Form 10-Q
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33118
ORBCOMM INC.
(Exact name of registrant as specified in its charter)
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Delaware
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41-2118289 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
2115 Linwood Avenue, Fort Lee, New Jersey 07024
(Address of principal executive offices)
(201) 363-4900
(Registrants telephone number)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
number of shares outstanding of the registrants common stock as
of May 7, 2009 is 42,396,031.
ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
66,946 |
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$ |
75,370 |
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Restricted cash |
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2,000 |
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2,000 |
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Accounts receivable, net of allowances for doubtful accounts of $512 and $227 |
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4,190 |
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3,750 |
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Inventories |
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1,791 |
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1,421 |
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Prepaid expenses and other current assets |
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3,885 |
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4,160 |
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Total current assets |
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78,812 |
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86,701 |
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Satellite network and other equipment, net |
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86,702 |
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93,290 |
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Intangible assets, net |
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3,714 |
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4,086 |
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Restricted cash |
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3,680 |
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3,680 |
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Inventories |
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1,544 |
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2,126 |
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Other assets |
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1,445 |
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1,484 |
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Total assets |
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$ |
175,897 |
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$ |
191,367 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,578 |
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$ |
8,529 |
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Accrued liabilities |
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6,901 |
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7,359 |
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Current portion of deferred revenue |
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3,580 |
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3,577 |
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Total current liabilities |
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13,059 |
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19,465 |
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Note payable related party |
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1,175 |
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1,244 |
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Deferred revenue, net of current portion |
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7,394 |
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7,607 |
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Total liabilities |
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21,628 |
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28,316 |
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Commitments and contingencies |
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Equity: |
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ORBCOMM
Inc. stockholders equity: |
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Common stock, par value $0.001; 250,000,000 shares authorized; 42,396,031
and 42,101,834 shares issued and outstanding |
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42 |
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42 |
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Additional paid-in capital |
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229,456 |
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229,001 |
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Accumulated other comprehensive income |
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400 |
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538 |
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Accumulated deficit |
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(77,111 |
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(67,976 |
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Total ORBCOMM Inc. stockholders equity |
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152,787 |
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161,605 |
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Noncontrolling interests in ORBCOMM Japan |
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1,482 |
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1,446 |
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Total equity |
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154,269 |
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163,051 |
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Total liabilities and equity |
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$ |
175,897 |
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$ |
191,367 |
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See notes to condensed consolidated financial statements.
3
ORBCOMM Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
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Three months ended |
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March 31, |
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2009 |
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2008 |
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Revenues: |
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Service revenues |
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$ |
6,627 |
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$ |
4,855 |
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Product sales |
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734 |
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1,024 |
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Total revenues |
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7,361 |
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5,879 |
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Costs and expenses (1): |
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Costs of services |
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3,221 |
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2,034 |
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Costs of product sales |
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1,110 |
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1,281 |
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Selling, general and administrative |
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4,804 |
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4,445 |
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Product development |
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224 |
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256 |
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Gain on customer claims settlement |
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(876 |
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Impairment charge satellite network |
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7,045 |
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Total costs and expenses |
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16,404 |
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7,140 |
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Loss from operations |
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(9,043 |
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(1,261 |
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Other income (expense): |
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Interest income |
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41 |
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766 |
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Other income (expense) |
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(49 |
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11 |
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Interest expense |
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(48 |
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(50 |
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Total other income (expense) |
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(56 |
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727 |
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Net loss |
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(9,099 |
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(534 |
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Less: Net income attributable to the noncontrolling interests |
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36 |
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Net loss attributable to ORBCOMM Inc. |
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$ |
(9,135 |
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$ |
(534 |
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Net loss
per common share: |
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Basic and diluted |
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$ |
(0.22 |
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$ |
(0.01 |
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Weighted average common shares outstanding: |
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Basic and diluted |
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42,308 |
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41,803 |
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(1) Stock-based compensation included in costs and expenses: |
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Costs of services |
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$ |
20 |
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$ |
48 |
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Costs of product sales |
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20 |
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Selling, general and administrative |
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427 |
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727 |
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Product development |
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8 |
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15 |
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$ |
455 |
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$ |
810 |
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See notes to condensed consolidated financial statements.
4
ORBCOMM Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Three months ended |
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March 31, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(9,099 |
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$ |
(534 |
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Adjustments to reconcile net loss
to net cash provided by (used in) operating activities: |
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Change in allowance for doubtful accounts |
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285 |
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(185 |
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Depreciation and amortization |
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1,302 |
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648 |
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Accretion on note payable related party |
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33 |
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33 |
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Stock-based compensation |
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455 |
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810 |
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Foreign exchange (gains) losses |
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51 |
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(11 |
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Non-cash portion of gain on customer claims settlement |
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(640 |
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Impairment charge satellite network |
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7,045 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(725 |
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1,359 |
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Inventories |
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212 |
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(816 |
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Prepaid expenses and other assets |
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250 |
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396 |
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Accounts payable and accrued liabilities |
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(859 |
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(1,225 |
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Deferred revenue |
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(210 |
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304 |
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Net cash provided by (used in) operating activities |
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(1,260 |
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139 |
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Cash flows from investing activities capital expenditures |
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(6,924 |
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(1,458 |
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Cash flows from financing activities: |
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Proceeds from exercise of warrants |
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133 |
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Payment of offering costs in connection with secondary public offering |
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(40 |
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Net cash provided by financing activities |
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93 |
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Effect of exchange rate changes on cash and cash equivalents |
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(240 |
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39 |
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Net decrease in cash and cash equivalents |
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(8,424 |
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(1,187 |
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Cash and cash equivalents: |
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Beginning of period |
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75,370 |
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115,587 |
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End of period |
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$ |
66,946 |
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$ |
114,400 |
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Supplemental cash flow disclosures: |
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Non cash investing activities
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Capital expenditures incurred not yet paid |
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$ |
1,025 |
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$ |
1,895 |
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See notes to condensed consolidated financial statements.
5
ORBCOMM Inc.
Condensed Consolidated Statements of Equity
Three months ended March 31, 2009
(in thousands, except share data)
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Accumulated |
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Noncontrolling |
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Additional |
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other |
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interests |
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Common stock |
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paid-in |
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comprehensive |
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Accumulated |
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in ORBCOMM |
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Total |
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Shares |
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Amount |
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capital |
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income |
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deficit |
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Japan |
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equity |
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Balances, January 1, 2009 |
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42,101,834 |
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$ |
42 |
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$ |
229,001 |
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$ |
538 |
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$ |
(67,976 |
) |
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$ |
1,446 |
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$ |
163,051 |
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Vesting of restricted stock units |
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294,197 |
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Stock-based compensation |
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455 |
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455 |
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Net income (loss) |
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(9,135 |
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36 |
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(9,099 |
) |
Cumulative translation adjustment |
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(138 |
) |
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(138 |
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Balances, March 31, 2009 |
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42,396,031 |
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$ |
42 |
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$ |
229,456 |
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$ |
400 |
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$ |
(77,111 |
) |
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$ |
1,482 |
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$ |
154,269 |
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See notes to condensed consolidated financial statements.
