Cautionary Notice Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including those relating to our
liquidity, our belief that we will not have sufficient cash and borrowing
capacity to meet our working capital needs for the next 12 months without
further financing, our expectations regarding acquisitions and new lines of
business, gross profit, gross margins and capital expenditures. Additionally,
words such as “expects,” “anticipates,” “intends,” “believes,” “will,” “would,”
“plan,” “vision” and similar words are used to identify forward-looking
statements.
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Some or all the results anticipated by these forward-looking statements may not
occur. Important factors, uncertainties and risks that may cause actual results
to differ materially from these forward-looking statements include, but are not
limited to, the Risk Factors which appear in our filings and reports made with
the Securities and Exchange Commission (the “SEC”), our lack of working capital,
the value of our securities, the impact of competition, the continuation or
worsening of current economic conditions, technology and technological changes,
a potential decrease in consumer spending and the condition of the domestic and
global credit and capital markets. Additionally, these forward-looking
statements are presented as of the date this Form 10-K is filed with the SEC. We
do not intend to update any of these forward-looking statements.
This discussion should be read in conjunction with the other sections of this
Report, including “Risk Factors,” “Description of Business” and the Financial
Statements attached hereto pursuant and the related exhibits. The various
sections of this discussion contain a number of forward-looking statements, all
of which are based on our current expectations and could be affected by the
uncertainties and risk factors described throughout this Report.
The following discussion provides information which management believes is
relevant to an assessment and understanding of our results of operations and
financial condition. The discussion should be read along with our financial
statements and notes thereto contained elsewhere in this annual report. The
following discussion and analysis contains forward-looking statements, which
involve risks and uncertainties. Our actual results may differ significantly
from the results, expectations and plans discussed in these forward-looking
statements.
Overview
Leveraging the e-commerce experience of the Company’s management team and the
Company’s existing e-commerce platforms, the Company has embarked upon the
rollout of a state-of-the-art e-commerce platform to collaborate with businesses
to optimize their ability to sell their goods online, domestically, and
internationally, and enabling customers and partners to optimize their
e-commerce presence and revenue, which we expect will become the focus of the
Company’s business in the future. Historically, the business of NextPlat has
been the provision of a comprehensive array of Satellite Industry communication
services, and related equipment sales. As detailed in Online Storefronts and
E-Commerce Platforms below, the Company operates two main e-commerce websites as
well as 25 third-party e-commerce storefronts such as Alibaba, Amazon and
Walmart. These e-commerce venues form an effective global network serving
thousands of consumers, enterprises, and governments. NextPlat has announced its
intention to broaden its e-commerce platform and is implementing comprehensive
systems upgrade to support this initiative. The Company has also begun the
design and development of a next generation platform for digital assets built
for Web3 (an internet service built using decentralized blockchains). This new
platform (“NextPlat Digital”) is currently in the design and development phase
and will enable the use of a range of digital assets, such as non-fungible
tokens (“NFTs”), in e-commerce and in community-building activities.
Recent Events
Expanding beyond our current global network of online storefronts serving
thousands of consumers, enterprises, and governments, the Company has embarked
upon the rollout of a state-of-the-art e-commerce platform to collaborate with
businesses to optimize their ability to sell their goods online, domestically,
and internationally, and enabling customers and partners to optimize their
e-commerce presence and revenue. We intend to develop a next generation platform
for digital assets built for Web3, an internet service built using decentralized
blockchains. Our new platform (“NextPlat Digital”), which is currently in the
design and development phase in collaboration with consultants and contracted
developers, will initially enable the use of non-fungible tokens (“NFTs”), in
e-commerce and in community-building activities. NextPlat Digital may in the
future also enable the posting and use of other digital or “crypto” assets once
applicable legal and regulatory requirements are addressed. As currently
contemplated, NextPlat Digital may facilitate the creation/minting, purchase and
sale of a broad range of non-yield-generating and non-fractionalized NFT
products, including, but not limited to, art, music, collectables, digital real
estate, video games, game items and certificates of authenticity. We also
anticipated developing and deploying NFTs for use in tokenizing data for use in
brand loyalty programs.
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NextPlat Digital, as currently planned, will be used by us to create both (a)
public marketplaces, for us and third-parties, where anyone with a crypto wallet
or credit card can buy an NFT from an authorized user, or, if authorized, sell
their own NFTs, and (b) private market places that only allow a particular
company or entity to sell their own NFTs within a branded market (such as for
the promotion of a particular brand or product). We do not currently intend to
undertake or participate in “initial coin offerings”, the minting of “coins” or
the mining of cryptocurrencies.
The legal status of NFTs under a myriad of state and federal laws and regulatory
regimes (including securities, banking, and commodities laws) is highly
uncertain and unresolved, and the applicability of various of those regimes to
any NFTs that we may propose to post on our platform is also unresolved. Our
creation and operation of NextPlat Digital will present a number of new
regulatory and legal compliance obligations for the Company. As an initial
matter we will need to make a determination whether a particular NFT could
reasonably be considered a security for federal and state law purposes, and if
so we would be required to comply with the applicable securities registration
requirements or obtain comfort that our activities would fall within applicable
exemptions from registration. To the extent that we determine that a particular
NFT could be deemed a “security” within the meaning of the U.S. federal and/or
securities laws, we intend to obtain contractual comfort from licensed
broker-dealer authorized to act as a trading system for those digital assets
that such broker-dealer will comply with the applicable “Know Your Customer”
(“KYC”) rules and custom and practice, as well as with the applicable Anti-Money
Laundering laws and regulations (“AML”) and Combating the Financing of Terrorism
(“CFT”), administered and enforced by the U.S. Treasury Financial Crimes and
Enforcement Network discussed below, among others. We may have legal exposure
for any alleged failures on the part of such licensed broker-dealer to fulfill
its obligations under its contracts with us.
