Item
1. Financial Statements
The
Company’s unaudited financial statements for the three months ended March 31, 2017 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.
ORBITAL
TRACKING CORP AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS AS OF
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
214,990
|
|
|
$
|
114,733
|
|
Accounts receivable, net
|
|
|
149,877
|
|
|
|
96,758
|
|
Inventory
|
|
|
369,189
|
|
|
|
335,267
|
|
Unbilled revenue
|
|
|
56,553
|
|
|
|
54,344
|
|
Prepaid expenses
|
|
|
121,096
|
|
|
|
171,164
|
|
Other current assets
|
|
|
59,639
|
|
|
|
29,841
|
|
Total current assets
|
|
|
970,844
|
|
|
|
802,107
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,917,544
|
|
|
|
1,978,338
|
|
Intangible assets, net
|
|
|
243,750
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,132,138
|
|
|
$
|
3,030,445
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
808,390
|
|
|
$
|
536,906
|
|
Deferred revenue
|
|
|
1,424
|
|
|
|
2,624
|
|
Related party payable
|
|
|
113,428
|
|
|
|
67,453
|
|
Derivative liabilities
|
|
|
123
|
|
|
|
1,237
|
|
Liabilities from discontinued operations
|
|
|
112,397
|
|
|
|
112,397
|
|
Total current liabilities
|
|
|
1,035,762
|
|
|
|
720,617
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,035,762
|
|
|
|
720,617
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.0001 par value; 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A ($0.0001 par value; 20,000 shares authorized, and no shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
-
|
|
|
|
-
|
|
Series B ($0.0001 par value; 30,000 shares authorized, 6,666 and 6,666 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
1
|
|
|
|
1
|
|
Series C ($0.0001 par value; 4,000,000 shares authorized, 3,540,365 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
354
|
|
|
|
354
|
|
Series D ($0.0001 par value; 5,000,000 shares authorized, 3,158,984 and 3,428,984 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
316
|
|
|
|
343
|
|
Series E ($0.0001 par value; 8,746,000 shares authorized, 7,717,356 and 7,929,651 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
772
|
|
|
|
793
|
|
Series F ($0.0001 par value; 1,100,000 shares authorized, 1,099,998 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
110
|
|
|
|
110
|
|
Series G ($0.0001 par value; 10,090,000 shares authorized, 10,083,351 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
1,008
|
|
|
|
1,008
|
|
Series H ($0.0001 par value; 200,000 shares authorized, 87,500 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)
|
|
|
9
|
|
|
|
9
|
|
Series I ($0.0001 par value; 114,944 shares authorized, 92,944 issued
|
|
|
9
|
|
|
|
9
|
|
Common Shares, $0.0001 par value; 750,000,000 shares authorized, 64,832,314 and 57,309,364 outstanding as of March 31, 2017 and December 31, 2016, respectively
|
|
|
6,483
|
|
|
|
5,731
|
|
Additional paid-in capital
|
|
|
6,935,331
|
|
|
|
6,935,817
|
|
Accumulated (deficit)
|
|
|
(4,820,668
|
)
|
|
|
(4,601,406
|
)
|
Accumulated other comprehensive loss
|
|
|
(27,349
|
)
|
|
|
(32,941
|
)
|
Total stockholder equity
|
|
|
2,096,376
|
|
|
|
2,309,828
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,132,138
|
|
|
$
|
3,030,445
|
|
See
the accompanying notes to the unaudited condensed consolidated financial statements.
ORBITAL
TRACKING CORP AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND
COMPREHENSIVE (LOSS) INCOME
FOR
THE THREE MONTHS ENDED
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,382,330
|
|
|
$
|
1,295,264
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,067,752
|
|
|
|
856,920
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
314,578
|
|
|
|
438,344
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
155,254
|
|
|
|
184,775
|
|
Salaries, wages and payroll taxes
|
|
|
152,951
|
|
|
|
173,855
|
|
Professional fees
|
|
|
148,859
|
|
|
|
300,568
|
|
Depreciation and amortization
|
|
|
75,978
|
|
|
|
82,822
|
|
Total operating expenses
|
|
|
533,042
|
|
|
|
742,020
|
|
|
|
|
|
|
|
|
|
|
(Loss) before other expenses and income taxes
|
|
|
(218,464
|
)
|
|
|
(303,676
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments, net
|
|
|
(1,114
|
)
|
|
|
(464,505
|
)
|
Interest expense
|
|
|
218
|
|
|
|
75,878
|
|
Foreign currency exchange rate variance
|
|
|
1,694
|
|
|
|
25,005
|
|
Total other (income) expense
|
|
|
798
|
|
|
|
(363,622
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(219,262
|
)
|
|
$
|
59,946
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(219,262
|
)
|
|
$
|
59,946
|
|
Foreign currency translation adjustments
|
|
|
5,592
|
|
|
|
2,039
|
|
Comprehensive income (loss)
|
|
$
|
(213,670
|
)
|
|
$
|
61,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding- basic
|
|
|
62,203,378
|
|
|
|
20,714,532
|
|
Weighted average number of common shares outstanding- diluted
|
|
|
62,203,378
|
|
|
|
23,102,865
|
|
Basic net income (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Diluted net income (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
)
|
See
the accompanying notes to the unaudited condensed consolidated financial statements.
ORBITAL
TRACKING CORP AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(219,262
|
)
|
|
$
|
59,946
|
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
(1,114
|
)
|
|
|
(464,505
|
)
|
Depreciation expense
|
|
|
69,728
|
|
|
|
69,529
|
|
Amortization of intangible asset
|
|
|
6,250
|
|
|
|
6,250
|
|
Amortization of notes payable discount
|
|
|
-
|
|
|
|
75,626
|
|
Amortization of prepaid expense in connection with the issuance of common stock issued for prepaid services
|
|
|
-
|
|
|
|
74,091
|
|
Imputed interest
|
|
|
218
|
|
|
|
252
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(53,119
|
)
|
|
|
(118,924
|
)
|
Inventory
|
|
|
(33,922
|
)
|
|
|
(61,142
|
)
|
Unbilled revenue
|
|
|
(2,209
|
)
|
|
|
9,398
|
|
Prepaid expense
|
|
|
50,068
|
|
|
|
(130,582
|
)
|
Other current assets
|
|
|
(29,798
|
)
|
|
|
(2,676
|
)
|
Accounts payable and accrued liabilities
|
|
|
301,484
|
|
|
|
7,272
|
|
Deferred revenue
|
|
|
(1,200
|
)
|
|
|
5,996
|
|
Net cash provided by (used in) operating activities
|
|
|
87,124
|
|
|
|
(469,469
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(8,934
|
)
|
|
|
(3,318
|
)
|
Net (cash used) in investing activities
|
|
|
(8,934
|
)
|
|
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
-
|
|
|
|
(75,626
|
)
|
Proceeds (repayments) of note payable, related party, net
|
|
|
15,975
|
|
|
|
(25,632
|
)
|
Net cash provided by (used in) financing activities
|
|
|
15,975
|
|
|
|
(101,259
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
|
5,592
|
|
|
|
2,039
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
99,757
|
|
|
|
(572,007
|
)
|
Cash beginning of period
|
|
|
114,733
|
|
|
|
963,329
|
|
Cash end of period
|
|
$
|
214,490
|
|
|
$
|
391,322
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON CASH FINANCE AND INVESTING ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for prepaid services
|
|
$
|
-
|
|
|
$
|
100,000
|
|
See
the accompanying notes to the unaudited condensed consolidated financial statements.
