,379,756 during the year ended December 31, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the Company to continue as a going concern is dependent upon obtaining additional capital and financing. We may need or want to raise additional funds in the future; however, these funds may not be available to us when we need or want them, or at all. If we cannot raise additional funds when we need them, our operations and prospects could be materially negatively affected.

 

Operating Activities

 

Net cash flows provided by operating activities for the three months ended March 31, 2020 amounted to $64,712 and were primarily attributable to our net loss of $284,860, total amortization expense of $6,250 and depreciation of $65,254, amortization of discount on debt of $74,837 and net change in assets and liabilities of $191,292, primarily attributable to a decrease in accounts receivable of $72,045, an increase in inventory of $77,686, decrease in prepaid expenses of $12,652, a decrease in unbilled revenue of $5,368, a decrease in right of use of $11,939, a decrease in other current assets of $76,609, increase in accounts payable of $120,709, a decrease in contract liabilities of $5,136, a decrease in lease liabilities of $11,939, and a decrease in provision for income taxes of $1,330.

 

Net cash flows used in operating activities for the three months ended March 31, 2019 amounted to $113,837 and were primarily attributable to our net loss of $307,623, total amortization expense of $6,250 and depreciation of $60,964, change in fair value of derivative liabilities of $36,925, amortization of notes payable discount of $17,595 and net change in assets and liabilities of $72,052, primarily attributable to an increase in accounts receivable of $38,658, an increase in inventory of $40,502, decrease in unbilled revenue of $17,085, decrease in prepaid expense of $1,926, an increase in other current assets of $1,472, increase in accounts payable of $124,264 and an increase in deferred revenue of $9,161 and an increase in provision for income taxes of 248.

 

Investing Activities

 

Net cash flows used in investing activities were $10,933 and $0 for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020 and March 31, 2019, we purchased property and equipment of $10,933 and $0, respectively.

 

 36 
 

 

Financing Activities

 

Net cash flows provided by financing activities were $13,310 and $82,134 for the three months ended March 31, 2020 and 2019, respectively. Net cash flows provided by financing activities were $13,310 for the three months ended March 31, 2020 and were for proceeds from related party payable of $20,536 and off set by repayments of line of credit for $7,226.

 

Net cash flows provided by financing activities for the three months ended March 31, 2019 were $82,134 for the three months ended March 31, 2019 and were for proceeds from convertible notes payable of $65,000 and amounts owed to related parties of $17,134.

.

Off-Balance Sheet Arrangements

 

We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 

Our company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have

 

an obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors
   
a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,
   
any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or
   
any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies and Estimates

 

Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed below.

 

Use of Estimates

 

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the assumptions used to calculate stock-based compensation, derivative liabilities and common stock issued for services.

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries, Orbital Satcom Corp. and Global Telesat Communications Ltd. All material intercompany balances and transactions have been eliminated in consolidation.

 

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Accounts Receivable

 

The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are offset against sales and relieved from accounts receivable, after all means of collection have been exhausted and the potential for recovery is considered remote. As of March 31, 2020, and 2019, there is an allowance for doubtful accounts of $5,300 and $0, respectively.

 

Inventories

 

Inventories are valued at the lower of cost or net realizable value, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.

 

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.

 

   Conversion feature
derivative liability
 
Balance at January 1, 2019   - 
Convertible notes payable – January 18, 2019   65,000 
Change in fair value included in earnings   36,925 
Balance at March 31, 2019  $101,925 
Derivative Liability   (65,000)
Change in fair value included in earnings   (36,925)
Balance at March 31, 2020  $- 

 

The current portion of the convertible notes were accounted for as liabilities at the date of issuance and adjusted to fair value through earnings for the three months ended March 31, 2019. On May 14, 2019 due to the cash repayment any derivative liability recorded was reversed.

 

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.

 

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. On February 19, 2015, the Company issued 444 of its common stock, par value $0.0001, at $112.61 per share, or $50,000, to a consultant as compensation for the design and delivery of dual mode gsm/Globalstar Simplex tracking devices and related hardware and intellectual property. For the year ended December 31, 2019, the Company recorded an impairment charge of $50,000 for the above-mentioned other asset, due to the delay in its launch to our existing product lines. For the three months ended March 31, 2020 and 2019, there were no additional expenditures on research and development.

 

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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, 2020, closing rate at 1.245481 US$: GBP, quarterly average rate at 1.281097 US$: GBP, for the three months ended March 31, 2019, closing rate at 1.304251 US$: GBP, quarterly average rate at 1.3064 US$: GBP, for the year ended 2019 closing rate at 1.3262 US$: GBP, average rate at 1.276933 US$: GBP.

 

For the three months ended March 31, 2020, Global Telesat Communications LTD, (GTCL) represents 65.0% of total company sales for the three months ended March 31, 2020 and as such, currency rate variances have an impact on results. For the three months ended March 31, 2020, the net effect on revenues were impacted by the differences in exchange rate from yearly average exchange of 1.3064 to 1.28109. Had the yearly average rate remained at 1.3064, sales for the three months ended March 31, 2020 would have been higher by $18,839. GTCL comparable sales in GBP, its home currency, decreased 0.4% or £2,741, from £747,275 to £744,534, for the three months ended March 31, 2020 as compared to March 31, 2019.