With respect to the securities status of an NFT that we propose to post to our
platform, we will follow an internally developed model that will permit us to
make a risk-based assessment regarding the likelihood that a particular NFT
could be deemed a “security” within the meaning of the U.S. federal and/or state
securities laws in determining if and how an NFT can be posted on our platform.
This process will involve employees trained to identify the indicia of a
“security” who will also work with outside legal counsel experienced in crypto
asset regulatory matters to make a determination with respect to each NFT, or
category of NFT, proposed to be posted on our platform. These processes and
procedures are risk-based assessments and are not a legal standard or binding on
regulators or courts. In the event an NFT or other digital asset is deemed by
us, pursuant to the above analysis, to possess a reasonable likelihood of being
deemed a security, we will (a) comply with applicable laws and regulations by
forming, acquiring or engaging a licensed broker-dealer authorized to act as an
trading system for those digital assets, or (b) transact in such digital assets
offshore in a way that complies with applicable laws and regulations; or (c) not
transact in the subject NFT. We expect our risk assessment policies will
continuously evolve to take into account developments in case law, applicable
facts, developments in technology, and changes in applicable regulatory schemes.
Irrespective of a particular NFT’s status as a security, we will need to assess
whether we needed to comply with other applicable regulations and laws
(including but not limited to AML and CFT regulations). If we are deemed to be
involved in the exchange or transmission of value that substitutes for currency,
or fall under other evolving requirements, we may be deemed to be a “money
transmitter” and will be subject to AML and CFT regulations. Depending on the
attributes of an NFT, the manner in which it is marketed, and the nature of the
clientele, we could be subject to other legal and regulatory regimes as well. We
will endeavor to comply with all applicable laws in connection with our NextPlat
Digital business, but the uncertain application of those laws to our proposed
business may create a substantial risk to the Company.
When onboarding new users, we intend to utilize third-party tools to proactively
screen for high-risk crypto wallets, including explicitly sanctioned addresses
and addresses associated with sanctioned entities. Crypto wallets protect the
identity of the owner of the wallet, store the owner’s private keys, secure and
provide access by the owner to the cryptocurrency owned by it and allow the
owner to send, receive, and transact business with cryptocurrencies. Such
wallets by their nature obfuscate the identity of the owner of the wallet and
limit access to the transaction history of that wallet and its owner.
Consequently, crypto wallets and cryptocurrencies may be used by persons seeking
to avoid legal oversight and to violate the law. For example, they can be used
to launder money and to promote terrorism. The applicable legal requirements and
our compliance obligations will vary depending on the nature of the client, the
service or product provided and jurisdiction. For example, if we engage, form or
acquire a broker dealer in order to post, trade or sell NFTs or other digital
assets that are securities, we will attempt to fully comply with all applicable
KYC, AML and CFT compliance requirements. If, on the other hand, we facilitate
the distribution of free promotional corporate collectable NFTs that are not
deemed to be securities, our compliance requirements will be significantly less.
In either event there can be no assurance that our efforts to fully comply with
applicable law will be successful.
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In determining to engage in transactions in an NFT, we will attempt to comply
with all applicable laws. However, given the substantial legal uncertainties
that may be presented by those laws and given the informational constraints
presented by crypto wallets we may not be successful in our efforts.
Consequently, we may be exposed to regulatory enforcement and civil or criminal
sanction should a legal authority determine that our approach is inadequate or
inappropriate, as well as to claims asserting civil liability. Moreover,
governmental agencies may seek to apply laws to our NextPlat Digital business
that we believe are inapplicable and may seek sanctions relating to our alleged
failure to comply with those laws.
December 2022 Private Placement of Common Stock
On December 9, 2022, the Company entered into a securities purchase agreement
with certain institutional and accredited investors for the sale by the Company
in a private placement of 4,575,429 units, each unit comprising (i) one share of
the Company’s common stock, and (ii) one warrant to purchase one share of common
stock. The offering price of the units was $1.75 per unit. The warrants included
in the units are exercisable at a price of $1.75 per share and expire three
years from the date of issuance.
The offering closed on December 14, 2022, and the Company received gross
proceeds of approximately $8.0 million for the units. The Company intends to use
the proceeds from the offering for working capital needs, potential
acquisitions, joint ventures, and ongoing business transition activities.
In connection with the offering, the Company entered into a registration rights
agreement, pursuant to which, among other things, the Company will prepare and
file with the Securities and Exchange Commission (the “SEC”) a registration
statement to register for resale the shares of Common Stock sold in the offering
and the shares of Common Stock underlying the Warrants, within 15 calendar days
and to use its best efforts to have the registration statement declared
effective as promptly as practical thereafter.
The securities offered and sold in the December Offering were sold in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act and
corresponding provisions of state securities or “blue sky” laws.
The terms of the transaction disclosed above, including the provisions of the
securities purchase agreement and registration rights agreement, were approved
by the Board of Directors and because some of the securities were offered and
sold to officers and directors of the Company, such terms were separately
reviewed and approved by the Audit Committee of the Board of Directors.
Investment in Progressive Care Inc.
On August 30, 2022, the Company entered into a Securities Purchase Agreement
(the “SPA”) with Progressive Care, Inc. (OTCQB: RXMD) (“Progressive”), which
subsequently closed on September 2, 2022. We purchased a non-controlling
interest with a view to enhancing our product and services offerings.