ORBITAL
TRACKING CORP AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited interim condensed consolidated 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 consolidated financial statements as of December 31, 2016 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 the Company for
the year ended December 31, 2016, which are contained in Form 10-K as filed with the Securities and Exchange Commission on April
7, 2017. The consolidated balance sheet as of December 31, 2016 was derived from those financial statements.
Basis
of Presentation and Principles of Consolidation
The
condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United
States of America (“US GAAP”) and the rules and regulations of the U.S Securities and Exchange Commission for Interim
Financial Information. The condensed consolidated financial statements of the Company include the Company and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated. All adjustments (consisting of normal recurring
items) necessary to present fairly the Company’s financial position as of March 31, 2017, and the results of operations
and cash flows for the three months ended March 31, 2017 have been included. The results of operations for the three months ended
March 31, 2017 are not necessarily indicative of the results to be expected for the full year.
Description
of Business
Orbital
Tracking Corp. (the “Company”) was formerly Great West Resources, Inc., a Nevada corporation. The Company, through
its wholly owned subsidiaries, Global Telesat Communications Limited (“GTCL”) and Orbital Satcom Corp. (“Orbital
Satcom”) 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.
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, preferred deemed dividend
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 charged to the bad debt expense after all means of collection
have been exhausted and the potential for recovery is considered remote. As of March 31, 2017, and December 31, 2016, there is
an allowance for doubtful accounts of $7,678 and $6,720.
Foreign
Currency Translation
The
Company’s reporting currency is US Dollars. The accounts of one of the Company’s subsidiaries, GTCL, is maintained
using the appropriate local currency, (Great British Pound) as the functional currency. All assets and liabilities are translated
into U.S. Dollars at balance sheet date, shareholders’ equity is translated at historical rates and revenue and expense
accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are deferred
as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains
and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency
are included in the statements of operations.
The
relevant translation rates are as follows: for the three months ended March 31, 2017 closing rate at 1.2555 US$: GBP, average
rate at 1.23801 US$: GBP, for the three months ended March 31, 2016 closing rate at 1.438034 US$: GBP, average rate at 1.43284
US$: GBP, for the year ended 2016 closing rate at 1.2345 US$: GBP, average rate at 1.35585 US$ GBP.
Revenue
Recognition and Unearned Revenue
The
Company recognizes revenue from satellite services when earned, as services are rendered or delivered to customers. Equipment
sales revenue is recognized when the equipment is delivered to and accepted by the customer. Only equipment sales are subject
to warranty. Historically, the Company has not incurred significant expenses for warranties.
The
Company’s customers generally purchase a combination of our products and services as part of a multiple element arrangement.
The Company’s assessment of which revenue recognition guidance is appropriate to account for each element in an arrangement
can involve significant judgment. This assessment has a significant impact on the amount and timing of revenue recognition.
Revenue
is recognized when all of the following criteria have been met:
●
|
Persuasive
evidence of an arrangement exists. Contracts and customer purchase orders are generally used to determine the existence of
an arrangement.
|
|
|
●
|
Delivery
has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
|
|
|
●
|
The
fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with
the transaction and whether the sales price is subject to refund or adjustment.
|
|
|
●
|
Collectability
is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customer’s payment history.
|
In
accordance with ASC 605-25,
Revenue Recognition
—
Multiple-Element Arrangements,
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.
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:
|
1.
|
Significant
underperformance relative to expected historical or projected future operating results;
|
|
|
|
|
2.
|
Significant
changes in the manner of use of the acquired assets or the strategy for the overall business; and
|
|
|
|
|
3.
|
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.
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
|
|
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, 2017 and December 31, 2016 respectively.
Fair
value of financial instruments
The
Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, 2017 to March 31, 2017:
|
|
Conversion Feature
Derivative Liability
|
|
|
Warrant Liability
|
|
|
Total
|
|
Balance at January 1, 2017
|
|
$
|
-
|
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Change in fair value included in earnings
|
|
|
-
|
|
|
|
(1,114
|
)
|
|
|
(1,114
|
)
|
Balance March 31, 2017
|
|
$
|
-
|
|
|
$
|
123
|
|
|
$
|
123
|
|
The
Company did not identify any other assets or liabilities that are required to be presented on the condensed 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.
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 505-50, 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.
Income
Taxes
The
Company has adopted Accounting Standards Codification subtopic 740-10,
Income Taxes
(“ASC740-10”) which requires
the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the
difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are recorded to reduce the deferred tax assets to an amount
that will more likely than 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 are 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.
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. For the three months ended March 31, 2017, the Company had net income,
therefore weighted average number of shares dilutive are noted. For the three months ended March 31, 2016, periods where the Company
has a net loss, all dilutive securities are excluded.
The
following are dilutive common stock equivalents during the period ended:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Convertible preferred stock
|
|
|
204,991,305
|
|
|
|
211,426,518
|
|
Stock options
|
|
|
12,850,000
|
|
|
|
2,850,000
|
|
Stock warrants
|
|
|
5,000
|
|
|
|
5,000
|
|
Total
|
|
|
217,846,305
|
|
|
|
214,281,518
|
|
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.
Reclassifications
Certain
reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.
These reclassifications had no effect on previously reported results of operations. The Company reclassified certain expense accounts
to conform to the currents year’s treatment.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material
effect on the Company’s financial statements.
NOTE
2 - GOING CONCERN CONSIDERATIONS
The
accompanying condensed consolidated financial statements are prepared assuming the Company will continue as a going concern. At
March 31, 2017, the Company had an accumulated deficit of approximately $4,820,668, working capital of approximately ($64,918)
and net loss of approximately $219,262 during the three months ended March 31, 2017. 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. The condensed 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 – ORBITAL TRACKING CORP AND GLOBAL TELESAT COMMUNICATIONS LIMITED SHARE EXCHANGE, REVERSE ACQUISITION AND RECAPITALIZATION
On
February 19, 2015, the Company entered into a Share Exchange Agreement with
Global Telesat
Communications Limited,
a Private Limited Company formed under the laws of England and Wales (“GTCL”) and all
of the holders of the outstanding equity of GTCL (the “GTCL Shareholders”). Upon closing of the transactions contemplated
under the Exchange Agreement the GTCL Shareholders (7 members) transferred all of the issued and outstanding equity of GTCL to
the OTC in exchange for (i) an aggregate of 2,540,000 shares of the common stock of the OTC and 8,746,000 shares of the newly
issued Series E Convertible Preferred Stock of the OTC with each share of Series E Convertible Preferred Stock convertible into
ten shares of common stock, (ii) a cash payment of $375,000 and (iii) a one-year promissory note in the amount of $122,536. Such
exchange caused GTCL to become a wholly owned subsidiary of the Company.
For
accounting purposes, this transaction is being accounted for as a reverse acquisition and has been treated as a recapitalization
of Orbital Tracking Corp. with Global Telesat Communications Limited 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 Orbital Tracking Corp. 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. As part of agreement, OTC shareholders retained 5,383,172 shares of the Common Stock,
20,000 shares of series A Convertible Preferred Stock, 6,666 shares of series B Convertible Preferred Stock, 1,197,442 shares
of series C Convertible Preferred Stock and 5,000,000 shares of series D Convertible Preferred Stock.