6
1. Overview
ORBCOMM Inc. (ORBCOMM or the Company), a Delaware corporation, is a satellite-based data
communications company that operates a two-way global wireless data messaging system optimized for
narrowband data communication. The Company also provides terrestrial-based cellular communication
services through reseller agreements with major cellular wireless providers. The Company provides
services through a constellation of 28 owned and operated low-Earth orbit satellites and
accompanying ground infrastructure through which small, low power, fixed or mobile satellite
subscriber communicators (Communicators) and cellular wireless subscriber identity modules, or
SIMS, connected to the cellular wireless providers network, that can be connected to other public
or private networks, including the Internet (collectively, the ORBCOMM System). The ORBCOMM
System is designed to enable businesses and government agencies to track, monitor, control and
communicate with fixed and mobile assets.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange Commission (the SEC).
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to SEC rules. These financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
In the opinion of management, the financial statements as of March 31, 2009 and for the three month
periods ended March 31, 2009 and 2008 include all adjustments (including normal recurring accruals)
necessary for a fair presentation of the consolidated financial position, results of operations and
cash flows for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full
year.
The financial statements include the accounts of the Company, its wholly-owned and majority-owned
subsidiaries, and investments in variable interest entities in which the Company is determined to
be the primary beneficiary. All significant intercompany accounts and transactions have been
eliminated in consolidation. The portions of majority-owned subsidiaries that the Company does not
own are reflected as noncontrolling interests in the consolidated balance sheet.
Effective January 1, 2009, the Company adopted SFAS No, 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160). The adoption of SFAS
160 has resulted in the reclassification of amounts previously attributable to minority interest
(now referred to as noncontrolling interest) to a separate component of equity in the
accompanying condensed consolidated balance sheets. Additionally, net income attributable to noncontrolling
interests is shown separately from net loss in the accompanying condensed consolidated statements of
operations. The prior periods presented have also been reclassified to conform to the current
classification as required by SFAS No. 160. These reclassifications have no effect on the Companys
previously reported net loss per common share.
Investments in entities over which the Company has the ability to exercise significant influence
but does not have a controlling interest are accounted for under the equity method of accounting.
The Company considers several factors in determining whether it has the ability to exercise
significant influence with respect to investments, including, but not limited to, direct and
indirect ownership level in the voting securities, active participation on the board of directors,
approval of operating and budgeting decisions and other participatory and protective rights. Under
the equity method, the Companys proportionate share of the net income or loss of such investee is
reflected in the Companys consolidated results of operations. Although the Company owns interests
in companies that if accounts for pursuant to the equity method, the investments in those entities
had no carrying value as of March 31, 2009 and December 31, 2008. The Company has no guarantees or
other funding obligations to those entities. The Company had no equity or losses of those investees
for the three months ended March 31, 2009 and the Companys equity in the earnings or losses of
those investees for the three months ended March 31, 2008 was not significant.
7
Non-controlling interests in companies are accounted for by the cost method where the Company does
not exercise significant influence over the investee. The Companys cost basis investments had no
carrying value as of March 31, 2009 and December 31, 2008.
The Company has incurred losses from inception including a net loss of $9,135 for the three months
ended March 31, 2009 and as of March 31, 2009, the Company has an accumulated deficit of $77,111.
As of March 31, 2009, the Companys primary source of liquidity consisted of cash and cash
equivalents, which the Company believes will be sufficient to provide working capital and milestone
payments for its next-generation satellites for the next twelve months.
Concentration of credit risk
During the three months ended March 31, 2009 and 2008, one customer comprised 15.5% and 28.2%
of revenues, respectively. As of March 31, 2009, this customer accounted for 16.2% of accounts
receivable and, as of December 31, 2008, this customer accounted for 12.7% of accounts receivable.
For the three months ended March 31, 2009, a second customer comprised 14.2% of revenues. As of
March 31, 2009 this customer accounted for 11.0% of accounts receivable and at December 31, 2008,
this customer accounted for less than 10% of accounts receivable.
Inventories
Inventories are stated at the lower of fair value or market, determined on a first-in, first-out basis.
Inventory consists primarily of finished goods available for sale to customers. The Company reviews
inventory quantities on hand and evaluates the realizability of inventories and adjusts the
carrying value as necessary based on forecasted product demand. Inventories in excess of one years
supply are classified as long-term.
As of March 31, 2009, the Company has classified $1,212 as long-term inventory.
As of March 31, 2009, the Company holds $332 of component parts inventory at the manufacturing
facility of its principal supplier. These component parts inventory is included in long-term
inventory.
Income taxes
As of March 31, 2009, the Company had unrecognized tax benefits of $775. There were no changes to
the Companys unrecognized tax benefits during the three months ended March 31, 2009. The Company
is subject to U.S. federal and state examinations by tax authorities from 2005. The Company does
not expect any significant changes to its unrecognized tax positions during the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. No interest and penalties related to uncertain tax positions were recognized during the
three months ended March 31, 2009.
A valuation allowance has been provided for all of the Companys deferred tax assets because it is
more likely than not that the Company will not recognize the tax benefits of these deferred tax
assets.
Accounting Pronouncements
In December 2007, the FASB issued No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS
141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other
events in which one entity obtains control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired, liabilities assumed, and interests
transferred as a result of business combinations. SFAS 141R expands on required disclosures to
improve the statement users abilities to evaluate the nature and financial effects of business
combinations. In April 2009, the FASB issued FSP 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that arise from Contingencies, which amends and
clarifies the initial and subsequent accounting and disclosures of contingencies in a business
combination. The Company adopted SFAS 141R on January 1, 2009 and will apply it and FSP 141(R)-1
prospectively to business combinations completed after January 1, 2009.
8
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), to define
fair value, establish a framework for measuring fair value in accordance with generally accepted
accounting principles and expand disclosures about fair value measurements. SFAS 157 requires
quantitative disclosures using a tabular format in all periods (interim and annual) and qualitative
disclosures about the valuation techniques used to measure fair value in all annual periods. On
January 1, 2008, the Company adopted SFAS 157 except with respect to its non-financial assets and
liabilities. On January 1, 2009, the Company adopted SFAS 157 for its non-financial assets and
liabilities. The adoption of SFAS 157 did not have material impact on the Companys consolidated
financial statements.
9
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments not measured on the balance sheet at fair value in interim financial
statements as well as in annual financial statements. Prior to this FSP, fair values for these
assets and liabilities were only disclosed annually. This FSP applies to all financial instruments
within the scope of SFAS 107 and requires all entities to disclose the methods and significant
assumptions used to estimate the fair value of financial instruments. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. The Company will include the required disclosure beginning with its Form 10-Q
for the quarter ending June 30, 2009.