Progressive is a Florida health services organization and provider of
Third-Party Administration (TPA), data management, COVID-19 related diagnostics
and vaccinations, 340B contracted pharmacy services, prescription
pharmaceuticals, compounded medications, provider of tele-pharmacy services, the
sale of anti-retroviral medications, medication therapy management (MTM), the
supply of prescription medications to long-term care facilities, and health
practice risk management. Our Chairman, Charles Fernandez, was appointed as the
Chief Executive Officer of Progressive in November 2022 along with our Board
member, Mr. Rodney Barreto, who was appointed to serve as Vice Chairman of
Progressive’s board of directors. Our holdings in Progressive include preferred
stock, common stock, warrants and convertible debt, and we currently account for
it using the equity method. In addition, we have extended an equity line of
credit to Progressive. Through conversion of our convertible debt and warrants
as well as via securities issuances that would result from utilization of the
equity line of credit, we are able to own more than 50% of the voting equity
securities of Progressive should we choose to do so. We have determined to use
our ownership of the above securities to assert control over Progressive; and we
are in the process of assessing whether we should take steps to obtain further
control of Progressive and/or integrate Progressive’s business with our own; or
whether we should maintain it as a separate business.
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The September 2, 2022, transaction with Progressive included the purchase of
3,000 newly issued units of securities from Progressive at a price per Unit of
$2,000 for an aggregate purchase price of $6 million (the “Unit Purchase”). Each
Unit consists of one share of Series B Convertible Preferred Stock of
Progressive (“Series B Preferred Stock”) and one warrant to purchase a share of
Series B Preferred Stock (“RXMD Warrants”).
Each share of Series B Preferred Stock votes as a class with the common stock of
Progressive Care and has 500 votes per share. Likewise, each share of Series B
Preferred Stock is convertible into 500 shares of Progressive common stock. In
addition, the Series B Preferred Stock has a liquidation and dividend
preference. The RXMD Warrants have a five-year term, and are immediately
exercisable, in whole or in part, and contain cashless exercise provisions. Each
Warrant is exercisable at $4.00 per share of Series B Preferred Stock.
Following the consummation of the Unit Purchase, our Chairman and Chief
Executive Officer, Charles M. Fernandez, and our board member, Rodney Barreto,
were appointed to Progressive’s Board of Directors, with Mr. Fernandez appointed
to serve as Chairman of Progressive’s Board of Directors and Mr. Barreto
appointed to serve as a Vice Chairman of Progressive’s Board of Directors. On
November 11, 2022, the Progressive Board of Directors elected Mr. Fernandez to
serve as the Chief Executive Officer of Progressive Care.
In addition, on September 2, 2022, NextPlat, Charles Fernandez, Rodney Barreto
and certain other purchasers purchased from Iliad Research and Trading, L.P.
(“Iliad”) a Secured Convertible Promissory Note, dated March 6, 2019, made by
Progressive to Iliad (the “Note”). The accrued and unpaid principal and interest
under the note at the time of the purchase was approximately $2.79 million. The
aggregate purchase price paid to Iliad for the Note was $2.3 Million of which
NextPlat contributed $1.0 million and Messrs. Fernandez and Barreto contributed
$400,000 each (the “Note Purchase”).
In connection with the Note Purchase, NextPlat, Messrs. Fernandez and Barreto
and the other purchasers of the Note entered into a Debt Modification Agreement
with Progressive Care. Pursuant to the Debt Modification Agreement, the interest
rate under the Note was reduced from 10% to 5% per annum and the maturity date
was extended to May 31, 2027. In addition, the conversion price under the note
was changed to $0.02 per share of Common Stock. Pursuant to the Debt
Modification Agreement, NextPlat, Messrs. Fernandez and Barreto and the other
purchasers of the Note have the right, exercisable at any time, to redeem all or
any portion of the Note. The Debt Modification Agreement also provides that the
Note will automatically convert upon the later to occur of: (a) the completion
by Progressive of a reverse stock split, and (b) the listing of Progressive’s
common stock on a national exchange. In consideration of the concessions in the
Debt Modification Agreement, Progressive issued 105,000 shares of its common
stock to the purchasers of the Note, of which NextPlat, Charles Fernandez and
Rodney Barreto, received 45,653, 18,261, and 18,261 shares, respectively, in
each case after giving effect to a 1-for-200 reverse stock split enacted by
Progressive Care on December 30, 2022.
On November 16, 2022, NextPlat Corp (NASDAQ: NXPL, NXPLW) (the “Company” or
“NextPlat”) entered into a Securities Purchase Agreement (the “SPA”) with
Progressive (OTCQB: RXMD), pursuant to which the Company has agreed to purchase,
from time to time during the three year term of the SPA, up to an aggregate of
$10.0 million of secured convertible debentures from Progressive (the
“Debentures”). Pursuant to the SPA, all purchases of the Debentures will be made
at the Company’s sole election and the proceeds from each purchase will be used
by Progressive only as approved by the Company’s Board of Directors. Until used,
the proceeds from each purchase of Debentures will be deposited in a controlled
account. If and when the Company elects to purchase Debentures under the SPA,
the minimum principal amount that can be purchased at any time is $1.0 million.
In addition, at the closing of each purchase under the SPA, the Company and
Progressive will enter into a Registration Rights Agreement (each, a
“Registration Rights Agreement”) pursuant to which Progressive will agree to
register the shares of Progressive common stock issuable upon conversion in full
of the Debentures purchased by the Company at such closing.