Property and equipment
|
|
$
|
4,973
|
|
Accounts receivable
|
|
|
34,585
|
|
Cash in bank
|
|
|
30,934
|
|
Prepaid expenses
|
|
|
2,219,677
|
|
Inventory
|
|
|
40,161
|
|
Intangible asset
|
|
|
250,000
|
|
Current liabilities
|
|
|
(469,643
|
)
|
Due to related party
|
|
|
(2,174
|
)
|
Derivative liability
|
|
|
(4,936
|
)
|
Liabilities of discontinued operations
|
|
|
(112,397
|
)
|
Total purchase price/assets acquired
|
|
$
|
1,991,180
|
|
NOTE
4 - STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred
Stock
As
of March 31, 2017, there were 50,000,000 shares of Preferred Stock authorized.
As
of March 31, 2017, there were 20,000 shares of Series A Convertible Preferred Stock authorized and 0 shares issued and outstanding,
due to the conversion of 20,000 shares of Series A into 20,000 shares of common stock.
As
of March 31, 2017, there were 30,000 shares of Series B Convertible Preferred Stock authorized and 6,666 shares issued and outstanding.
As
of March 31, 2017, there were 4,000,000 shares of Series C Convertible Preferred Stock authorized and 3,540,365 shares issued
and outstanding.
As
of March 31, 2017, there were 5,000,000 shares of Series D Convertible Preferred Stock authorized and 3,158,984 shares issued
and outstanding.
As
of March 31, 2017, there were 8,746,000 shares of Series E Convertible Preferred Stock authorized and 7,717,356 shares issued
and outstanding.
As
of March 31, 2017, there were 1,100,000 shares of Series F shares authorized and 1,099,998 shares issued and outstanding.
As
of March 31, 2017, there were 10,090,000 shares of Series G shares authorized and 10,083,351 shares issued and outstanding.
As
of March 31, 2017, there were 200,000 shares of Series H shares authorized and 87,500 shares issued and outstanding.
As
of March 31, 2017, there were 114,944 shares of Series I shares authorized and 92,944 shares issued and outstanding.
Common
Stock
As
of March 31, 2017, there were 750,000,000 shares of Common Stock authorized and 64,832,314 shares issued and outstanding.
On
January 3, 2017, the Company issued an aggregate of 816,810 shares of common stock upon the conversion of 35,000 shares of Series
D Preferred Stock and 11,681 shares of Series E Preferred Stock.
On
January 4, 2017, the Company issued an aggregate of 1,000,000 shares of common stock upon the conversion of 100,000 shares of
Series E Preferred Stock.
On
January 6, 2017, the Company issued an aggregate of 6,140 shares of common stock upon the conversion of 614 shares of Series E
Preferred Stock.
On
January 11, 2017, the Company issued an aggregate of 1,200,000 shares of common stock upon the conversion of 60,000 shares of
Series D Preferred Stock.
On
January 31, 2017, the Company issued an aggregate of 2,500,000 shares of common stock upon the conversion of 125,000 shares of
Series D Preferred Stock
On
March 2, 2017, the Company issued an aggregate of 1,000,000 shares of common stock upon the conversion of 50,000 shares of Series
D Preferred Stock.
On
March 7, 2017, the Company issued an aggregate of 1,000,000 shares of common stock upon the conversion of 100,000 shares of Series
E Preferred Stock.
Stock
Options
2014
Equity Incentive Plan
On
January 21, 2014, the Board approved the adoption of a 2014 Equity Incentive Plan (the “2014 Plan”). The purpose of
the 2014 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through
the grant of awards to attract, motivate, retain and reward selected employees and other eligible persons. The 2014 Plan provides
for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation
rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. Pursuant to
the terms of the 2014 Plan, either the Board or a board committee is authorized to administer the plan, including by determining
which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and
conditions of such awards. Unless earlier terminated by the Board, the Plan shall terminate at the close of business on January
21, 2024. Up to 226,667 shares of common stock are issuable pursuant to awards under the 2014 Plan, as adjusted in a single adjustment
for an issuance no later than sixty (60) days following the date of shareholder approval of the Plan in connection with (i) a
private placement of the Company’s securities in which the Corporation receives gross proceeds of at least $1,000,000 and
(ii) an acquisition of at least 50 mining leases and/or claims in the Holbrook Basin.
On
December 28, 2015, the Company issued Ms. Carlise, Chief Financial Officer, a ten-year option to purchase 500,000 shares of common
stock as compensation for services provided to the Company. The options have an exercise price of $0.05 per share, were fully
vested on the date of grant and shall expire in December 2025. The 500,000 options were valued on the grant date at approximately
$1.30 per option or a total of $650,000 using a Black-Scholes option pricing model with the following assumptions: stock price
of $1.30 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 three months ended March 31, 2017 and for the year ended December 31, 2016 of $0 and $0, respectively.
Also
on December 28, 2015, the Company issued Mr. Delgado, its Director, a ten-year option to purchase 200,000 shares of common stock
as compensation for services provided to the Company. The options have an exercise price of $0.05 per share, were fully vested
on the date of grant and shall expire in December 2025. The 200,000 options were valued on the grant date at approximately $1.30
per option or a total of $260,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $1.30
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 three months ended March 31, 2017 and for the year ended December 31, 2016 of $0 and $0, respectively.
On
December 16, 2016, the Company issued options to Mr. Phipps, to purchase up to 10,000,000 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 $0.01 per share, vest immediately, and have a term of ten years. The 10,000,000 options were valued on the
grant date at approximately $0.019 per option or a total of $190,000 using a Black-Scholes option pricing model with the following
assumptions: stock price of $0.019 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.
Stock
options outstanding at March 31, 2017 as disclosed in the table below have approximately $57,000 of intrinsic value at the end
of the period.
A
summary of the status of the Company’s outstanding stock options and changes during the three months ended March 31, 2017
is as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance at January 1, 2017
|
|
|
12,850,000
|
|
|
$
|
0.02
|
|
|
|
9.10
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance outstanding and exercisable at March 31, 2017
|
|
|
12,850,000
|
|
|
$
|
0.02
|
|
|
|
8.85
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
Stock
Warrants
A
summary of the status of the Company’s outstanding stock warrants and changes during the three months ended March 31, 2017
is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance at January 1, 2017
|
|
|
5,000
|
|
|
$
|
4.50
|
|
|
|
0.35
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance outstanding at March 31, 2017
|
|
|
5,000
|
|
|
$
|
4.50
|
|
|
|
0.11
|
|
The
following table summarizes the Company’s stock warrants outstanding at March 31, 2017:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise Price
|
|
|
Number Outstanding at March 31, 2017
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable at March 31, 2017
|
|
|
Weighted Average Exercise Price
|
|
|
4.50
|
|
|
|
5,000
|
|
|
|
0.11 Years
|
|
|
|
4.50
|
|
|
|
5,000
|
|
|
|
4.50
|
|
$
|
4.50
|
|
|
|
5,000
|
|
|
|
0.11 Years
|
|
|
$
|
4.50
|
|
|
|
5,000
|
|
|
$
|
4.50
|
|
NOTE
5 – PREPAID STOCK BASED COMPENSATION
Prepaid
expenses amounted to $121,096 at March 31, 2017 and $171,164 at December 31, 2016. Prepaid expenses include prepayments in cash
for professional fees, prepayments in equity instruments which are being amortized over the terms of their respective agreements.