3. ORBCOMM Japan
On March 25, 2008, the Company received a 37% equity interest in ORBCOMM Japan and cash of $602 in
satisfaction of claims against ORBCOMM Japan. The distribution was pursuant to a voluntary
reorganization of ORBCOMM Japan in accordance with a rehabilitation plan approved by the Tokyo
district court on December 25, 2007.
The Company and ORBCOMM Japan are parties to a service license agreement, pursuant to which ORBCOMM
Japan acts as a country representative and resells the Companys services in Japan. ORBCOMM Japan
owns a gateway earth station in Japan, holds the regulatory authority and authorization to operate
the gateway earth station and provides the Companys satellite communication services in Japan.
The fair value of the consideration the Company received for settlement of claims against ORBCOMM Japan exceeded the
$366 carrying value of current and long-term receivables from ORBCOMM Japan by $876 and the Company
recognized a gain for the same amount in the first quarter of 2008. The estimated fair value of the
Companys equity interest in ORBCOMM Japan was $640 at March 31, 2008.
ORBCOMM Japans results of operations were not significant for the period from March 25, 2008
through March 31, 2008.
On May 12, 2008, the Company entered into an amended service license agreement with ORBCOMM Japan,
which expires in June 2018. On May 15, 2008, in consideration for entering into the amended service
license agreement, the Company received 616 newly issued shares of common stock from
ORBCOMM Japan representing an additional 14% equity interest. As a result, the Companys ownership interest in
ORBCOMM Japan increased to 51%. On June 9, 2008, the Company and the noncontrolling stockholder
entered into an agreement, which terminated the noncontrolling stockholders substantive
participatory rights in the governance of ORBCOMM Japan and resulted in the Company obtaining a
controlling interest in ORBCOMM Japan.
As the 51% interest in ORBCOMM Japan was acquired in two transactions during 2008, the Company
accounted for this transaction using the step acquisition method prescribed by Accounting Research
Bulletin No. 51, Consolidated Financial Statements (ARB 51). As permitted by ARB 51, the Company
consolidated ORBCOMM Japans results of operations as though the controlling interest was acquired
on April 1, 2008.
10
4. Comprehensive Loss
The components of comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(9,135 |
) |
|
$ |
(534 |
) |
Foreign currency translation adjustment |
|
|
(138 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(9,273 |
) |
|
|
(589 |
) |
Comprehensive loss attributable to noncontrolling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to ORBCOMM Inc. |
|
$ |
(9,273 |
) |
|
$ |
(589 |
) |
|
|
|
|
|
|
|
5. Stock-based Compensation
The Companys share-based compensation plans consist of its 2006 Long-Term Incentives Plan (the
2006 LTIP) and its 2004 Stock Option Plan. As of March 31, 2009, there were 2,114,261 shares
available for grant under the 2006 LTIP and no shares available for grant under the 2004 Stock
Option Plan.
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based compensation
expense of $455 and $810, respectively. The components of the Companys stock-based compensation
expense are presented below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
24 |
|
|
$ |
24 |
|
Restricted stock units |
|
|
181 |
|
|
|
697 |
|
Stock appreciation rights |
|
|
250 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
455 |
|
|
$ |
810 |
|
|
|
|
|
|
|
|
As of March 31, 2009, the Company had an aggregate of $2,336 of unrecognized compensation costs for
all share-based payment arrangements.
11
Time-Based Restricted Stock Units
During the three months ended March 31, 2009, the Company granted 77,420 time-based RSUs. These
RSUs vest in January 2010.
A summary of the Companys time-based RSUs for the three months ended March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Balance at January 1, 2009 |
|
|
342,184 |
|
|
$ |
8.21 |
|
Granted |
|
|
77,420 |
|
|
|
1.55 |
|
Vested |
|
|
(169,959 |
) |
|
|
10.34 |
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
|
249,645 |
|
|
$ |
4.69 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based compensation
expense of $101 and $513 related to the time-based RSUs, respectively. As of March 31, 2009, $737
of total unrecognized compensation cost related to the time-based RSUs granted is expected to be
recognized through September 2011.
The fair value of the time-based RSU awards granted in 2009 is based upon the closing stock price
of the Companys common stock on the date of grant.
Performance-Based Restricted Stock Units
A summary of the Companys performance-based RSUs for the three months ended March 31, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Balance at January 1, 2009 |
|
|
131,129 |
|
|
$ |
4.85 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(82,634 |
) |
|
|
4.81 |
|
Forfeited or expired |
|
|
(38,387 |
) |
|
|
4.81 |
|
|
|
|
|
|
|
|
Balance at
March 31, 2009 |
|
|
10,108 |
|
|
$ |
5.32 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based compensation
expense of $80 and $184 related to the performance-based RSUs, respectively. As of March 31, 2009,
$5 of total unrecognized compensation cost related to the performance-based RSUs is expected to be
recognized through May 2009.
Time-Based Stock Appreciation Rights
During the three months ended March 31, 2009, the Company granted 25,000 time-based SARs. These
SARS vest over various periods through February 2012. The weighted-average grant date fair value of
these time-based SARs was $0.91 per share.
12
A summary of the Companys time-based SARs for the three months ended March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1,
2009 |
|
|
1,141,667 |
|
|
$ |
5.31 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
25,000 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
1,166,667 |
|
|
$ |
5.23 |
|
|
|
8.93 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
351,667 |
|
|
$ |
6.11 |
|
|
|
8.72 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
at March 31, 2009 |
|
|
1,166,667 |
|
|
$ |
5.23 |
|
|
|
8.93 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based compensation
expense of $222 and $33 relating to the time-based SARs, respectively. As of March 31, 2009,
$1,594 of total unrecognized compensation cost related to the time-based SARs is expected to be
recognized through February 2012.
Performance-Based Stock Appreciation Rights
A summary of the Companys performance-based SARs for the three months ended March 31, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1, 2009 |
|
|
291,899 |
|
|
$ |
10.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(41,753 |
) |
|
|
9.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
8.20 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
8.20 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
8.20 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based
compensation expense of $28 and $56 relating to the performance-based SARs, respectively. As of
March 31, 2009, there was no unrecognized compensation cost related to the performance-based
SARs.
13
The fair value of each SAR award is estimated on the date of grant using the Black-Scholes
option pricing model with the assumptions described below for the periods indicated. Expected
volatility was based on the stock volatility for comparable publicly traded companies. The
Company uses the simplified method based on the average of the vesting term and the
contractual term to calculate the expected life of each SAR award. Estimated forfeitures were
based on voluntary and involuntary termination behavior as well as analysis of actual SAR
forfeitures. The risk-free interest rate was based on the U.S. Treasury yield curve at the time
of the grant over the expected term of the SAR grants.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Risk-free interest rate |
|
|
2.34% |
|
|
2.50% to 2.67% |
|
Expected life (years) |
|
|
6.00 |
|
|
5.50 to 6.00 |
|
Estimated volatility factor |
|
|
55.03% |
|
|
43.98% |
|
Expected dividends |
|
|
None |
|
|
None |
|
2004 Stock Option Plan
A summary of the status of the Companys stock options as of March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.91 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.91 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.91 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss attributable to ORBCOMM Inc. by
the weighted-average number of common shares outstanding for the period. Diluted net loss per common
share is the same as basic net loss per common share, because potentially dilutive securities such
as RSUs, SARs, stock options and stock warrants would have an antidilutive effect as the Company
incurred a net loss for the three months ended March 31, 2009 and 2008.
