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
Global Telesat Communications Limited
(“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 presence in the UK and Miami, as well as our online storefront presence in more than 10 countries, and have
in excess of 20,000 customers located in almost 80 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
Acquisition
of Global Telesat and Related Transactions
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.
GlobalStar
License Acquisition
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.
December
2015 Financings
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
May 17, 2016, the Company entered into exchange agreements with holders of the Company’s outstanding $504,168 convertible
notes originally issued on December 28, 2015, 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 Preferred Stock.
The terms of the shares of Series G
Preferred Stock are set forth in the Certificate of Designation of Series G Preferred Stock as filed with the Secretary of
State of the State of Nevada. The Series G COD authorizes 10,090,000 Preferred G Shares. The Preferred G Shares are
convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred G Share
divided by the conversion price. The stated value of each Preferred G Share is $0.05 and the initial conversion price is
$0.05 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions
or other similar events. The Company is prohibited from effecting a conversion of the Preferred G Shares to the extent that,
as a result of such conversion, such investor 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 Preferred G
Shares. Each Preferred G Share 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 Preferred G Share entitles the holder to cast one vote per share of Series
G Preferred Stock owned at the time of such vote subject to the 4.99% beneficial ownership limitation. Subject to certain
specified exceptions, in the event the Company issues securities at a per share price less than the conversion price prior to
December 28, 2016, 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 G Shares with a
conversion price equal to the lower price issuance.
The
exchanging holders, GRQ Consultants Inc. 401K, Michael Brauser and Intracoastal Capital LLC, are each holders of over 5% of a
class of the Company’s voting securities.
Key
Compensation Arrangements
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.
On May 26, 2017, the Company
issued 5,000,000 options to Mr. Phipps, 3,750,000 options to Theresa Carlise, 1,250,000 options to Hector Delgado, its Director
and 20,000,000 options to certain employees of the Company. The employees are the adult children of our Chief Executive Officer.
All of the options are fully vested and have an exercise price of $0.01 per share and a term of 10 years.
Series
H Preferred Stock Financing
On
October 26, 2016, the Company entered separate subscription agreements with accredited investors relating to the issuance and
sale of $350,000, out of a maximum of $800,000, of shares of Series H Preferred Stock at a purchase price of $4.00 per share.
The initial conversion price is $0.04 per share, subject to adjustment as set forth in the Series H COD. The Company is prohibited
from effecting a conversion of the Series H Preferred Stock to the extent that, because of such conversion, the investor would
beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving
effect to the issuance of shares of common stock upon conversion of the Series H Preferred Stock.
Each
Series H Preferred Stock
entitles the holder to cast one vote per share of
Series H Preferred Stock
owned as of the record date for the determination of shareholders
entitled to vote, subject to the 4.99% beneficial ownership limitation. The Company received the necessary consents as required
from prior subscription agreements, Preferred Series C, Preferred Series G and Preferred Series H, as well as antidilution rights.
Certain shareholders have waived their right to adjustment, equal treatment, most favored nations and other rights to which
they were entitled pursuant to the Prior Offerings, including without limitation, certain rights granted to holders of our Series
C Preferred Stock, Series F Preferred Stock and G Preferred Stock.
The Company was required
to issue 550,000 shares of its Preferred Series C, which is convertible into 5,500,000 shares of the Company’s common stock
and 114,944 shares of Preferred Series I, which is convertible into 11,494,400 shares of the Company’s common stock. Preferred
Series I was issued to certain holders in lieu of Preferred Series G and Preferred Series H.
Series
J Preferred Stock Financing
On May 31, 2017, the Company
entered into separate subscription agreements with accredited investors relating to the issuance of shares of Series J Preferred
Stock at a purchase price of $10.00 per share for sale of $500,000 proceeds and settlement of $46,694 accounts payable.
The Series J Preferred Stock are convertible into shares of common stock based on a conversion calculation equal to (i) multiplying
the number of shares to be converted by the stated value thereof, and then (ii) dividing the result by the conversion price in
effect immediately prior to such conversion. The stated value of each Series J Preferred Stock is $10.00 and the initial conversion
price is $0.01 per share, subject to adjustment as set forth in the Series J COD. The Company is prohibited from effecting a conversion
of the Series J Preferred Stock to the extent that, as a result of such conversion, the investor would beneficially own more than
4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the Series J Preferred Stock. Each Series J Preferred Stock entitles the holder to
cast one vote per share of Series J Preferred Stock owned as of the record date for the determination of shareholders entitled
to vote, subject to the 4.99% beneficial ownership limitation.