Amortization of the prepaid expense is included professional fees. For the three months ended March 31, 2017 and 2016, amortization
expense was $40,068 and $173,009, respectively. The current portion consists primarily of costs paid for future services which
will occur within a year. Prepaid expense current portion and long-term portion were $121,096 and $0, as of March 31, 2017. For
the year ended December 31, 2016, prepaid expense current portion and long-term portion were $171,164 and $0, respectively.
NOTE
6 – INTANGIBLE ASSETS
On
February 19, 2015, the Company purchased an intangible asset valued at $250,000 for 1,000,000 shares of common stock. Amortization
of customer contracts will be included in general and administrative expenses. The Company began amortizing the customer contracts
in January 2015. Amortization expense for the three months ended March 31, 2017 and 2016 was $6,250 and $6,250, respectively.
Future amortization of intangible assets is as follows:
2017
|
|
|
18,750
|
|
2018
|
|
|
25,000
|
|
2019
|
|
|
25,000
|
|
2020
|
|
|
25,000
|
|
2021 and thereafter
|
|
|
100,000
|
|
Total
|
|
$
|
193,750
|
|
On
February 19, 2015, the Company issued 1,000,000 of its common stock, par value $0.0001, at $0.05 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.
NOTE
7 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Office furniture and fixtures
|
|
$
|
93,244
|
|
|
$
|
90,728
|
|
Computer equipment
|
|
|
29,370
|
|
|
|
29,066
|
|
Appliques
|
|
|
2,160,096
|
|
|
|
2,160,096
|
|
Website development
|
|
|
108,451
|
|
|
|
100,436
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(473,617
|
)
|
|
|
(401989
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,917,544
|
|
|
$
|
1,978,338
|
|
Depreciation
expense was $69,728 for the three months ended March 31, 2017. For the three months ended March 31, 2016 depreciation expense
was $69,529.
NOTE
8 - INVENTORIES
At
March 31, 2017 and December 31, 2016, inventories consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
369,189
|
|
|
$
|
335,267
|
|
Less reserve for obsolete inventory
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
369,189
|
|
|
$
|
335,267
|
|
For
the three months ended March 31, 2017 and the year ended December 31, 2016, the Company did not make any change for reserve for
obsolete inventory.
NOTE
9 - RELATED PARTY TRANSACTIONS
The
Company has received financing from the Company’s Chief Executive Officer. No formal repayment terms or arrangements existed
prior to February 19, 2015, when as part of the Share Exchange Agreement, the Company entered into a note with David Phipps where
the stockholder loans bear no interest and are due February 19, 2016. On February 19, 2016, the note was extended an additional
year to February 19, 2017 and on January 9, 2017 the note was extended another additional year to February 19, 2018. The balance
of the related party note payable was $16,864 as of March 31, 2017. The accounts payable due to related party includes advances
for inventory due to David Phipps of $66,563 and wages of $30,000. Total payments due to David Phipps as of March 31, 2017 and
December 31, 2016 are $113,428 and $67,453, respectively.
Also,
as part of the Share Exchange Agreement entered into on February 19, 2015, Mr. Phipps received a payment of $25,000 as compensation
for transition services that he provided.
The
Company employs two individuals who are related to Mr. Phipps, of which earned gross wages totaled $15,006 for the three months
ended March 31, 2017. For the three months ended March 31, 2016, the Company employed three individuals who were related to Mr.
Phipps of which earned gross wages of $15,299.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On
February 19, 2015, Orbital Satcom entered into an employment agreement with Mr. Phipps, whereby Mr. Phipps agreed to serve as
the President of Orbital Satcom for a period of two years, subject to renewal, in consideration for an annual salary of $180,000.
Additionally, under the terms of the employment agreement, Mr. Phipps shall be eligible for an annual bonus if the Company meets
certain criteria, as established by the Board of Directors. Mr. Phipps remains the sole director of GTCL following the closing
of the Share Exchange. Mr. Phipps and the Company entered into an Indemnification Agreement at the closing.
The
Company entered into an employment agreement with Ms. Carlise on June 9, 2015. The agreement has a term of one year, and shall
automatically be extended for additional terms of one year each. The agreement provides for an annual base salary of $72,000.
In addition to the base salary Ms. Carlise shall be 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
December 28, 2015, the Company amended her employment agreement. Effective December 1, 2015, the term of Ms. Carlise’s employment
was extended to December 1, 2016 from June 9, 2016, her annual salary was increased to $140,000 from $72,000 and she agreed to
devote her full business time to the Company. The term of the Original Agreement, as amended by the Amendment, shall automatically
extend for additional terms of one year each, unless either party gives prior written notice of non-renewal to the other party
no later than 60 days prior to the expiration of the initial term or the then current renewal term, as applicable.
On
March 3, 2016, the Company entered into a two-year Executive Employment Agreement with Mr. Phipps, effective January 1, 2016.
Under the Employment Agreement, Mr. Phipps will serve as the Company’s Chief Executive Officer and President, and receive
an annual base salary equal to the sum of $144,000 and £48,000, or $65,078 at the yearly conversion rate of 1.3558. Mr.
Phipps is 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. Also on March 3, 2016 and effective January 1, 2016, the Company’s
wholly owned subsidiary Orbital Satcom Corp. and Mr. Phipps, terminated an employment agreement between them dated February 19,
2015 pursuant to which Mr. Phipps was employed as President of Orbital Satcom for an annual base salary of $180,000. The other
terms of this agreement with the Company are identical to the terms of Mr. Phipps’ employment agreement with Orbital Satcom
described above.
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
11– DERIVATIVE LIABILITY
In
June 2008, a FASB approved guidance related to the determination of whether a freestanding equity-linked instrument should be
classified as equity or debt under the provisions of FASB ASC Topic No. 815-40, Derivatives and Hedging – Contracts in an
Entity’s Own Stock. The adoption of this requirement will affect accounting for convertible instruments and warrants with
provisions that protect holders from declines in the stock price (“down-round” provisions). Warrants with such provisions
are no longer recorded in equity and are reclassified as a liability.
Instruments
with down-round protection are not considered indexed to a company’s own stock under ASC Topic 815, because neither the
occurrence of a sale of common stock by the company at market nor the issuance of another equity-linked instrument with a lower
strike price is an input to the fair value of a fixed-for-fixed option on equity shares.
In
connection with the issuance of its 6% convertible debentures and related warrants, the Company has determined that the terms
of the convertible warrants include down-round provisions under which the exercise price could be affected by future equity offerings.
Accordingly, the warrants are accounted for as liabilities at the date of issuance and adjusted to fair value through earnings
at each reporting date. On May 17, 2016, the Company entered into exchange agreements with holders of the Company’s outstanding
convertible notes in the amount of $504,168 originally issued on December 28, 2015 (the “Notes”) pursuant to which
the Notes were cancelled and the exchanging holders were issued an aggregate of 10,083,351 shares of newly designated Series G
Convertible Preferred Stock. Upon the conversion of the Series G Convertible Preferred Stock, additional paid in capital increased
by $649,662 from the decrease in the Notes payable of $504,168, decrease in derivative liabilities of $146,502 and increase in
Series G Convertible Preferred Stock of $1,008.
The
Notes were accounted for as liabilities at the date of issuance and adjusted to fair value through earnings at each reporting
date. The Company recorded amortization for the discount to the Notes of $0 and $602,515 at March 31, 2017 and December 31, 2016.