In accordance with the form of Debenture to be used for each purchase under the
SPA, each Debenture will be convertible at any time, upon the Company’s
election, to shares of Progressive’s common stock at a conversion price of $6.0
per share (on a post-split bases and may be further adjusted from time to time
for share dividends, share splits, reverse share splits, etc.). In addition,
each Debenture will mature on the third anniversary of its issuance and bear
interest at 5.0% per annum, payable quarterly. At the Company’s election,
interest can be paid in cash, shares of Progressive’s common stock, or some
combination thereof. Progressive has the right to prepay the Debenture at any
time provided that it gives the Company seven (7) business days advance written
notice, during which time the Company could elect to convert the Debenture to
Progressive common stock. Upon the prepayment of a Debenture, Progressive will
pay the Company an amount equal to the sum of: (i) all outstanding principal
under such Debenture, plus (ii) all accrued and unpaid interest under such
Debenture through the prepayment date, multiplied by (iii) 110%. While amounts
are outstanding under a Debenture, Progressive will be subject to certain
restrictive covenants, including with respect to the incurrence of indebtedness,
the imposition of liens on Progressive’s assets, changes to the Progressive’s
organization documents, etc.
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In connection with the SPA, on November 16, 2022, the Company entered into a
Security Agreement (the “Security Agreement”) with Progressive and its
subsidiaries, Touchpoint RX, LLC, a Florida limited liability company
(“Touchpoint”), Family Physicians RX, Inc., a Florida corporation (“FPRX”), and
ClearMetrX Inc., a Florida corporation (“ClearMetrX” and collectively with
Progressive, Touchpoint and FPRX, the “Borrower Parties”). Pursuant to the
Security Agreement, the Borrower Parties granted the Company a security interest
in all of their respective assets to secure Progressive’s obligations under the
Debentures.
January 2022 Private Placement of Common Stock
On December 31, 2021, after markets closed, a securities purchase agreement (the
“Purchase Agreement”) was circulated to, and signatures were received from,
certain institutional and accredited investors (the “December Investors”) in
connection with the sale in a private placement by the Company of 2,229,950
shares of the Company’s common stock (the “December Offering”). On January 2,
2022, the Company delivered to December Investors a fully executed Purchase
Agreement, which was dated December 31, 2021. The purchase price for the common
stock sold in the December Offering was $3.24 per share, the closing transaction
price reported by Nasdaq on December 31, 2021.
The closing of the December Offering occurred on January 5, 2022. The Company
received gross proceeds from the sale of the common stock in the December
Offering of approximately $7.2 million. The Company intends to use the proceeds
from the December Offering for general corporate purposes, including potential
acquisitions and joint ventures. Approximately 73% of funds raised in the
December Offering were secured from existing shareholders and from the members
of the Company’s senior management and Board of Directors.
In connection with the December Offering, the Company entered into a
registration rights agreement with the December Investors (the “Registration
Rights Agreement”), pursuant to which, among other things, the Company agreed to
prepare and file with the SEC a registration statement to register for resale
the shares of the Company’s common stock sold in the Offering.
The shares of common stock offered and sold in the December Offering were sold
in reliance on the exemption from registration provided by Section 4(a)(2) of
the Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act and corresponding provisions of state securities or “blue sky” laws.
The terms of the transaction disclosed above, including the provisions of the
Purchase Agreement and Registration Rights Agreement, were approved by the Board
of Directors and because some of the securities were offered and sold to
officers and directors of the Company, such terms were separately reviewed and
approved by the Audit Committee of the Board of Directors.
January 2022 Name Change
On January 18, 2022, the Company filed a Certificate of Amendment of the Amended
and Restated Articles of Incorporation of the Company with the Secretary of
State of the State of Nevada in order to change the Company’s corporate name
from Orbsat Corp to NextPlat Corp. This name change was effective as of January
21, 2022. The name change was approved by the Company’s stockholders at the 2021
annual meeting of stockholders held on December 16, 2021.
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Enterprise Resource Planning System (ERP)
On April 1, 2022, the Company commenced its implementation of an enterprise
resource planning “ERP” system, to replace our legacy business applications. The
new ERP platform provides better support for our changing business needs and
plans for future global growth. The project includes software, external
implementation assistance, testing, training, and support. For the year ended
December 31, 2022, 19.2% or approximately $86,000 of the cost was expensed in
the period incurred to SG&A and 80.8% or approximately $362,000 was capitalized
and depreciated over its useful life. On January 1, 2023, the Company completed
its implementation process.
On June 22, 2022, the Company formed NextPlat B.V., a Netherlands limited
liability company, as a wholly-owned subsidiary. At present, NextPlat B.V., has
no active operations.
Distribution of Our Products Through Alibaba
On July 13, 2021, we announced that our Global Telesat Communications (“GTC”)
unit has entered into an agreement with Alibaba.com, the B2B
(Business-to-Business) e-commerce website owned and operated by Alibaba Group
Holding Limited, also known as Alibaba Group (NYSE: BABA; HKEX: 9988), a Chinese
multinational technology company specializing in e-commerce, retail, internet,
and technology. GTC is a Gold-level Supplier on Alibaba.com, the world’s largest
Business-to-Business (B2B) e-commerce website. Under the agreement, GTC
significantly expanded its 24/7/365 e-commerce presence with the launch of its
latest global storefront on Alibaba.com on which it offers a range of satellite
IoT and connectivity products. These will include our specialized satellite
tracking products, some of which operate using the Company’s many ground
station-based network processors and can be used to track and monitor the
location of cars, trucks, trailers, boats, containers, animals, and other remote
assets. Although we currently have a limited range of products available through
the Alibaba storefront due to supply chain constrictions, we plan to ultimately
have up to 500 products and connectivity services available on Alibaba.com. The
agreement will continue a year-to-year basis.