The potentially dilutive securities excluded from the determination of diluted loss per share, as
their effect is antidilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Common stock warrants |
|
|
56,924 |
|
|
|
371,850 |
|
Stock options |
|
|
782,079 |
|
|
|
832,957 |
|
RSUs |
|
|
259,753 |
|
|
|
547,138 |
|
SARs |
|
|
1,416,813 |
|
|
|
1,403,566 |
|
|
|
|
|
|
|
|
|
|
|
2,515,569 |
|
|
|
3,155,511 |
|
|
|
|
|
|
|
|
14
7. Satellite Network and Other Equipment
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life |
|
|
March 31, |
|
|
December 31, |
|
|
|
(years) |
|
|
2009 |
|
|
2008 |
|
Land |
|
|
|
|
|
$ |
381 |
|
|
$ |
381 |
|
Satellite network |
|
|
3-10 |
|
|
|
21,869 |
|
|
|
21,290 |
|
Capitalized software |
|
|
3-5 |
|
|
|
1,243 |
|
|
|
1,224 |
|
Computer hardware |
|
|
5 |
|
|
|
1,116 |
|
|
|
1,108 |
|
Other |
|
|
5-7 |
|
|
|
1,246 |
|
|
|
1,166 |
|
Assets under construction |
|
|
|
|
|
|
70,984 |
|
|
|
77,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,839 |
|
|
|
102,497 |
|
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(10,137 |
) |
|
|
(9,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,702 |
|
|
$ |
93,290 |
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009 and 2008, the Company capitalized costs attributable
to the design and development of internal-use software in the amount of $65 and $132, respectively.
Depreciation and amortization expense for the three months ended March 31, 2009 and 2008 was $930
and $276, respectively. This includes amortization of internal-use software of $80 and $74 for the
three months ended March 31, 2009 and 2008, respectively.
Assets under construction primarily consist of costs relating to milestone payments and other costs
pursuant to the Companys satellite payload and launch procurement agreements for its quick-launch
satellites and the procurement agreement for its next-generation satellites (See Note 15) and
upgrades to its infrastructure and ground segment.
On June 19, 2008, the Coast Guard Demonstration satellite and five quick-launch satellites were
successfully launched. Due to delays associated with the construction of the final quick-launch
satellite, the Company is retaining it for future deployment. Each of the satellites successfully separated from
the launch vehicle in the proper orbit, and began in-orbit testing and final positioning. During
this testing, communications contact was lost with one satellite as described below. The majority
of in-orbit testing of the payload subsystems has been completed to verify proper operation of the
subscriber links, gateway links and AIS payload functionality. As a result of on-going in-orbit
testing of these satellites, the engineers and satellite providers are investigating the lower than
nominal gateway transmission power on one satellite, lower than expected nominal subscriber
transmission on one satellite, intermittent computer resets on one satellite and outages to the
reaction wheel components of the attitude control system on each of the satellites. The satellite
with the lower than expected subscriber transmission has been reprogrammed to operate in a mode
which utilizes the gateway transmission for subscriber messaging traffic. The satellite with
intermittent flight computer resets is being reprogrammed to use a redundant receiver to perform
some of the flight computer functions. The extent of the impacts of these operational procedures
continues to be evaluated. All of the satellites with the exception of the satellite that lost
communications contact are providing limited ORBCOMM messaging and worldwide AIS services.
On February 22, 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite by both the Companys ground control
systems and the ground control systems of the company providing in-orbit monitoring and testing, KB
Polyot-Joint Stock Company, a provider of sub-contracting services to OHB Technology A.G. (OHB). After consultation with
OHB and
15
its own engineers, the Company believes that after such an extended period of no communication with
the satellite, it is unlikely that the satellite will be recovered. A non-cash impairment charge
to write-off the cost of this satellite of $7,045 has been recognized in the quarter ended
March 31, 2009. The loss of one
quick-launch satellite is not expected to have a material adverse effect on the current
communications service as the satellite was only in the testing phase and not in regular
operational service. Each of the quick-launch and Coast Guard Demonstration satellites is equipped
with an AIS payload and the Company believes the loss of one satellite will not adversely impact
its current AIS service in any material respect, as the other satellites provide redundant
capabilities to the AIS data service.
The Company conducted a post-loss data analysis to determine the root cause and establish
operational procedures, if any, to mitigate the risk of a similar anomaly from occurring on the
remaining four quick-launch satellites which are of the same design and the Coast Guard
Demonstration Satellite which is of a similar design. This analysis revealed the most likely cause
to be a failure of the Electrical Power System (EPS) components that control battery charging which
resulted in completely discharging the battery and precluding additional charging. As a precaution
to mitigate the risk of this type of failure leading to the loss of the other satellites, the
Company has developed new software that resides in the payload flight computer that performs the
majority of the functions performed by the EPS component the Company believes failed. This software has
been uploaded to three of the satellites that have experienced failures to redundant EPS
components. The Company is unable to determine whether or when another EPS
anomaly will occur on the other satellites, and is currently unable to quantify the impact, if any,
that a potential EPS anomaly will have on the expected useful life and communications capabilities
of these satellites.
The remaining satellites that were recently launched are experiencing Attitude Control System (ACS)
anomalies, which results in the satellites not pointing towards the sun and the earth as expected.
The result of this pointing error is reduced power generation, improper satellite spacing within
the orbital plane and expected reduced communications capabilities. While OHB, the satellite bus
manufacturer and the Companys engineering staff, continue their efforts to correct and develop
alternate operational procedures to satisfactorily mitigate the effect of these anomalies, there
can be no assurance in this regard. The Company is currently unable to quantify the impact that ACS anomalies will have on the expected useful life
of the satellites or the extent of degradation in their communication capabilities
until the in-orbit testing is completed and all operational procedures to minimize the impact,
including autonomous software system correction techniques, have been fully implemented and
evaluated.
The Company has in-orbit insurance that under certain circumstances covers the total loss or
constructive total loss of the Coast Guard demonstration and five quick-launch satellites that were
launched in June 2008. Under the terms of the policy, a satellite that does not meet the
working satellite criteria constitutes a constructive total loss of that satellite for insurance purposes. The
in-orbit insurance is subject to certain exclusions including a deductible under which no claim is
payable under the policy for the first satellite to suffer a constructive total loss or
total loss.