As of March 31, 2017, and December 31, 2016, the Company has an unamortized discount balance of $0. The Company has recognized
derivative liabilities of $0 at March 31, 2017 and December 31, 2016, respectively. The gain (loss) resulting from the decrease
(increase) in fair value of this convertible instrument was $422,974 for the year ended December 31, 2016. The Company has recognized
derivative liabilities for related warrants of $123 and $1,237 at March 31, 2017 and December 31, 2016, respectively. The gain
resulting from the decrease in fair value of this convertible instrument was $1,114 and $3,119 for the three months ended March
31, 2017 and the year ended December 31, 2016, respectively. Weighted average term is 0.11 years.
|
|
Conversion feature derivative liability
|
|
|
Warrant liability
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
|
614,035
|
|
|
|
4,356
|
|
|
|
618,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value included in earnings
|
|
|
(422,974
|
)
|
|
|
(3,119
|
)
|
|
|
(426,093
|
)
|
Net effect on additional paid in capital
|
|
|
(191,062
|
)
|
|
|
-
|
|
|
|
(191,062
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Change in fair value included in earnings
|
|
|
-
|
|
|
|
(1,114
|
)
|
|
|
(1,114
|
)
|
Balance at March 31, 2017
|
|
$
|
-
|
|
|
$
|
123
|
|
|
$
|
123
|
|
The
Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes
option pricing model:
|
|
March 31, 2017
|
|
Expected volatility
|
|
|
257.1
|
%
|
Expected term - years
|
|
|
0.11
|
|
Risk-free interest rate
|
|
|
1.27
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
NOTE
12 - CONCENTRATIONS
Customers:
No
customer accounted for 10% or more of the Company’s revenues during the three months ended March 31, 2017 and 2016.
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, 2017 and 2016.
|
|
March 31, 2017
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Globalstar Europe
|
|
$
|
179,312
|
|
|
|
17.9
|
%
|
|
$
|
190,814
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Innovations
|
|
$
|
302,616
|
|
|
|
30.2
|
%
|
|
$
|
349,496
|
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satcom Global
|
|
$
|
182,467
|
|
|
|
18.2
|
%
|
|
$
|
72,609
|
|
|
|
7.3
|
%
|
NOTE
13 - SUBSEQUENT EVENTS
On
April 21, 2017, the Company issued an aggregate of 1,000,000 shares of common stock upon the conversion of 100,000 shares of Series
E Convertible Preferred Stock.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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 or Plan
of Operation,” and elsewhere in this 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 filed for the year ended December 31, 2016, filed on April 7, 2017.
Corporate
Information
On
January 22, 2015, the Company changed its name to “Orbital Tracking Corp.” from “Great West Resources, Inc.”
pursuant to a merger with a newly-formed wholly owned subsidiary.
On
March 28, 2014, the Company merged with a newly-formed wholly-owned subsidiary of the Company solely for the purpose of changing
its state of incorporation to Nevada from Delaware, 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 business.
The
Company was originally incorporated in 1997 as a Florida corporation. On April 21, 2010, the Company merged with and into a newly-formed
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 newly-formed wholly-owned subsidiary.
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 is being accounted for as a reverse acquisition and has been treated as a recapitalization
of Orbital Tracking Corp. with Global Telesat Communications Limited 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 Orbital Tracking Corp. 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.
The
Company is a distributor, developer and reseller of satellite enabled communications hardware and provides products, airtime and
related services to customers located both in the United States and internationally through its subsidiaries, US based Orbital
Satcom Corp. (“Orbital Satcom”) and UK based GTCL. We sell equipment and airtime for use on all major satellite networks
including Globalstar, Inmarsat, Iridium and Thuraya. We specialize in offering a range of satellite enabled personal and asset
tracking products and provide an advanced mapping portal for customers using our range of GSM and satellite based GPS tracking
devices. Additionally, we operate a short-term rental service for customers who require use of our equipment for a limited time
without the up-front expense of purchasing hardware. 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 which entitle
us to transmit GPS tracking coordinates and other information at preferential rates through one of the world’s largest commercial
satellite networks. We now have a physical or storefront presence in more than 10 countries, and have in excess of 15,000 customers
located in almost 60 countries across every continent in the world. Our customers include businesses, U.S. and foreign governments,
non-governmental and charitable organizations, military users and private individuals located all over the world.
Recent
Transactions
On
January 22, 2015, the Company changed its name to “Orbital Tracking Corp.” from “Great West Resources, Inc.”
The Company effectuated the name change through a short-form merger pursuant to Chapter 92A of the Nevada Revised Statutes where
a subsidiary formed solely for the purpose of the name change was merged with and into the Company, with the Company as the surviving
corporation in the merger. The merger had the effect of amending the Company’s Articles of Incorporation to reflect its
new legal name.
On
February 19, 2015, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation for the Series
E Convertible Preferred Stock, setting forth the rights, powers, and preferences of the Series E Convertible Preferred Stock.
Pursuant to the
Series E
Certificate of Designation,
the Company designated
8,746,000
shares of its blank check preferred stock as Series
E Convertible Preferred
Stock
. Each share of Series E
Convertible
Preferred
Stock
has a stated value equal to its par value of $0.0001 per share. In the event
of a liquidation, dissolution or winding up of the Company,
the holder of the Series E Convertible Preferred Stock would
have preferential payment and distribution rights over any other class or series of capital stock that provide for Series E Convertible
Preferred Stock’s preferential payment and over our common stock
. The Series E
Convertible
Preferred is convertible into ten (10) shares of the Company’s common stock. The Company
is prohibited from effecting the conversion of the Series E
Convertible
Preferred
Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99%, in the aggregate, of the
issued and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock
upon the conversion of the Series E
Convertible
Preferred Stock. Each share of Series
E
Convertible
Preferred Stock entitles the holder to vote on all matters voted on
by holders of common stock as a single class. With respect to any such vote, each share of Series E
Convertible
Preferred
Stock entitles the holder to cast ten (10) votes per share of Series E
Convertible
Preferred
Stock owned at the time of such vote, subject to the 4.99% beneficial ownership limitation.
On
February 19, 2015, the Company entered into a share exchange agreement with
Global Telesat
Communications Limited,
a Private Limited Company formed under the laws of England and Wales (“GTCL”) and all
of the holders of the outstanding equity of GTCL (the “GTCL Shareholders”). Upon closing of the transactions contemplated
under the share exchange agreement, the GTCL Shareholders transferred all of the issued and outstanding equity of GTCL to the
Company in exchange for (i) an aggregate of 2,540,000 shares of the common stock of the Company and 8,746,000 shares of the newly
issued Series E Convertible Preferred Stock of the Company (the “Series E Preferred Stock”) with each share of Series
E Preferred Stock convertible into ten shares of common stock, (ii) a cash payment of $375,000 and (iii) a one-year promissory
note in the amount of $122,536. Such exchange caused GTCL to become a wholly owned subsidiary of the Company.
Also
on February 19, 2015, David Phipps, the founder, principal owner and sole director of GTCL and the former founder and president
of GTC, was appointed President of Orbital Satcom. Following the transaction, Mr. Phipps was appointed Chief Executive Officer
and Chairman of the Board of Directors of the Company. The acquisition of GTCL expands the Company’s global satellite based
business and enables the Company to operate as a vertically integrated satellite services business with experienced management
operating from additional locations in Poole, England in the United Kingdom and Aventura, Florida.
On
February 19, 2015, the Company issued to Mr. Rector, the former Chief Executive Officer, Chief Financial Officer and director
of the Company, 850,000 shares of common stock and a seven year immediately vested option to purchase 2,150,000 shares of common
stock at a purchase price of $0.05 per share as compensation for services provided to the Company.