In
connection with the Series J Offering, the Company obtained the consent of certain shareholders, as required under the agreements
entered into by the Company and issued shares pursuant to applicable anti-dilution obligations. The Company is required to issue
to certain prior investors of Series G Preferred Stock additional shares of Series G Preferred Stock, which would be convertible
into an aggregate of 38,805,668 shares of the Company’s common stock. However, in lieu of issuing such additional shares
of Series G Preferred Stock, the Company will create a new series of preferred stock, to be designated as “Series K Preferred
Stock” and will issue to such holders of Series G Preferred Stock an aggregate of 388,057 shares of Series K Preferred Stock,
each of which shall be convertible into 100 shares of the Company’s common stock. In addition, in order to proceed with
the Series J Offering, the Company agreed to issue additional shares of Series F Preferred Stock and Series H Preferred Stock
to certain prior investors. However, in lieu of issuing such additional shares of Series F Preferred Stock and Series H Preferred
Stock, the Company issued to such holders of Series F Preferred Stock and Series H Preferred Stock an aggregate of 701,832 shares
of Series K Preferred Stock, each of which are convertible into 100 shares of the Company’s common stock, or 70,183,243
shares. In addition, certain creditors of the Company were also entitled to anti-dilution protection from issuances and as a result
such creditors were, at the closing of the Series J Offering, issued an aggregate of 76,762 shares of Series K Preferred Stock
convertible into 7,676,241 shares of common stock in full satisfaction of payments owed to them.
The
following table describes the capital raised for the periods as described above:
|
|
Date
|
|
|
Units
|
|
|
Stated Value
|
|
|
Total Proceeds
|
|
|
Common Equivalents
|
|
|
Anti-Dilution Issuances
|
|
|
Total Common Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Series C
|
|
|
2/19/2015
|
|
|
|
550,000
|
|
|
$
|
2.00
|
|
|
$
|
1,100,000
|
|
|
|
22,000,000
|
|
|
|
5,500,000
|
|
|
|
27,500,000
|
|
Preferred Series F
|
|
|
12/28/2015
|
|
|
|
1,099,998
|
|
|
$
|
0.50
|
|
|
$
|
550,000
|
|
|
|
1,099,998
|
|
|
|
53,899,902
|
|
|
|
54,999,900
|
|
Preferred Series G
|
|
|
5/17/2016
|
|
|
|
10,083,351
|
|
|
$
|
0.05
|
|
|
$
|
504,168
|
|
|
|
10,083,351
|
|
|
|
40,333,449
|
|
|
|
50,416,800
|
|
Preferred Series H
|
|
|
10/31/2016
|
|
|
|
87,500
|
|
|
$
|
4.00
|
|
|
$
|
350,000
|
|
|
|
8,750,000
|
|
|
|
26,250,000
|
|
|
|
35,000,000
|
|
Preferred Series J
|
|
|
5/31/2017
|
|
|
|
50,000
|
|
|
$
|
10.00
|
|
|
$
|
500,000
|
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,004,168
|
|
|
|
46,933,349
|
|
|
|
125,983,351
|
|
|
|
172,916,700
|
|
Results
of Operations for the Three and Six Months Ended June 30, 2017 compared to the Three and Six Months Ended June 30, 2016
Revenue.
Sales for the three and six months ended June 30, 2017 consisted primarily of sales of satellite phones, accessories and airtime
plans. For the three months ended June 30, 2017, revenues generated were approximately $1,567,191 compared to approximately
$1,188,593 of revenues for the three months ended June 30, 2016, an increase in total revenues of $378,598 or 31.9%.
Sales for the six months ended June 30, 2017 were $2,938,881 compared to approximately $2,483,857 of revenues during the
six months ended June 30, 2016, a $455,024 increase in total revenues or 18.3%. The Company attributes the increases in
revenue to an increase in recurring revenue related customer and the introduction of new product lines, offset by exchange rate
variances as described above.
Cost
of Sales.
During the three months ended June 30, 2017, cost of revenues increased to $1,272,551 compared to $1,004,891
for the three months ended June 30, 2016, an increase of $267,660 or 26.6%. For the six months ended June 30, 2017,
cost of revenues increased to $2,344,325 compared to $1,892,323 for the three months ended June 30, 2016, an increase of $452,002
or 23.9%. Gross profit margins during the three months ended June 30, 2017 were 18.8% as compared to 15.5% for the comparable
period in the prior year. During the six months ended June 30, 2017, gross profit margins were 20.2% as compared to 23.8%. We
expect our cost of revenues to continue to increase during fiscal 2017 and beyond, as we expand our operations and begin generating
additional revenues under our current business. However, we are unable at this time to estimate the amount of the expected increases.