The Company expects to file shortly a claim under the policy for all six satellites as either a
total loss or constructive total loss. The total loss claim is for the one satellite that
suffered a power system failure resulting in loss of contact, and the constructive total loss claim
for each of the other five satellites is on the basis that these satellites do not meet the working
satellite criteria stated in the policy due to, among other anomalies, the pointing errors
described above. The Company is testing for impairment of the remaining satellites and may be required
to record a further impairment charge that could have a significant non-cash financial impact. The
information needed to complete this assessment is not available as of the date of this report.
The maximum amount recoverable by the Company under the policy from third party
insurers for all six satellites covered by the policy is $50 million, which includes the
one-satellite deductible described above, and less any salvage value that can be established. Any
payments that are made under this policy may not be sufficient to compensate the Company for the
losses it may suffer.
8. Restricted Cash
Restricted cash consists of cash collateral of $5,000 for a performance bond required by the
FCC in connection with the Company obtaining expanded FCC authorization to construct, launch and
operate an additional 24 next-generation satellites. Under the terms of the performance bond, the
cash collateral will be reduced in increments of $1,000 upon completion of specified milestones.
The Company has completed two milestones and accordingly has classified $2,000 of restricted cash as a current asset.
Restricted cash also includes $680 deposited into an escrow account under the terms of the Orbital
Sciences procurement agreement for the quick-launch satellites. The amounts in escrow will be paid
to Orbital Sciences one year following the successful completion of in-orbit testing of the five
quick-launch satellites (See Note 15).
The interest income earned on the restricted cash balances is unrestricted and included in interest
income.
16
9. Intangible Assets
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Useful life |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
(years) |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
Acquired licenses |
|
|
6 |
|
|
$ |
8,115 |
|
|
$ |
(4,401 |
) |
|
$ |
3,714 |
|
|
$ |
8,115 |
|
|
$ |
(4,029 |
) |
|
$ |
4,086 |
|
Amortization expense was $372 for the three months ended March 31, 2009 and 2008.
Estimated amortization expense for intangible assets subsequent to March 31, 2009 is as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
Remainder of 2009 |
|
$ |
1,114 |
|
2010 |
|
|
1,486 |
|
2011 |
|
|
1,114 |
|
|
|
|
|
|
|
$ |
3,714 |
|
|
|
|
|
10. Accrued Liabilities
The Companys accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Litigation settlement (See Note 15) |
|
$ |
2,450 |
|
|
$ |
2,450 |
|
Accrued compensation and benefits |
|
|
1,208 |
|
|
|
2,288 |
|
Accrued interest |
|
|
751 |
|
|
|
736 |
|
Accrued professional services |
|
|
368 |
|
|
|
229 |
|
Accrued satellite network and other equipment |
|
|
338 |
|
|
|
|
|
Other accrued expenses |
|
|
1,785 |
|
|
|
1,656 |
|
|
|
|
|
|
|
|
|
|
$ |
6,901 |
|
|
$ |
7,359 |
|
|
|
|
|
|
|
|
11. Deferred Revenues
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Professional services |
|
$ |
6,938 |
|
|
$ |
7,043 |
|
Service activation fees |
|
|
2,982 |
|
|
|
3,032 |
|
Manufacturing license fees |
|
|
56 |
|
|
|
59 |
|
Prepaid services |
|
|
998 |
|
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
10,974 |
|
|
|
11,184 |
|
Less current portion |
|
|
(3,580 |
) |
|
|
(3,577 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
7,394 |
|
|
$ |
7,607 |
|
|
|
|
|
|
|
|
Deferred professional services revenues at March 31, 2009, represent amounts related to the USCG Concept Validation Project (See Note 15).
17
12. Note Payable
In connection with the acquisition of a majority interest in Satcom in 2005, the Company recorded
an indebtedness to OHB Technology A.G. (formerly known as OHB Teledata A.G.), a stockholder
of the Company. At March 31, 2009, the principal balance of the note payable was 1,138 ($1,503)
and it had a carrying value of $1,175. At December 31, 2008, the principal balance of the note
payable was 1,138 ($1,605) and it had a carrying value of $1,244. The carrying value was based
on the notes estimated fair value at the time of acquisition. The difference between the carrying
value and principal balance is being amortized to interest expense over the estimated life of the
note of six years. Interest expense related to the note for the three months ended March 31, 2009
and 2008 was $33. This note does not bear interest and has no fixed repayment term. Repayment will
be made from the distribution profits (as defined in the note agreement) of ORBCOMM Europe LLC. The
note has been classified as long-term and the Company does not expect any repayments to be required
prior to March 31, 2010.
13. Stockholders Equity
As of March 31, 2009, the Company had outstanding warrants to purchase 56,924 shares of common
stock at an exercise price of $4.26 per share. During the three months ended March 31, 2009,
warrants to purchase 201,062 common shares with per share exercise prices of $4.26 expired.
At
March 31, 2009, the Company reserved the following shares of common stock for future issuance:
|
|
|
|
|
|
|
Shares |
|
Employee stock compensation plans |
|
|
4,572,906 |
|
Warrants to purchase common stock |
|
|
56,924 |
|
|
|
|
|
|
|
|
4,629,830 |
|
|
|
|
|
14. Geographic Information
The Company operates in one reportable segment, satellite data communications. Other than
satellites in orbit, long-lived assets outside of the United States are not significant. The
following table summarizes revenues on a percentage basis by geographic regions, based on the
country in which the customer is located.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
|
86 |
% |
|
|
91 |
% |
Japan |
|
|
10 |
% |
|
|
|
|
Other |
|
|
4 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
15. Commitments and Contingencies
Procurement agreements in connection with quick-launch satellites
On April 21, 2006, the Company entered into an agreement with Orbital Sciences to design,
manufacture, test and deliver one payload engineering development unit and six
AIS-equipped satellite payloads to the Company. The cost of the payloads is $17,000, subject to
adjustment under certain circumstances. Payments under the agreement were due upon the achievement
of specified milestones by Orbital Sciences. As of March 31, 2009, the Company has made milestone
payments of $16,300 under this agreement. The Company anticipates making the remaining payments,
subject to adjustments under the agreement, of $700 in 2009.
18
On June 5, 2006, the Company entered into an agreement with OHB System, AG, an affiliate of OHB, to
design, develop and manufacture six satellite buses, integrate such buses with the payloads
provided by Orbital Sciences, and launch the six integrated satellites. The original price for the
six satellite buses and launch services was $20,000 and payments under the agreement were due upon
specific milestones achieved by OHB System, AG.