On
February 19, 2015, the Company sold an aggregate of 550,000 units at a per unit purchase price of $2.00, in a private placement
to certain accredited investors for gross proceeds of $1,100,000. Each unit consists of: forty (40) shares of the Company’s
common stock or, at the election of any purchaser who would, as a result of purchase of units become a beneficial owner of five
(5%) percent or greater of the outstanding common stock of the Company, four (4) shares of the Company’s Series C Convertible
Preferred Stock, par value $0.0001 per share, with each share convertible into ten (10) shares of common stock. The Company sold
15,000 units consisting of an aggregate of 600,000 shares of common stock and 535,000 units consisting of an aggregate of 2,140,000
shares of Series C Convertible Preferred Stock.
On
February 19, 2015, the Company issued an aggregate of 1,675,000 shares of common stock to certain current consultants, former
consultants and employees. These shares consist of (i) 250,000 shares of common stock issued to a consultant as compensation for
services relating to the provision of satellite tracking hardware and related services, sales and lead generation, valued at $12,500
(ii) 1 million shares of common stock issued to a consultant as compensation for the design and delivery of dual mode gsm/Globalstar
Simplex tracking devices and related hardware and intellectual property, valued at $50,000 (iii) 250,000 shares of common stock,
subject to a one year lock up, issued to the Company’s controller, valued at $12,500 and (iv) 175,000 shares of common stock
issued to MJI in full satisfaction of outstanding debts of $175,000. MJI agreed to sell only up to 5,000 shares per day and the
Company has a nine month option to repurchase these shares at a purchase price of $0.75 per share.
On
June 18, 2015, the Company issued an aggregate of 150,000 shares of its common stock, valued at $0.79 per share, or $118,500 to
an investor relations consultant for compensation of services.
On
October 13, 2015, the Company through its wholly owned subsidiary, Orbital Satcom Corp, purchased from World Surveillance Group,
Inc., and its wholly owned subsidiary, Global Telestat Corp the “Globalstar” license and equipment, which it had previously
leased. On December 10, 2014, the Company, entered into a License Agreement with World Surveillance Group, Inc., and its wholly
owned subsidiary, Global Telestat Corp, by which the Company had an irrevocable non-exclusive license to use certain equipment,
consisting of Appliques for a term of ten years. Appliques are demodulator and RF interfaces located at various ground stations
for gateways. The Company issued 2,222,222 common shares, valued at $1 per share based on the quoted trading price on date of
issuance, or $2,222,222. The company reflected the license as an asset on its balance sheet with a ten-year amortization, the
term of the license. On October 13, 2015, the Company acquired the license for additional consideration of $125,000 in cash. The
Company valued the asset at $2,160,016, which is the unamortized balance of the Appliques License, $2,043,010 plus the consideration
of $125,000.
On
December 21, 2015, the Company entered into a Placement Agent Agreement with Chardan Capital Markets LLC, as Agent, pursuant to
which the Placement Agent agreed to serve as the non-exclusive placement agent for the Company in connection with any private
placement from December 21, 2015 through January 15, 2017. The Company agreed to pay the Placement Agent a cash fee of $50,000
and issue the Placement agent 250,000 shares of common stock following the issuance of at least $900,000 of securities prior to
the expiration of the term of the Placement Agent Agreement. On December 28, 2015, upon closing of the note purchase and Series
F subscription agreements, the Company paid the respective fees and issued the common shares.
On
December 28, 2015, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation for the Series
F Convertible Preferred Stock, setting forth the rights, powers, and preferences of the Series F Convertible Preferred Stock.
Pursuant to the
Series F
Certificate of Designation,
the Company designated
1,100,000
shares of its blank check preferred stock as Series
F Convertible Preferred
Stock
. Each share of Series F
Convertible
Preferred
Stock
has a stated value equal to its par value of $0.0001 per share. In the event
of a liquidation, dissolution or winding up of the Company,
the holder of the Series F Convertible Preferred Stock would
have preferential payment and distribution rights over any other class or series of capital stock that provide for Series F Convertible
Preferred Stock’s preferential payment and over our common stock
. The Series F
Convertible
Preferred is convertible into one (1) share of the Company’s common stock. The Company
is prohibited from effecting the conversion of the Series F
Convertible
Preferred
Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99%, in the aggregate, of the
issued and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock
upon the conversion of the Series F
Convertible
Preferred Stock. Each share of Series
F
Convertible
Preferred Stock entitles the holder to vote on all matters voted on
by holders of common stock as a single class. With respect to any such vote, each share of Series F
Convertible
Preferred
Stock entitles the holder to cast one (1) vote per share of Series F
Convertible
Preferred
Stock owned at the time of such vote, subject to the 4.99% beneficial ownership limitation.
On
December 28, 2015, the Company entered into separate subscription agreements with accredited investors relating to the issuance
and sale of $550,000 of shares of Series F convertible preferred stock at a purchase price of $0.50 per share. The Preferred F
Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred
F Share divided by the conversion price. The stated value of each Preferred F Share is $0.50 and the initial conversion price
is $0.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions
or other similar events. Subject to certain specified exceptions, in the event the Company issues securities at a per share price
less than the conversion price for a period of two years from the closing, each holder will be entitled to receive from the Company
additional shares of common stock such that the holder shall hold that number of conversion shares, in total, had such holder
purchased the Preferred F Shares with a conversion price equal to the lower price issuance.
On
December 28, 2015, the Company entered into separate note purchase agreements with accredited investors relating to the issuance
and sale of an aggregate of $605,000 in principal amount of original issue discount convertible notes for an aggregate purchase
price of $550,000.
The
Notes mature on December 28, 2017. The Company must repay 1/24th of the principal of the Notes each month commencing January 18,
2016. The Notes do not bear interest except that all overdue and unpaid principal bears interest at a rate equal to the lesser
of 18% per year or the maximum rate permitted by applicable law. The Notes are convertible into common stock at the option of
the holder at a conversion price of $1.00, subject to adjustment for stock splits, stock dividends, recapitalizations, combinations,
subdivisions or other similar events; provided however, that the principal and interest, if any, on the Notes may not be converted
to the extent that, as a result of such conversion, the holder would beneficially own more than 4.99% of the number of shares
of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Notes.
Subject to certain specified exceptions, in the event the Company issues securities at a per share price less than the conversion
price for a period of one year from the closing, each holder will be entitled to receive from the Company additional shares of
common stock such that the holder shall hold that number of conversion shares, in total, had such holder purchased the Notes with
a conversion price equal to the lower price issuance.
Pursuant
to the Subscription Agreement and Note Purchase Agreement, the Company agreed to use its reasonable best efforts to effectuate
the increase of its authorized shares of common stock from 200,000,000 shares of common stock to 750,000,000 shares of common
stock on or prior to January 31, 2016. The Company’s shareholders on March 5, 2016, approved the increase in authorized
common and preferred shares. $350,000 of the proceeds from the sale of Preferred F Shares and the Notes are intended to be utilized
for public relations and expenses associated with publications, reports and communications with shareholders and others concerning
the company’s business. The Subscription Agreement provides the purchasers of the Preferred F Shares with a 100% right of
participation in all future securities offerings of the Company, subject to customary exceptions.