Listing on the Nasdaq Capital Market
Our shares have been listed on the Nasdaq Capital Market since May 28, 2021. Our
common stock and warrants have been trading on the Nasdaq Capital Market under
the symbols “NXPL” and “NXPLW,” respectively, since January 21, 2022. Prior to
January 21, 2022, our common stock and warrants were traded on the Nasdaq
Capital Market under the symbols “OSAT” and “OSATW,” respectively.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. These estimates and assumptions are affected by management’s
applications of accounting policies. Critical accounting policies for our
company include the following:
Revenue Recognition and Unearned Revenue
The Company recognizes revenue from satellite services when earned, as services
are rendered or delivered to customers. Equipment sales revenue is recognized
when the equipment is delivered to and accepted by the customer. Only equipment
sales are subject to warranty. Historically, the Company has not incurred
significant expenses for warranties. Equipment sales which have been prepaid,
before the goods are shipped are recorded as contract liabilities and once
shipped is recognized as revenue. The Company also records as contract
liabilities, certain annual plans for airtime, which are paid in advance. Once
airtime services are incurred, they are recognized as revenue. Unbilled revenue
is recognized for airtime plans whereby the customer is invoiced for its data
usage the following month after services are incurred.
The Company’s customers generally purchase a combination of our products and
services as part of a multiple element arrangement. The Company’s assessment of
which revenue recognition guidance is appropriate to account for each element in
an arrangement can involve significant judgment. This assessment has a
significant impact on the amount and timing of revenue recognition.
The Company recognizes revenue when its customer obtains control of promised
goods or services, in an amount that reflects the consideration which we expect
to receive in exchange for those goods or services. To determine revenue
recognition for arrangements that the Company determines are within the scope of
ASC 606, we perform the following five steps: (i) identify the contract(s) with
a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as)
we satisfy a performance obligation. The five-step model is applied to contracts
when it is probable that we will collect the consideration we are entitled to in
exchange for the goods or services transferred to the customer. At contract
inception, once the contract is determined to be within the scope of ASC 606, we
assess the goods or services promised within each contract and determine those
that are performance obligations and assess whether each promised good or
service is distinct. We then recognize revenue in the amount of the transaction
price that is allocated to the respective performance obligation when (or as)
the performance obligation is satisfied.
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.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation.
(Topic 718). This update is intended to reduce cost and complexity and to
improve financial reporting for share-based payments issues to non-employees
(for example, service providers, external legal counsel, suppliers, etc.). The
ADU expands the scope of ASC 718, Compensation – Stock Compensation, which
currently only includes share-based payments issued to employees, also includes
share-based payments issues to non-employees for goods and services.
Consequently, the accounting for share-based payment to non-employees and
employees will be substantially aligned. This standard will be effective for the
financial statements issues by public companies for the annual and interim
periods beginning after December 15, 2018. Early adoption of the standard is
permitted. The standard will be applied in a retrospective approach for each
period presented. Management adopted this standard on January 1, 2019.
The Company estimated the fair value of stock options granted using the
Black-Scholes option-pricing formula. This fair value is then amortized on a
straight-line basis over the requisite service periods of the awards, which is
generally the vesting period. The Company’s determination of the fair value
using the option-pricing model is affected by the stock price as well as
assumptions regarding the number of highly subjective variables.
46 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, and common stock and options issued for services, receivables, the
useful lives of property and equipment, and intangible assets, the estimate of
the fair value of the lease liability and related right of use assets and the
estimates of the valuation allowance on deferred tax assets.
Effect of Exchange Rate on Results
The Company’s reporting currency is U.S. Dollars. The accounts of one of the
Company’s subsidiaries, GTC, 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 year ended December 31,
2022, closing rate at 1.2098 US$: GBP, yearly average rate at 1.2369 US$: GBP
for the year ended December 31, 2021, closing rate at 1.3534 US$: GBP, yearly
average rate at 1.3750 US$: GBP
For the year ended December 31, 2022, GTC represents 72.5% of total company
sales and as such, currency rate variances have an impact on results. The net
effect on revenues were impacted by the differences in exchange rate from yearly
average exchange of 1.2369 to 1.3751. Had the yearly average rate remained,
sales would have been higher by approximately $953,000. GTC comparable sales in
GBP, its home currency, increased 77.9% or approximately £3.0 million, from
approximately £3.9 million to approximately £6.9 million for the year ended
December 31, 2022, as compared to December 31, 2021.
For the year ended December 31, 2021, GTC represents 68.8% of total company
sales and as such, currency rate variances have an impact on results. The net
effect on revenues were impacted by the differences in exchange rate from yearly
average exchange of 1.2866 to 1.3750. Had the yearly average rate remained,
sales would have been lower by approximately $459,000. GTC comparable sales in
GBP, its home currency, increased 34.0% or £984,000, from £2.9 million to £3.9
million for the year ended December 31, 2021, as compared to December 31, 2020.
Results of Operations
Net Revenue. For the years ended December 31, 2022, and 2021, revenues generated
were approximately $11.7 million and approximately $7.7 million, an increase of
approximately $4.0 million or 51.3%. Revenues were derived primarily from the
sales of satellite phones, locator beacons, IoT GPS trackers, terminals,
accessories and additional and recurring airtime plans. Comparable sales for
Orbital Satcom Corp increased to approximately $3.2 million from approximately
$2.4 million or an increase of approximately $825,000 or 34.2%. Comparable sales
for GTC increased to approximately $8.5 million from approximately $5.3 million,
or an increase of approximately $3.2 million or approximately 60.1%. The overall
sales increase is attributable to increased sales through Amazon storefronts and
product selections, which constituted 54.3% and 63.6% of our total sales for the
years ended December 31, 2022, and 2021, respectively.