On July 2, 2008, the Company and OHB System, AG entered into an agreement to amend the June 5, 2006
agreement in connection with the successful launch of the Coast Guard demonstration satellite and
the five quick-launch satellites on June 19, 2008. Pursuant to the agreement, the Company and
OHB System, AG agreed to a revised schedule of milestone and related payments for the launch of the
five quick-launch satellites and delivery schedule of the sixth quick-launch satellite, with no
modification to the price in the agreement entered into on June 5, 2006, including certain launch
support and in-orbit testing services for the sixth quick-launch satellite. In addition, the
Company agreed to pay an additional $450 to OHB System, AG relating to the construction of the five
quick-launch satellites. The Company and OHB System, AG have also agreed to waive any applicable
on-time delivery incentive payments and to waive any applicable liquidating damages, except for any
liquidating delay damages with respect to delivery delay of the sixth quick-launch satellite.
As of March 31, 2009, the Company has made milestone payments of $17,767 under this agreement. In
addition, OHB System, AG will provide services relating to the development, demonstration and
launch of the Companys next-generation satellites at a total cost of $1,350. The Company
anticipates making the remaining payments, subject to adjustments
under the agreement, of $2,233 in 2009, for the six
satellite buses and the related integration and launch services.
Procurement agreements in connection with U.S. Coast Guard contract
In May 2004, the Company entered into an agreement to construct and deploy a satellite for use by
the USCG. In connection with this agreement, the Company entered into procurement
agreements with Orbital Sciences and OHB System, AG. As of March 31, 2009, the Companys remaining
obligation under this agreement was $121.
Procurement agreement in connection with next-generation satellites
On May 5, 2008, the Company entered into a procurement agreement with Sierra Nevada Corporation (SNC) pursuant to which SNC
will construct eighteen low-earth-orbit satellites in three sets of six satellites (shipsets) for
the Companys next-generation satellites (the Initial Satellites). Under the agreement, SNC will
also provide launch support services, a test satellite (excluding the mechanical structure), a
satellite software simulator and the associated ground support equipment. Under the agreement, the
Company may elect to use the launch option to be offered by SNC or it may contract separately with
other providers for launch services and launch insurance for the satellites.
Under the agreement, the Company has the option, exercisable at any time until the third
anniversary of the execution of the agreement, to order up to thirty additional satellites
substantially identical to the Initial Satellites (the Optional Satellites).
19
The total contract price for the Initial Satellites is $117,000, subject to reduction upon failure
to achieve certain in-orbit operational milestones or if the
pre-ship reviews of each shipset are delayed more than 60 days after the specified time periods
described below. The Company has agreed to pay SNC up to $1,500 in incentive payments for the
successful operation of the Initial Satellites five years following the successful completion of
in-orbit testing for the third shipset of six satellites. The price for the Optional Satellites
ranges from $5,000 to $7,700 per satellite depending on the number of satellites ordered and the
timing of the exercise of the option.
The agreement also requires SNC to complete the pre-ship review of the Initial Satellites (i) no
later than 24 months after the execution of the agreement for the first shipset of six satellites,
(ii) no later than 31 months after the execution of the agreement for the second shipset of six
satellites and (iii) no later than 36 months after the execution of the agreement for the third
shipset of six satellites. Payments under the agreement will begin upon the execution of the
agreement and will extend into the second quarter of 2012, subject to SNCs successful completion
of each payment milestone. As of March 31, 2009, the Company has made milestone payments of $30,420
under the agreement. The Company anticipates making payments under the agreement of $21,060 during
2009. Under the agreement, SNC has agreed to provide the Company with an optional secured credit
facility for up to $20,000 commencing 24 months after the execution of the agreement and maturing
44 months after the effective date. If the Company elects to establish and use the credit facility
it and SNC will enter into a formal credit facility on terms established in the agreement.
Airtime credits
In 2001, in connection with the organization of ORBCOMM Europe LLC and the reorganization of the
ORBCOMM business in Europe, the Company agreed to grant certain country representatives in Europe
approximately $3,736 in airtime credits. The Company has not recorded the airtime credits as a
liability for the following reasons: (i) the Company has no obligation to pay the unused airtime
credits if they are not utilized; and (ii) the airtime credits are earned by the country
representatives only when the Company generates revenue from the country representatives. The
airtime credits have no expiration date. Accordingly, the Company is recording airtime credits as
services are rendered and these airtime credits are recorded net of revenues from the country
representatives. For the three months ended March 31, 2009 and 2008, airtime credits used totaled
approximately $33 and $41, respectively. As of March 31, 2009 and December 31, 2008, unused credits
granted by the Company were approximately $2,274 and $2,307, respectively.
Purchase commitment
On August 29, 2008, the Company entered into an agreement with Delphi Automotive Systems LLC to
purchase approximately $4,800 of a future model of a subscriber communicator over a two-year period
beginning once the subscriber communicator model is commercially available within the next twelve months.
Litigation
From time to time, the Company is involved in various litigation matters involving ordinary and
routine claims incidental to its business. Management currently believes that the outcome of these
proceedings, either individually or in the aggregate, will not have a material adverse effect on
the Companys business, results of operations or financial condition. The Company is also involved
in certain litigation matters as discussed below.
20
Class Action Litigation
On September 20 and 25, 2007, two separate plaintiffs filed purported class action lawsuits in the
United States District Court for the District of New Jersey against the Company and certain of its
officers. On June 2, 2008, the Court consolidated the actions, appointed Erwin Weichel, David
Peterson and William Hunt as lead plaintiffs and approved the lead plaintiffs selection of co-lead
and liaison counsel. On July 17, 2008, the lead plaintiffs filed their consolidated complaint
against the Company and certain of its officers, and added as defendants the two co-lead
underwriters of the Companys initial public offering, UBS Securities LLC and Morgan Stanley & Co.
Incorporated. The consolidated complaint alleges, among other things, that the Companys
registration statement related to its initial public offering in November 2006 contained material
misstatements and omissions in violation of the Securities Act of 1933. The action cited, among
other things, a drop in the trading price of the Companys common stock that followed disclosure on
August 14, 2007 of a change in the Companys definition of billable subscriber communicators and
reduced guidance for the remainder of 2007 released with the Companys 2007 second quarter
financial results. The action seeks to recover compensatory and rescissory damages, on behalf of a
class of shareholders who purchased common stock in and/or traceable to the Companys initial
public offering on or about November 3, 2006 through August 14, 2007. On February 25, 2009, the
Company and the other named defendants agreed in principle to settle the action, while continuing
to deny any liability for these claims, for a payment of $2,450 to be paid entirely by the
Companys insurer providing directors and officers liability coverage for the claims asserted in
the litigation. The agreement remains subject to final negotiated documentation executed by the
parties and approval by the United States District Court for the District of New Jersey. As of
March 31, 2009 and December 31, 2008, the Company has accrued the $2,450 as a component of accrued
liabilities. The Company has established a receivable from its insurance carrier in the same amount
that is included as component of prepaid expenses and other current assets as collection is
probable. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include money damages. If an unfavorable ruling were to occur, it could
have a material adverse effect on the Companys business and results of operations for the period in which
the ruling occurred or future periods. In addition, the Company has received a request for
indemnification pursuant to the Underwriting Agreement entered into in connection with the initial
public offering from UBS Securities, LLC and Morgan Stanley & Co. Incorporated for any losses or
costs they may incur as a result of this lawsuit. The Company has declined to pay any such
indemnity claims by these firms.