On
December 28, 2015, the Company and Theresa Carlise, its Chief Financial Officer, amended her employment agreement, dated June
9, 2015. Pursuant to the Amendment, which is effective December 1, 2015, the term of Ms. Carlise’s employment was extended
to December 1, 2016 from June 9, 2016, her annual salary was increased to $140,000 from $72,000 and she agreed to devote her full
business time to the Company. The term of the Original Agreement, as amended by the Amendment, shall automatically extend for
additional terms of one year each, unless either party gives prior written notice of non-renewal to the other party no later than
60 days prior to the expiration of the initial term or the then current renewal term, as applicable.
Also
on December 28, 2015, the Company issued Ms. Carlise options to purchase up to 500,000 shares of common stock and issued Hector
Delgado, a director of the Company, options to purchase up to 200,000 shares of common stock. The options were issued outside
of the Company’s 2014 Equity Incentive Plan and are not governed by the Plan. The options have an exercise price of $0.05
per share, vest immediately, and have a term of ten years.
On
January 15, 2016, the Company engaged IRTH Communications LLC., for a term of 12 months to provide investor relations, public
relations, internet development, communication and consulting services. As consideration for its services, IRTH will receive from
the Corporation a monthly fee of $7,500 and as a single one-time retainer payment, $100,000 worth of shares of the Company’s
common stock; calculated by the average closing price of the Company’s common stock on its principal exchange for the 10
(ten) trading days immediately prior to the execution of this Agreement; which shares shall be Restricted Securities, pursuant
to the provisions of Rule 144. As additional compensation, in the event the Company, during or within two (2) years after the
term of this Agreement, receives investment monies (debt, equity or a combination thereof) from investor(s) introduced to the
Company by IRTH as described herein, Company agrees to pay IRTH a finder’s fee equal to three percent (3%) of all gross
monies invested by investor(s) and received by Company.
On
February 11, 2016, the Company issued 136,612 shares of its common stock, valued at $0.60 per share, or $81,967, to IRTH Communications
LLC for services, as disclosed above.
On
March 3, 2016, the Company entered into an Executive Employment Agreement with David Phipps, its Chairman, President and Chief
Executive Officer, effective January 1, 2016. Under the Employment Agreement, Mr. Phipps will serve as the Company’s Chief
Executive Officer and President, and receive an annual base salary equal to the sum of $144,000 and $48,000. Mr. Phipps is 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. Also on March 3, 2016 and effective January 1, 2016, the Corporation’s
wholly owned subsidiary Orbital Satcom Corp. and Mr. Phipps terminated an employment agreement between them dated February 19,
2015 pursuant to which Mr. Phipps was employed as President of Orbital Satcom for an annual base salary of $180,000. The other
terms of the Original Agreement are identical to the terms of the Employment Agreement. Mr. Phipps remains the President of Orbital
Satcom.
Results
of Operations for the Three Months Ended March 31, 2017 compared to the Three Months Ended March 31, 2016
Revenue.
Sales for the three months ended March 31, 2017 consisted primarily of sales of satellite phones, accessories and airtime
plans. For the three months ended March 31, 2017, revenues generated were approximately $1,382,330 compared to approximately $1,295,264
of revenues for the three months ended March 31, 2016, an increase in total revenues of $87,066 or 6.7%. Factors relative to the
increase in revenue are; an increase in comparable revenue of 5.95% and 10.2% for its wholly owned subsidiaries, Global Telesat
Communication Ltd and Orbital Satcom Corp., for the three months ended March 31, 2017. Total sales for Global Telestat Communications
Ltd. were $977,141 for the three months ended March 31, 2017 as compared to $927,493 for the three months ended March 31, 2016,
an increase of $49,648 or 5.4%. Total sales for Orbital Satcom Corp. were $405,189 for the three months ended March 31, 2017 as
compared to $367,771 for the three months ended March 31, 2016, an increase of $37,418 or 10.2%. The Company attributes the increases
in revenue to the addition of online marketplaces, offset by exchange rate variances as described above.
For
the three months ended March 31, 2017, Global Telesat Communications LTD, (GTCL) represents 70.7% of total company sales and as
such, currency rate variances have an impact on results. For the three months ended March 31, 2017 the net effect on revenues
were impacted by the differences in exchange rate from quarterly average exchange of 1.43284 to 1.23801. Had the yearly average
rate remained, sales would have been higher by $153,776. GTCL comparable sales in GBP, its home currency, increased 22.6% or £145,651,
from £643,633 to £789,283 for the three months ended March 31, 2017 as compared to March 31, 2016.
Cost
of Sales.
During the three months ended March 31, 2017, cost of revenues increased to $1,067,752 compared to $856,920 for
the three months ended March 31, 2016, an increase of $210,832 or 24.6%. We expect our cost of revenues to continue to increase
during fiscal 2017 and beyond, as we expand our operations and begin generating additional revenues under our current business.
However, we are unable at this time to estimate the amount of the expected increases. Gross profit margins during the three months
ended March 31, 2017 were 22.8% as compared to 33.8% for the comparable period in the prior year. GBP depreciated significantly
against US$ following BREXIT vote but we had to maintain product pricing at the same level to remain competitive. Additionally,
we picked up new reseller customers who buy in larger quantities at lower margins.
Operating
Expenses.
Total operating expenses for the three months ended March 31, 2017 were $533,042, a decrease of $208,978, or 28.2%,
from total operating expenses for the three months ended March 31, 2016 of $742,020. Factors contributing to the increase are
described below.
Selling,
general and administrative expenses
were $155,254 and $184,775 for the three months ended March 31, 2017 and 2016, respectively,
a decrease of $29,521 or 16.0%. The decrease for the three months ended March 31, 2017, was due to lower exchange rates in the
current period offset by variable expenses which increase as revenue increases.
Salaries,
wages and payroll taxes
were $152,951 and $173,855, for the three months ended March 31, 2017 and 2016, respectively, a decrease
of $20,904, or 12.0%. The decrease in the exchange rate was the primary reason for the reduction.
Professional
fees
were $148,859 and $300,568 for the three months ended March 31, 2017 and 2016, respectively, a decrease of $151,709,
or 50.5%. The decrease during the three months ended March 31, 2017 as compared to the same period in 2016 was attributable to
the Company’s decrease of $152,142 for investor relation fees from the same period in the prior year.
Depreciation
and amortization
expenses were $75,978 and $82,822 for the three months ended March 31, 2017 and 2016, respectively, a decrease
of $6,844 or 8.3%. The decrease during the 2017 period was primarily attributable the decrease in the exchange rate, 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 2017 and beyond as we expand our operations and
begin generating additional revenues under our current business. However, we are unable at this time to estimate the amount of
the expected increases.
Total
Other (Income) Expense.
Our total other (income) expenses were $798 compared to ($363,622) during the three months ended March
31, 2017 and 2016 respectively, a decrease of $364,420. The decrease is primarily attributed to changes in the fair value of derivative
instruments and interest expense related to the December 2015 private placement offering of convertible preferred stock and convertible
debt.
Net
Income (Loss)
We
recorded net loss before income tax of ($219,262), for the three months ended March 31, 2017 as compared to a net income of $59,946,
for the three months ended March 31, 2016. The increase in income is a result of the factors as described above.
Comprehensive
(Loss) Income
We
recorded a gain for foreign currency translation adjustments for the three months ended March 31, 2017 and 2016, of $5,592 and
$2,039, respectively. The fluctuations of the increase/decrease are primarily attributed to the increase 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, 2017, we had a cash balance of $214,490. Our working capital is ($64,918) at March 31,
2017.