Gross margins reacted negatively with the devaluation of GBP against US$ following the BREXIT vote and in order to remain competitive
we had to maintain product pricing. In addition, we attracted new reseller customers who buy in larger quantities at lower margins.
Operating
Expenses.
Total operating expenses for the three months ended June 30, 2017 were $1,119,925, an increase of $337,070,
or 43.1%, from total operating expenses for the three months ended June 30, 2016 of $782,855. For the six months ended
June 30, 2017 total operating expenses were $1,652,023, as compared to $1,494,363, for the same period in 2016, an increase
of $157,660 or 10.6%. Factors contributing to the increase are described below.
Selling,
general and administrative expenses
were $144,160 and $160,624 for the three months ended June 30, 2017 and 2016,
respectively, a decrease of $16,464 or 10.3%. For the six months ended June 30, 2017, selling, general and administrative
expenses were $298,616 as compared to $314,887, a decrease of $16,271 or 5.2%. The decrease for the three and six
months ended June 30, 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 $181,870 and $170,981, for the three months ended June 30, 2017 and 2016, respectively, an increase of
$10,889, or 6.4%. For the six months ended June 30, 2017, salaries, wages and payroll taxes were $334,594 as compared to $344,836,
a decrease of $10,242, or 3.0%, for the same period in the prior year. For the three months ended June 30, 2017, the increase
is attributable to an increase in compensation as a result of additional employees, offset by the decrease in the exchange rate.
For the six months ended June 30, 2017, the decrease is related to changes in personnel from the prior year.
Stock
based compensation
was $600,000 for the three and six months ended June 30, 2017, as compared to $0 for the three and six
months ended June 30, 2016. On May 26, 2017, the Company issued 5,000,000 options to Mr. Phipps, 3,750,000 options to Theresa
Carlise and 20,000,000 options to certain employees of the Company. The employees are the adult children of our Chief Executive
Officer. All of the options are fully vested and have an exercise price of $0.01 per share and a term of 10 years.
Professional
fees
were $119,809 and $387,916 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $268,107, or
69.1%. For the six months ended June 30, 2017, professional fees were $268,655 as compared to $688,484, a decrease of $419,829
or 61.0% from the six months ended June 30, 2016. The decrease was primarily attributable to the Company’s decrease
of investor relation fees from the same period in the prior year.
Depreciation
and amortization
expenses were $74,086 and $63,334 for the three months ended June 30, 2017 and 2016, respectively, an increase
of $10,752 or 17.0%. For the six months ended June 30, 2017 depreciation and amortization expenses were $150,158 as compared to
$146,156, an increase of $4,002, or 2.7% from the same period in the prior year. For the three and six months, the increase in
depreciation is proportionately related to an increased in website development, which has a shorter useful life and an increase
in computer equipment, respectively.
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 $2,305,229 compared to $574,584 during the three months ended June 30, 2017
and 2016 respectively, an increase of $1,730,645. Our total other (income) expenses were $2,302,806 compared to $210,962 during
the six months ended June 30, 2017 and 2016 respectively, an increase of $2,091,844. The increase is primarily attributable
to the expense of $2,308,981 related to the Series J Preferred stock issuance, for price protection to certain Subscribers of
Preferred Series F, Preferred Series G and Preferred Series H. The additional issuance for price protection, while expensed as
other expense, also results as an increase to additional paid in capital.
Net
Income (Loss)
We
recorded net loss before income tax of $3,130,516, for the three months ended June 30, 2017 as compared to a net loss of
$1,173,737, for the three months ended June 30, 2016. We recorded net loss before income tax of $3,360,273, for the six
months ended June 30, 2017 as compared to a net loss of $1,113,791, for the six months ended June 30, 2016. The increase in net
loss 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 June 30, 2017 and 2016, of $9,050 and
$4,413, respectively. For the six months ended June 30, 2017, we recorded a gain of $14,642 and for the six months ended June
30, 2016, a loss of $2,375. 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 June 30, 2017, we had a cash balance of $501,689. Our working capital is $322,092 at June
30, 2017.
Our
current assets at June 30, 2017 increased by approximately 74.0% from December 31, 2016 and included cash, accounts receivable,
unbilled revenue, inventory, prepaid and other current assets.
Our
current liabilities at June 30, 2017 increased by 49.0% 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.
Our
recent sources of financing are discussed in more detail under “Recent Transactions,” above. Growing and operating
our business will require significant cash outlays, liquidity reserves and capital expenditures and commitments to respond to
business challenges, including developing or enhancing new or existing products.