16. Subsequent Events
GE Agreements
On April 3, 2009, the Company entered into a Settlement Agreement ( the Settlement Agreement)
with GE Asset Intelligence, LLC (GE) with respect to the supply agreement dated October
10, 2006 (the 2006 Agreement) to supply up to 412,000 units of in-production and future models of
subscriber communicators through December 31, 2009 to support GEs applications utilizing the
Companys data communications system. 270,000 of these units were non-cancelable except for
specified early termination provisions.
Pursuant to the Settlement Agreement, the Company received $800 as settlement for GEs obligation
under the 2006 Agreement. GE did not purchase its
minimum committed volumes for 2007 and 2008.
The Company and GE terminated the 2006 Agreement
and all their respective obligations relating to it, and released each other from any claims
relating to their obligations arising under the 2006 Agreement, except for certain obligations
related to warranties, indemnities, confidentiality and intellectual property.
21
Concurrent with the Settlement Agreement, the Company and GE entered into a Services Agreement
(the Services Agreement) with a term of January 1, 2009 through December 31 2013, pursuant to which the
Company and GE agreed to expand the scope of services provided or that may in the future be
provided to include other satellite, cellular or dual mode (cellular plus satellite) data
communications services, in addition to the low-earth-orbit-satellite-based data communication
services (the Low-Earth Services).
Under the Services Agreement, GE will activate and provide telematics and machine-to-machine
data communications services on all communicators sold or managed by or on behalf of GE in the
United States, Canada and Mexico for purposes of communications between (i) subscriber
communicators sold or managed by or on behalf of GEs asset tracking and monitoring business and
(ii) communications centers or customers of GEs asset tracking and monitoring business, whether
satellite, cellular or dual mode (cellular plus satellite), exclusively (subject to certain
restrictions and qualifications) on ORBCOMMs communications system that provides the Low-Earth
Services and terrestrial-based cellular communication services through reseller agreements with
major cellular wireless providers and that may in the future provide communication services through
other third party communication networks in each case as long as the Company provides competitive services at
competitive rates with appropriate regulatory approval, subject to the terms of the Services
Agreement.
22
Assets Held for Sale
The
Company has been focusing on its network services business and is the process of identifying
interested parties to pursue a sale of its subsidiary, Stellar Satellite Communications, Ltd.
(Stellar). The GE Settlement and Services Agreement discussed above provides the Company
with the ability to dispose of Stellar without disrupting ORBCOMMs growth prospects with GE and allows the Company to concentrate its
resources on its service-based data communications business. Beginning with the second quarter of 2009,
the Company will reclassify the net assets of Stellar as assets held for sale on its consolidated
balance sheet and reclassify Stellars results of operations as discontinued operations in its
consolidated statements of operations for the periods presented. As of March 31, 2009, the major
classes of assets and liabilities of Stellar were as follows:
|
|
|
|
|
Accounts receivable |
|
$ |
513 |
|
Inventories, current |
|
|
1,689 |
|
Current assets |
|
|
2,346 |
|
Other equipment, net |
|
|
502 |
|
Inventories, long term |
|
|
1,544 |
|
Current liabilities |
|
|
412 |
|
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Safe Harbor Statement Under the Private Securities Litigation Reform of Act 1995.
Certain statements discussed in Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form
10-Q constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans,
objectives and expectations for future events and include statements about our expectations,
beliefs, plans, objectives, intentions, assumptions and other statements that are not historical
facts. Such forward-looking statements, including those concerning the Companys expectations,
are subject to known and unknown risks and uncertainties, which could cause actual results to
differ materially from the results, projected, expected or implied by the forward-looking
statements, some of which are beyond the Companys control, that may cause the Companys actual
results, performance or achievements, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking
statements. These risks and uncertainties include but are not limited to: the impact of global
recession and continued worldwide credit and capital constraints; substantial losses we have
incurred and expect to continue to incur; demand for and market acceptance of our products and
services and the applications developed by our resellers; loss or decline or slowdown in the
growth in business from the Asset Intelligence division of General Electric Company (GE or
General Electric or AI), other value-added resellers or VARs and international value-added
resellers or IVARs; loss or decline or slowdown in growth in business of any of the specific
industry sectors the Company serves, such as transportation, heavy equipment, fixed assets and
maritime; litigation proceedings; technological changes, pricing pressures and other competitive
factors; the inability of our international resellers to develop markets outside the United
States; market acceptance and success of our Automatic Identification System (AIS) business;
the in-orbit satellite failure of the Coast Guard demonstration or the quick-launch satellites;
satellite launch and construction delays and cost overruns and in-orbit satellite failures or
reduced performance; the failure of our system or reductions in levels of service due to
technological malfunctions or deficiencies or other events; our inability to renew or expand our
satellite constellation; political, legal regulatory, government administrative and economic
conditions and developments in the United States and other countries and territories in
which we operate; and changes in our business strategy. These and other risks are described in
more detail in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2008. The Company undertakes no obligation to publicly revise any
forward-looking statements or cautionary factors, except as required by law.
Overview
We operate a global commercial wireless messaging system optimized for narrowband
communications. Our system consists of a global network of 28 low-Earth orbit, or LEO, satellites
and accompanying ground infrastructure. Our two-way communications system enables our customers and
end-users, which include large and established multinational businesses and government agencies, to
track, monitor, control and communicate cost-effectively with fixed and mobile assets located
anywhere in the world. We also provide terrestrial-based cellular communication services through
reseller agreements with major cellular wireless providers. These terrestrial-based communication
services enable our customers who have higher bandwidth requirements to receive and send messages
from communication devices based on terrestrial-based technologies
using the cellular providers wireless networks as well as from dual-mode devices combining our satellite subscriber
communicators with devices for terrestrial-based technologies. As a result, our customers are now
able to integrate into their applications a terrestrial communications device that will allow them
to add messages, including data intensive messaging from the cellular providers wireless networks.
24
Our products and services enable our customers and end-users to enhance productivity, reduce
costs and improve security through a variety of commercial, government, and emerging homeland
security applications. We enable our customers and end-users to achieve these benefits using a
single global satellite technology standard for machine-to-machine and telematic, or M2M, data
communications. Our customers have made significant investments in developing ORBCOMM-based
applications. Examples of assets that are connected through our M2M data communications system
include trucks, trailers, railcars, containers, heavy equipment, fluid tanks, utility meters,
pipeline monitoring equipment, marine vessels, and oil wells. Our customers include original
equipment manufacturers, or OEMs, such as Caterpillar Inc.,
(Caterpillar), Doosan Infracore America, Hitachi Construction
Machinery Co., Ltd., Hyundai Heavy Industries, Komatsu Ltd., The Manitowoc Company and Volvo Construction Equipment, IVARs, such as GE, VARs, such
as XATA Corporation and American Innovations, Ltd., and government agencies, such as the U.S. Coast
Guard.