 

For the three months ended March 31, 2019, GTCL represented 75.2% of total company sales and as such, currency rate variances have an impact on results. For the three months ended March 31, 2019 the net effect on revenues were impacted positively by the differences in exchange rate from quarterly average exchange rate of 1.39059 to 1.3064. Had the yearly average rate remained, sales would have been higher by $62,913. GTCL comparable sales in GBP, its home currency, decreased 8.6% or £70,159, from £817,434 to £747,275 for the three months ended March 31, 2019 as compared to March 31, 2018

 

Revenue Recognition and Unearned Revenue

 

The Company recognizes revenue from satellite services when earned, as services are rendered or delivered to customers. Equipment sales revenue is recognized when the equipment is delivered to and accepted by the customer. Only equipment sales are subject to warranty. Historically, the Company has not incurred significant expenses for warranties.

 

The Company’s customers generally purchase a combination of our products and services as part of a multiple element arrangement. The Company’s assessment of which revenue recognition guidance is appropriate to account for each element in an arrangement can involve significant judgment. This assessment has a significant impact on the amount and timing of revenue recognition.

 

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.

 

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We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, ): Narrow-Scope Improvements and Practical Expedient, which is to (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact as a result of adopting this ASU on the financial statements and related disclosures.

 

The Company provides product warranties with varying lengths of time and terms. The product warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company has historically experienced a low rate of product returns under the warranty program.

 

A variety of technical services can be contracted by our customers for a designated period of time. The service contracts allow customers to call the Company for technical support, replace defective parts and to have onsite service provided by the Company’s third-party contract service provider. The Company records revenues for contract services at the amount of the service contract, but such amount is deferred at the beginning of the service term and amortized ratably over the life of the contract.

 

The Company believes that its products and services can be accounted for separately as its products and services have value to the Company’s customers on a stand-alone basis. When a transaction involves more than one product or service, revenue is allocated to each deliverable based on its relative fair value; otherwise, revenue is recognized as products are delivered or as services are provided over the term of the customer contract.

 

Contract liabilities is shown separately in the condensed consolidated balance sheets as current liabilities. At March 31, 2020 and 2019, we had contract liabilities of approximately $36,071 and $28,862. At December 31, 2019, we had contract liabilities of approximately $41,207.

 

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  

 

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, 2020 and December 31, 2019, respectively.

 

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Fair value of financial instruments

 

The Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures”, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable input (Level 3) from January 1, 2019 to March 31, 2020:

 

    Conversion
feature
derivative
liability
 
Balance at January 1, 2019     -  
Derivative liability     65,000  
Change in fair value included in earnings     36,925  
Balance at March 31, 2019   $ 101,925  
Derivative Liability     (65,000 )
Change in fair value included in earnings     (36,925 )
Balance at March 31, 2020   $ -  

 

The current portion of the convertible notes were accounted for as liabilities at the date of issuance and adjusted to fair value through earnings for the three months ended March 31, 2019. On May 14, 2019 due to the cash repayment any derivative liability recorded was reversed.

 

The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the accounting guidance. The carrying amounts reported in the balance sheet for cash, accounts payable, and accrued expenses approximate their estimated fair market value based on the short-term maturity of the instruments.

 

Share-Based Payments

 

Compensation cost relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

 

Recent Accounting Pronouncements

 

In May 2016, the FASB issued 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.

 

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ORBSAT CORP AND SUBSIDIARIES

FKA: ORBITAL TRACKING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. There was no impact as a result of adopting this ASU on the financial statements and related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which 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 0. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 and did not have a material impact on the Company’s financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging, which changes the accounting and earnings per share for certain instruments with down round features. The amendments in this ASU are applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment to each period presented and is effective for annual periods beginning after December 15, 2018, and interim periods within those periods.

 

On December 22, 2017 the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “TCJA”). SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied this guidance to its consolidated financial statements.

 

In November 2018, the FASB amended Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 with ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for us on January 1, 2019, however the Company did not have any leases that met the criteria as established above, until July 24, 2019, when the Company entered into a three year lease for its UK office and warehouse for annual rent of £25,536 or GBP: USD using exchange rate close for the three months ended March 31, 2020, for liability of 1.245481 or $31,805. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

 

At March 31, 2020, the Company had current and long-term operating lease liabilities of $27,457 and $41,632, respectively, and right of use assets of $71,740.

 

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.

 

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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

 

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Under the supervision and with the participation of our management, we conducted an evaluation, as of March 31, 2020, of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon our evaluation, our management, including our principal executive officer and principal financial officer, has concluded that, as of March 31, 2020, our disclosure controls and procedures were not effective due to our limited internal audit functions and lack of ability to have multiple levels of transaction review.

 

The Company intends to address the foregoing deficiency the Company by upgrading its accounting software to a ERP (“Enterprise Resource Planning”), a cloud-based solution, which would add the necessary controls to manage day to day activities such as accounting, procurement, project management, risk management and compliance as well as to automate the consolidation process of its entities, adding a level of reliability to the Company’s financial reporting. The Company proposes to add personnel to address the lack of ability to have multiple level transaction review.

 

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Management intends to complete these steps in the near future, but in any event before the end of the 2020 fiscal year. However, until additional capital is raised, no assurance can be made that the implementation of such remedial steps will be completed in a timely manner or that they will be adequate once implemented.

 

Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no unregistered securities sold by us during the three months ended March 31, 2020.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5. 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   XBRL Instance Document
101.sch   XBRL Taxonomy Schema Document
101.cal   XBRL Taxonomy Calculation Document
101.def   XBRL Taxonomy Linkbase Document
101.lab   XBRL Taxonomy Label Linkbase Document
101.pre   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 15, 2020 ORBSAT CORP
     
  By: /s/ David Phipps
    David Phipps
    Chief Executive Officer and Chairman
    (principal executive officer)
     
    /s/ Theresa Carlise
    Chief Financial Officer, Treasurer and Secretary
    (principal financial officer and principal accounting officer)

 

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