Operating
Activities
Net
cash flows used in by operating activities for the six months ended June 30, 2017 amounted to $100,631 and were primarily
attributable to our net loss of $3,360,273, total amortization expense of $12,500, depreciation of $137,658, imputed interest
of $436, stock based compensation of $600,000, preferred price based stock protection expense of $2,308,981, amortization of prepaid
expense for stock based compensation for services of $80,582 offset by change in fair value of derivative liabilities of $1,237
and net change in assets and liabilities of $120,722, primarily attributable to an increase in accounts receivable of $115,846,
increase in inventory of $92,303, increase in unbilled revenue of $33,989, decrease in prepaid expense of $10,000,
increase in other current assets of $55,256, increase in accounts payable of $389,017 and an increase in deferred
revenue of $19,099.
Net cash flows used in
operating activities for the six months ended June 30, 2016 amounted to $705,892 and were primarily attributable to our net loss
of $1,113,791, total amortization expense of $615,015, depreciation of $133,656, imputed interest of $471, issuance of
common stock for prepaid services of $164,608 and offset by change in fair value of derivative liabilities of $424,846 and net
change in asset and liabilities of $81,005, primarily attributable to an increase in accounts receivable of $63,198, increase
in inventory of $38,004, decrease in unbilled revenue of $5,705, increase in prepaid expense of $1,237, decrease in other current
assets of $1,047, increase in accounts payable of $31,342 and an decrease in deferred revenue of $16,662.
Investing
Activities
Net cash flows used in
investing activities were $16,964 and $30,654 for the six months ended June 30, 2017 and 2016, respectively. We purchased property
and equipment of $16,964 during the six months ended June 30, 2017. We purchased property and equipment of $30,654 during the
six months ended June 30, 2016.
Financing
Activities
Net cash flows provided
by (used in) financing activities were $492,981 and ($89,263) for the six months ended June 30, 2017 and 2016,
respectively. Net cash flows provided by financing activities were $492,981 for the six months ended June 30, 2017 and were for
proceeds from sale of preferred stock for $500,000 and amounts owed to a related party of $7,019. During the six months ended
June 30, 2016, net cash used in financing activities were repayments of convertible notes payable of $100,834 and proceeds from
related party payable of $11,571.
Off-Balance
Sheet Arrangements
We
do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to our stockholders.
Our
company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us
under which we have
●
|
an
obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase
obligations to vendors
|
|
|
●
|
a
retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such assets,
|
|
|
●
|
any
obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or
|
|
|
●
|
any
obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held
by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages
in leasing, hedging or research and development services with us.
|
Critical
Accounting Policies and Estimates
Critical
accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results
of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates
about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed
below.
Use
of Estimates
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 and six months ended June 30, 2017 closing rate at 1.30240 US$: GBP,
average rate at 1.27779 US$: GBP and 1.25801 US$: GBP. For the three and six months ended June 30, 2016 closing rate at 1.3311
US$: GBP, average rate at 1.43544 US$: GBP and 1.43414 US$: GBP and for the year ended 2016 closing rate at 1.2345 US$: GBP, average
rate at 1.35585 US$ GBP.
Global Telesat Communications
LTD, (GTCL) represents 70.6% of total company sales for the six months ended June 30, 2017 and as such, currency rate variances
have an impact on results. For the six months ended June 30, 2017 the net effect on revenues were impacted by the differences
in exchange rate from quarterly average exchange of 1.43414 to 1.25801. Had the yearly average rate remained, sales for the
six months would have been higher by $290,606. GTCL comparable sales in GBP, its home currency, increased 31.3% or
£412,574, from £1,237,379 to £1,649,954, for the six months ended June 30, 2017 as compared to
June 30, 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 June 30, 2017, and the results of operations and
cash flows for the six months ended June 30, 2017 have been included. The results of operations for the six months ended June
30, 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 June 30, 2017, and December 31, 2016, there is an allowance for doubtful accounts of $415 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 and six months ended June 30, 2017 closing rate at 1.30240 US$: GBP,
average rate at 1.27779 US$: GBP and 1.25801 US$: GBP. For the three and six months ended June 30, 2016 closing rate at 1.3311
US$: GBP, average rate at 1.43544 US$: GBP and 1.43414 US$: GBP and for the year ended 2016 closing rate at 1.2345 US$: 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.
|
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:
|
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 June 30, 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, 2016 to June 30, 2017:
|
|
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
|
|
|
-
|
|
|
|
(1,237
|
)
|
|
|
(1,237
|
)
|
Balance at June 30, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.