47
Approximately 54.3% of our products are sold on Amazon and are subject to
Amazon’s terms of service and various other Amazon seller policies that apply to
third parties selling products on Amazon’s marketplace. Amazon’s terms of
service provide, among other things, that it may terminate or suspend its
agreement with any seller or any of its services being provided to a seller at
any time and for any reason. In addition, if Amazon determines that any seller’s
actions or performance, including ours, may result in violations of its terms or
policies, or create other risks to Amazon or to third parties, then Amazon may
in its sole discretion withhold any payments owed for as long as Amazon
determines any related risk to Amazon or to third parties persist. Further, if
Amazon determines that any seller’s, including our, accounts have been used to
engage in deceptive, fraudulent or illegal activity, or that such accounts have
repeatedly violated its policies, then Amazon may in its sole discretion
permanently withhold any payments owed. In addition, Amazon in its sole
discretion may suspend a seller account and product listings if Amazon
determines that a seller has engaged in conduct that violates any of its
policies. Any limitation or restriction on our ability to sell on Amazon’s
platform could have a material impact on our business, results of operations,
financial condition and prospects. We also rely on services provided by Amazon’s
fulfillment platform which provides for expedited shipping to the consumer, an
important aspect in the buying decision for consumers. Any inability to market
our products for sale with delivery could have a material impact on our
business, results of operations, financial condition and prospects. Failure to
remain compliant with the fulfillment practices on Amazon’s platform could have
a material impact on our business, results of operations, financial condition
and prospects.
Cost of Sales. During the years ended December 31, 2022, and 2021, cost of sales
increased to approximately $9.2 million compared to approximately $5.9 million
for the year ended December 31, 2021, an increase of approximately $3.3 million
or 56.8%. We expect our cost of revenues to increase during fiscal 2023 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 year ended
December 31, 2022, and 2021 were 21.2% and 24.0%, respectively. The decrease in
margin was attributable due to significant increases in the cost of inventory
and freight, an increase in sales to distributors which attract lower percentage
profits, as well as, selling some items at a discounted rate to charities for
use in Ukraine.
Operating Expenses. Total operating expenses for the year ended December 31,
2022 were approximately $9.7 million, an increase of approximately $1.2 million,
or 14.7%, from total operating expenses for the year ended December 31, 2021, of
approximately $8.5 million. Factors contributing to the increase are described
below.
Selling, general and administrative expenses were approximately $5.1 million for
both years ended December 31, 2022 and 2021, respectively. Stock based
compensation decreased approximately $785,000 which was offset by increases in
information technology expense, insurance, rent, marketing, travel and variable
expenses which increase with sales.
Salaries, wages and payroll taxes were approximately $2.6 million and $1.8
million for the years ended December 31, 2022, and 2021, respectively,
representing an increase of approximately $726,000, or 39.5%. The increase is a
result of executive management additions and an increase in personnel.
Professional fees were approximately $1.6 million and $1.2 million for the years
ended December 31, 2022, and 2021, respectively, representing an increase of
approximately $354,000 or 29.6%. The increase in professional fees were
primarily due to an increase in legal, accounting and public company expenses of
approximately $479,000, an increase in director fees of approximately $99,000,
associated with the two additional independent directors offset by a reduction
to the current director fee structure, decrease in other professional fees of
approximately $224,000, related to capital raising efforts.
Depreciation and amortization expenses were approximately $490,000 and $317,000
for the years ended December 31, 2022 and 2021, respectively, representing an
increase of approximately $173,000, or 54.5%. The increase was attributable to
fixed asset additions.
We expect our expenses in each of these areas to continue to increase during
fiscal 2023 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 expenses were approximately
$132,000 and $1.5 million during the years ended December 31, 2022, and 2021,
respectively, representing a decrease of approximately $1.4 million or 91.1%.
The decrease was attributable to the Company’s decrease in interest expense of
approximately $1.4 million related to convertible notes payable.
48
Net Loss Before Income Tax & Equity of Affiliate. We recorded a net loss before
income tax and equity net loss of affiliate of approximately $7.3 million and
$8.1 million for the years ended December 31, 2022 and 2021, respectively. The
increase is a result of the factors as described above.
Provision for Income Taxes and Income Tax Expense. For the years ended December
31, 2022, and 2021, the Company recorded income tax expense of $87,000 and $0,
respectively.
Equity in Net Losses of Affiliate. We recorded a net loss in equity of affiliate
of approximately $1.7 million for the year ended December 31, 2022. See Note 7 –
Equity Method Investment in Progressive Care Inc. and Subsidiaries. For the year
ended December 31, 2021, there were no losses or income.
Net Loss. We recorded net loss of approximately $9.2 million and $8.1 million,
for the years ended December 31, 2022 and 2021, respectively. The increase is a
result of the factors as described above.
Comprehensive Loss. We recorded a (loss) gain for foreign currency translation
adjustments for the year ended December 31, 2022, and 2021 of approximately
($44,000) and $46,000, respectively. The fluctuations of the increase/decrease
are primarily attributable to exchange rate variances. Comprehensive loss for
the year ended December 31, 2022 and 2021, was approximately $9.2 million and
$8.1 million, respectively.
Liquidity and Capital Resources
Since inception, we have incurred and continue to incur significant losses from
operations. Historically, cash flow from operations has not been sufficient to
further the growth of the Company’s core business. The combined proceeds from
the June 2021 Offering of approximately $16.6 million, January 2022 Offering of
approximately $7.2 million and December 2022 Offering of approximately $8.0
million provide sufficient cash resources for the Company to meet its operating
needs. Furthermore, the available cash resources permit investment to expand
existing business, investments in expanding our e-commerce platforms, and the
development of digital asset initiatives. Should these initiatives and results
from operations not prove successful, we will need to raise additional capital
through debt facilities, and/or public or private equity or debt financings to
continue operations. The Company can provide no assurance as to the successful
conclusion of the financings.