Our
current assets at March 31, 2017 increased by approximately 21.0% from December 31, 2016 and included cash, accounts receivable,
unbilled revenue, inventory, prepaid and other current assets.
Our
current liabilities at March 31, 2017 increased by 43.7% from December 31, 2016 and included our accounts payable, derivative
liabilities, due to related party and deferred revenue and other liabilities in the ordinary course of our business.
Operating
Activities
Net
cash flows provided by operating activities for the three months ended March 31, 2017 amounted to $87,124 and were primarily attributable
to our net loss of $219,262, total amortization expense of $6,250, depreciation of $69,728, and offset by change in fair value
of derivative liabilities of $1,114 and net change in assets and liabilities of $231,304, primarily attributable to an increase
in accounts receivable of $53,119, increase in inventory of $33,922, increase in unbilled revenue of $2,209, decrease in prepaid
expense of $50,068, increase in other current assets of $29,978, increase in accounts payable of $301,484 and an decrease in deferred
revenue of $1,200.
Net
cash flows used in operating activities for the three months ended March 31, 2016 amounted to $469,469 and were primarily attributable
to our net income of $59,946, total amortization expense of $155,967, depreciation of $69,529, and offset by change in fair value
of derivative liabilities of $464,505 and net change in asset and liabilities of $290,658, primarily attributable to an increase
in accounts receivable of $118,924, increase in inventory of $61,142, decrease in unbilled revenue of $9,398, increase in prepaid
expense of $130,582, increase in other current assets of $2,676, increase in accounts payable of $7,272 and an increase in deferred
revenue of $5,996.
Investing
Activities
Net
cash flows used in investing activities were ($8,934) and ($3,318) for the three months ended March 31, 2017 and 2016, respectively.
We purchased property and equipment of $8,934 during the three months ended March 31, 2017. During the three months ended March
31, 2016, we purchased property and equipment of $3,318.
Financing
Activities
Net
cash flows provided by (used in) financing activities were $15,975 and ($101,259) for the three months ended March 31, 2017 and
2016, respectively. Net cash flows provided by financing activities were $15,975 for the three months ended March 31, 2017 and
were for amounts owed to a related party. During the three months ended March 31, 2016, net cash used in financing activities
were repayments of related party payable and convertible notes payable of $25,632 and $75,626, respectively.
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
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|
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.
|
Plan
of Operation
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
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those
estimates. The Company’s significant estimates include the valuation of stock based charges, the valuation of derivatives
and the valuation of inventory reserves.
Effect
of Exchange Rate on Results
The
Company’s reporting currency is US 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, 2017 closing rate at 1.2555 US$: GBP, average rate at 1.23801 US$:
GBP, for the three months ended March 31, 2016 closing rate at 1.438034 US$: GBP, average rate at 1.43284 US$: GBP, for the three
months ended March 31, 2016 and for the year ended 2016 closing rate at 1.2345 US$: GBP, average rate at 1.35585 US$.
Global
Telesat Communications LTD, (GTCL) represents 70.7% of total company sales for the three months ended March 31, 2017 and as such,
currency rate variances have an impact on results. For the three months ended March 31, 2017 the net effect on revenues were impacted
by the differences in exchange rate from quarterly average exchange of 1.43284 to 1.23801. Had the yearly average rate remained,
sales would have been higher by $153,776. GTCL comparable sales in GBP, its home currency, increased 22.6% or £145,651,
from £643,633 to £789,283 for the three months ended March 31, 2017 as compared to March 31, 2016.
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”) and the rules and regulations of the U.S Securities and Exchange Commission for Interim Financial
Information. All intercompany transactions and balances have been eliminated. All adjustments (consisting of normal recurring
items) necessary to present fairly the Company’s financial position as of March 31, 2017, and the results of operations
and cash flows for the three months ended March 31, 2017 have been included. The results of operations for the three months ended
March 31, 2017 are not necessarily indicative of the results to be expected for the full year.
Accounts
Receivable
The
Company extends credit to its customers based upon a written credit policy. Accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable
credit losses in the Company’s existing accounts receivable. The Company establishes an allowance of doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances
are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does not require collateral on accounts receivable.
As of March 31, 2017, and December 31, 2016, there is an allowance for doubtful accounts of $7,678 and $6,720.
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
Research
and Development
Research
and Development (“R&D”) expenses are charged to expense when incurred. The Company has consulting arrangements
which are typically based upon a fee paid monthly or quarterly. Samples are purchased that are used in testing, and are expensed
when purchased. R&D costs also include salaries and related personnel expenses, direct materials, laboratory supplies, equipment
expenses and administrative expenses that are allocated to R&D based upon personnel costs.
Foreign
Currency Translation
The
Company’s reporting currency is US Dollars. The accounts of one of the Company’s subsidiaries is maintained using
the appropriate local currency, (Great British Pound) GTCL 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 deferred
as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains
and losses arising from exchange rate fluctuation 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, 2017 closing rate at 1.2555 US$: GBP, average
rate at 1.23801 US$: GBP, for the three months ended March 31, 2016 closing rate at 1.438034 US$: GBP, average rate at 1.43284
US$: GBP, for the three months ended March 31, 2016 and for the year ended 2016 closing rate at 1.2345 US$: GBP, average rate
at 1.35585 US$: GBP.
Revenue
Recognition and Unearned Revenue
The
Company recognizes revenue from satellite services when earned, as services are rendered or delivered to customers. Equipment
sales revenue is recognized when the equipment is delivered to and accepted by the customer. Only equipment sales are subject
to warranty. Historically, the Company has not incurred significant expenses for warranties.
The
Company’s customers generally purchase a combination of our products and services as part of a multiple element arrangement.
The Company’s assessment of which revenue recognition guidance is appropriate to account for each element in an arrangement
can involve significant judgment. This assessment has a significant impact on the amount and timing of revenue recognition.
Revenue
is recognized when all of the following criteria have been met:
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Persuasive
evidence of an arrangement exists. Contracts and customer purchase orders are generally used to determine the existence of
an arrangement.
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Delivery
has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
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The
fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with
the transaction and whether the sales price is subject to refund or adjustment.
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Collectability
is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customer’s payment history.
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In
accordance with ASC 605-25,
Revenue Recognition
—
Multiple-Element Arrangements,
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.
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:
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Years
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|
Office furniture and fixtures
|
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|
4
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|
Computer equipment
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|
|
4
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|
Appliques
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|
|
10
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|
Website development
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|
2
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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, 2017 and December 31, 2016.
Fair
value of financial instruments
The
Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, 2016 to March 31, 2017:
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Conversion feature derivative liability
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Warrant liability
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Total
|
|
Balance at January 1, 2016
|
|
|
614,035
|
|
|
|
4,356
|
|
|
|
618,391
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Change in fair value included in earnings
|
|
|
(422,974
|
)
|
|
|
(3,119
|
)
|
|
|
(426,093
|
)
|
Net effect on additional paid in capital
|
|
|
(191,062
|
)
|
|
|
-
|
|
|
|
(191,062
|
)
|
Balance at December 31, 2016
|
|
$
|
-
|
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
Change in fair value included in earnings
|
|
|
-
|
|
|
|
(1,114
|
)
|
|
|
(1,114
|
)
|
Balance at March 31, 2017
|
|
$
|
-
|
|
|
$
|
123
|
|
|
$
|
123
|
|
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 be 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
The
Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.