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 December 31, 2022, we had a cash balance of approximately
$18.9 million and working capital is approximately $19.2 million. We reported a
net increase in cash for the year ended December 31, 2022, as compared to
December 31, 2021, of approximately $1.6 million primarily as a result of net
cash proceeds received from the January 2022 and December 2022 Offering, and
offset by the investment in Progressive Care, Inc. during the third quarter of
2022.
We believe that our existing working capital and our future cash flows from
operating activities will provide sufficient cash to enable us to meet our
operating needs for the next twelve months.
Our current assets on December 31, 2022, increased 9.3% to approximately $21.2
million, from approximately $19.4 million or an increase of approximately $1.8
million, from December 31, 2021. The increases included cash of approximately
$1.6 million, net accounts receivable of approximately $34,000, inventory of
approximately $267,000, unbilled revenue of $41,000, offset by decreases in VAT
receivable of approximately $59,000, prepaid expenses current portion of
approximately $51,000, and other current assets of approximately $49,000.
Our current liabilities on December 31, 2022, decreased to approximately $2.1
million from $2.8 million for a decrease of approximately $722,000, or 26.0%
from December 31, 2021. The decrease is primarily related to the stock
subscription payable of approximately $1.4 million, applied towards the January
5, 2022, private placement of common stock, of approximately $7.2 million.
49 Operating Activities
Net cash flows used in operating activities for the year ended December 31, 2022
amounted to approximately $3.6 million and were attributable to our net loss of
approximately $9.2 million, offset by depreciation expense of approximately
$465,000, amortization of intangible asset of approximately $25,000, right of
use asset of approximately $106,000, write-off of website development costs of
approximately $43,000, share of loss from equity method investment of
approximately $1.7 million, stock-based compensation related to the fair value
of options granted of approximately $823,000, and stock-based compensation
related to issuance of restricted stock awards of approximately $2.2 million.
Changes in operating assets and liabilities were reflected by increases in
accounts receivable of approximately $34,000, unbilled revenue of approximately
$41,000, inventory of approximately $267,000, lease liabilities of approximately
$101,000, contract liabilities of $350, and offset by increases in prepaid and
other current assets of approximately $101,000, VAT receivable of approximately
$59,000, provision for income taxes of approximately $37,000, and accounts
payable and accrued expenses of approximately $455,000.
Net cash flows used in operating activities for the year ended December 31, 2021
amounted to approximately $4.1 million and were attributable to our net loss of
approximately $8.1 million and gain from debt extinguishment of approximately
$21,000, offset by depreciation and amortization expense of approximately
$317,000, right of use asset of approximately $33,000, amortization of
intangible asset of approximately $25,000, amortization of debt discount of
convertible debt of approximately $1,4 million, stock-based compensation related
to the fair value of options granted of approximately $1.3 million and
stock-based compensation related to issuance of restricted stock awards of
approximately $2.5 million. Changes in operating assets and liabilities were
reflected by increases in accounts receivable of approximately $173,000,
unbilled revenue of approximately $25,000, inventory of approximately $658,000,
prepaid and other current assets of approximately $166,000, VAT receivable of
approximately $491,000, and lease liabilities of approximately $33,000, and
offset by increases in accounts payable and accrued expenses of approximately
$11,000, provision for income taxes of approximately $38,000, and contract
liabilities of $61.
Investing Activities
Net cash flows used in investing activities were approximately $7.7 million and
$229,000 for the years ended December 31, 2022, and 2021, respectively. For the
year ended December 31, 2022, we purchased equipment, capitalized software and
website development for approximately $716,000. On September 2, 2022, we
purchased an equity method investment of $7,000,000, see Note 7. For the year
ended December 31, 2021, we purchased equipment, capitalized software and
website development for approximately $229,000.
Financing Activities
Net cash flows provided by financing activities were approximately $13.0 million
and $20.8 million for the years ended December 31, 2022, and 2021, respectively.
During the year ended December 31, 2022, we had net proceeds from the January
2022 Offering of approximately $5.6 million, and the December 2022 Offering of
approximately $7.5 million, which was offset by repayments from; coronavirus
loan of approximately $60,000 and repayments to related party payable of
approximately $7,000. During the year ended December 31, 2021, we had proceeds
from convertible notes payable of $350,000, the June 2021 Offering of
approximately $14.1 million, warrant exercise of approximately $4.6 million, and
over-allotments of common stock and warrants of approximately $2.0 million,
proceeds from options exercise of $5,000, which was offset by repayments from
notes payable for approximately $122,000, coronavirus loan of approximately
$28,000 and repayments to related party payable of approximately $67,000.
Recent Financing Activities
January 2022 Private Placement of Common Stock
On December 31, 2021, after markets closed, a securities purchase agreement (the
“Purchase Agreement”) was circulated to, and signatures were received from,
certain institutional and accredited investors (the “December Investors”) in
connection with the sale in a private placement by the Company of 2,229,950
shares of the Company’s common stock (the “December Offering”). On January 2,
2022, the Company delivered to December Investors a fully executed Purchase
Agreement, which was dated December 31, 2021. The purchase price for the common
stock sold in the December Offering was $3.24 per share, the closing transaction
price reported by Nasdaq on December 31, 2021.
50
The closing of the December Offering occurred on January 5, 2022. The Company
received gross proceeds from the sale of the common stock in the December
Offering of approximately $7.2 million. The Company intends to use the proceeds
from the December Offering for general corporate purposes, including potential
acquisitions and joint ventures. Approximately 73% of funds raised in the
December Offering were secured from existing shareholders and from the members
of the Company’s senior management and Board of Directors.
In connection with the December Offering, the Company entered into a
registration rights agreement with the December Investors (the “Registration
Rights Agreement”), pursuant to which, among other things, the Company agreed to
prepare and file with the SEC a registration statement to register for resale
the shares of the Company’s common stock sold in the Offering.
The shares of common stock offered and sold in the December Offering were sold
in reliance on the exemption from registration provided by Section 4(a)(2) of
the Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act and corresponding provisions of state securities or “blue sky” laws.
The terms of the transaction disclosed above, including the provisions of the
Purchase Agreement and Registration Rights Agreement, were approved by the Board
of Directors and because some of the securities were offered and sold to
officers and directors of the Company, such terms were separately reviewed and
approved by the Audit Committee of the Board of Directors.
December 2022 Private Placement of Common Stock
On December 9, 2022, the Company entered into a securities purchase agreement
with certain institutional and accredited investors for the sale by the Company
in a private placement of 4,575,429 units, each unit comprising (i) one share of
the Company’s common stock, and (ii) one warrant to purchase one share of common
stock. The offering price of the units was $1.75 per unit. The warrants included
in the units are exercisable at a price of $1.75 per share and expire three
years from the date of issuance.
The offering closed on December 14, 2022, and the Company received gross
proceeds of approximately $8.0 million for the units. The Company intends to use
the proceeds from the offering for working capital needs, potential
acquisitions, joint ventures, and ongoing business transition activities.
In connection with the offering, the Company entered into a registration rights
agreement, pursuant to which, among other things, the Company will prepare and
file with the Securities and Exchange Commission (the “SEC”) a registration
statement to register for resale the shares of Common Stock sold in the offering
and the shares of Common Stock underlying the Warrants, within 15 calendar days
and to use its best efforts to have the registration statement declared
effective as promptly as practical thereafter.
The securities offered and sold in the December Offering were sold in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act and
corresponding provisions of state securities or “blue sky” laws.
The terms of the transaction disclosed above, including the provisions of the
securities purchase agreement and registration rights agreement, were approved
by the Board of Directors and because some of the securities were offered and
sold to officers and directors of the Company, such terms were separately
reviewed and approved by the Audit Committee of the Board of Directors.
Investment in Progressive Care Inc.
On September 2, 2022, we closed a transaction with Progressive, pursuant to
which we purchased 3,000 newly issued units of securities from Progressive (the
“Units”) at a price per Unit of $2,000 for an aggregate purchase price of $6.0
million (the “Unit Purchase”). Each Unit consists of one share of Series B
Convertible Preferred Stock of Progressive (“Series B Preferred Stock”) and one
warrant to purchase a share of Series B Preferred Stock (“RXMD Warrants”).
51
Each share of Series B Preferred Stock votes as a class with the common stock of
Progressive and has 500 votes per share. Likewise, each share of Series B
Preferred Stock is convertible into 500 shares of Progressive common stock. In
addition, the Series B Preferred Stock has a liquidation and dividend
preference. The RXMD Warrants have a five-year term, and are immediately
exercisable, in whole or in part, and contain cashless exercise provisions. Each
Warrant is exercisable at $2,000 per share of Series B Preferred Stock.
Following the consummation of the Unit Purchase, our Chairman and Chief
Executive Officer, Charles M. Fernandez, and our board member, Rodney Barreto,
were appointed to Progressive’s Board of Directors, with Mr. Fernandez appointed
to serve as Chairman of Progressive’s Board of Directors and Mr. Barreto
appointed to serve as a Vice Chairman of Progressive’s Board of Directors. On
November 11, 2022, the Progressive Board of Directors elected Mr. Fernandez to
serve as the Progressive’s Chief Executive Officer.
In addition, on September 2, 2022, NextPlat, Charles Fernandez, Rodney Barreto
and certain other purchasers purchased from Iliad Research and Trading, L.P.
(“Iliad”) a Secured Convertible Promissory Note, dated March 6, 2019, made by
Progressive to Iliad (the “Note”). The accrued and unpaid principal and interest
under the note at the time of the purchase was approximately $2.79 million. The
aggregate purchase price paid to Iliad for the Note was $2.3 Million of which
NextPlat contributed $1.0 million and Messrs. Fernandez and Barreto contributed
$400,000 each (the “Note Purchase”).
In connection with the Note Purchase, NextPlat, Messrs. Fernandez and Barreto
and the other purchasers of the Note entered into a Debt Modification Agreement
with Progressive. Pursuant to the Debt Modification Agreement, the interest rate
under the Note was reduced from 10% to 5% per annum and the maturity date was
extended to May 31, 2027. In addition, the conversion price under the note was
changed to $0.02 per share of Common Stock. Pursuant to the Debt Modification
Agreement, NextPlat, Messrs. Fernandez and Barreto and the other purchasers of
the Note have the right, exercisable at any time, to redeem all or any portion
of the Note. The Debt Modification Agreement also provides that the Note will
automatically convert upon the later to occur of: (a) the completion by
Progressive Care of a reverse stock split, and (b) the listing of Progressive’s
common stock on a national exchange. In consideration of the concessions in the
Debt Modification Agreement, Progressive issued 105,000 shares of its common
stock to the purchasers of the Note, of which NextPlat, Charles Fernandez and
Rodney Barreto, received 45,653, 18,261, and 18,261 shares, respectively, in
each case after giving effect to a 1-for-200 reverse stock split enacted by
Progressive Care on December 30, 2022.
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered any
derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity.
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