Our products and services are satellite-based data communications services, product sales from
subscriber communicators, terrestrial-based cellular communications services, product sales from
cellular wireless subscriber identity modules, or SIMS for use with devices or equipment that
enable the use of the cellular providers wireless network for data communications and satellite
AIS data services.
We currently have a contract to provide AIS data to the U.S. Coast Guard and plan to offer the
AIS data service to other government and commercial customers. Further, we will be working with
system integrators and maritime information service
providers for value-added service and to facilitate the sales and distribution of our AIS
data. In January 2009, we entered into our first AIS data license distribution agreement for
commercial purposes with Lloyds Register-Fairplay Ltd. We will continue to work with additional
candidates to address the various market sectors for AIS data. We believe we are the only
commercially available satellite-based AIS data provider reaching beyond coastal access into the
open water.
The recent global economic conditions, including concerns about a global economic recession,
along with unprecedented credit and capital constraints in the capital markets and deteriorations
of financial institutions have created a challenging economic environment leading to a lack of
customer confidence. Our worldwide operations and performance depend significantly on global
economic conditions and their impact on our customers decisions to purchase our services and
products. Economic conditions have worsened significantly in many parts of the world, and may
remain weak or even deteriorate further in the foreseeable future. The worldwide economic turmoil
may have a material adverse effect on our operations and financial results, and we may be unable to
predict the scope and magnitude of its effects on our business. VARs and end users in any of our
target markets, including in commercial transportation and heavy equipment, have and may experience
unexpected fluctuations in demand for their products, as our end users alter purchasing activities
in response to this economic volatility. Our customers may change or scale back product development
efforts, the roll-out of service applications, product purchases or other sales activities that
affect purchases of our products and services, and this could adversely affect the amount and
timing of revenue for the long-term future, leaving us with limited visibility in the revenue we
can anticipate in any given period. These economic conditions also affect our third party
manufacturers, and if they are unable to obtain the necessary capital to operate their business,
this may also impact their ability to provide the subscriber communicators that our end-users need,
or may adversely affect their ability to provide timely services or to make timely deliveries of
products or services to our end-users. It is currently unclear as to what
overall effect these economic conditions and uncertainties will have on our existing customers and
core markets, and future business with existing and new customers in our current and future
markets.
On June 19, 2008, the Coast Guard Demonstration satellite and five quick-launch satellites were
successfully launched. Due to delays associated with the construction of the final quick-launch
satellite, we are retaining it for future deployment. Each of the satellites successfully separated
from the launch vehicle in the proper orbit, and began in-orbit testing and final positioning.
During this testing, communications contact was lost with one satellite as described below. The
majority of in-orbit testing of the payload subsystems has been completed to verify proper
operation of the subscriber links, gateway links and AIS payload functionality. As a result of
on-going in-orbit testing of these satellites, our engineers and satellite providers are
investigating the lower than nominal gateway transmission power on one satellite, lower than
expected nominal subscriber transmission on one satellite, intermittent computer resets on one
satellite and outages to the reaction wheel components of the attitude control system on each of
the satellites. The satellite with the lower than expected subscriber transmission has been
reprogrammed to operate in a mode which utilizes the gateway transmission for subscriber messaging
traffic. The satellite with intermittent flight computer resets is being reprogrammed to use a
redundant receiver to perform some of the flight computer functions. The extent of the impacts of these
operational procedures continues to be evaluated. All the satellites with the exception of
the satellite that lost communications contact are providing limited ORBCOMM messaging and
worldwide AIS services.
On February 22, 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite by both our ground control systems
and the ground control systems of the company providing in-orbit monitoring and testing, KB
Polyot-Joint Stock Company, a provider of sub-contracting services to OHB. After consultation with
OHB and our own engineers, we believe that after such an extended period of no communication with
the satellite, it is unlikely that the satellite will be recovered. A non-cash impairment charge
to write-off the cost of this satellite of approximately $7.0 million has been recognized in
the quarter ended March 31, 2009. The loss of one quick-launch satellite is not expected to have a material adverse effect on our
current communications service as the satellite was only in the testing phase and not in regular
operational service. Each of the quick-launch and Coast Guard Demonstration satellites is equipped
with an AIS payload and we believe the loss of one satellite will not adversely impact our current
AIS service in any material respect, as the other satellites provide redundant capabilities to the
AIS data service.
We conducted a post-loss data analysis to determine the root cause and establish operational
procedures, if any, to mitigate the risk of a similar anomaly from occurring on the remaining four
quick-launch satellites which are of the same design and the Coast Guard Demonstration Satellite
which is of a similar design. This analysis revealed the most likely cause to be a failure of the
Electrical Power System (EPS) components that control battery charging which resulted in completely
discharging the battery and precluding additional charging. As a precaution to mitigate the risk
of this type of failure leading to the loss of the other satellites, we have has developed new
software that resides in the payload flight computer that performs the majority of the functions
performed by the EPS component we believe failed. This software has been uploaded to three of the
satellites that have experienced failures to redundant EPS components. We
are unable to determine whether or when another EPS anomaly will occur on the other satellites, and
is currently unable to quantify the impact, if any, that a potential EPS anomaly will have on the
expected useful life and communications capabilities of these satellites.
25
The remaining satellites that were recently launched are experiencing Attitude Control System
(ACS) anomalies, which results in the satellites not pointing towards the sun and the earth as
expected. The result of this pointing error is reduced power generation, improper satellite spacing
within the orbital plane and expected reduced communications capabilities. While OHB, the satellite bus
manufacturer and our engineering staff, continue their efforts to correct and develop alternate
operational procedures to satisfactorily mitigate the effect of these anomalies, there can be no
assurance in this regard. We are currently unable to quantify the impact that ACS anomalies will
have on the expected useful life of the satellites or the extent of degradation in their
communication capabilities until the in-orbit testing is completed and all
operational procedures to minimize the impact, including autonomous software system correction
techniques, have been fully implemented and evaluated.
We have in-orbit insurance that under certain circumstances covers the total loss or constructive
total loss of the Coast Guard demonstration and five quick-launch satellites. Under the terms of the policy, a satellite that does not meet the working
satellite criteria constitutes a constructive total loss of that satellite for insurance purposes. The in-orbit insurance
is subject to certain exclusions including a deductible under which no claim is payable under the
policy for the first satellite to suffer a constructive total loss or total loss.
We expect to file shortly a claim under the policy for all six satellites as either a total loss or
constructive total loss. The total loss claim is for the one satellite that suffered a power
system failure resulting in loss of contact, and the constructive total loss claim is for each of the
other five satellites on the basis that these satellites do not meet the working satellite criteria
stated in the policy due to, among other anomalies, the pointing errors described above. The Company
is testing for impairment of the remaining satellites and we may be required to record a
further impairment charge that could have a significant non-cash financial impact. The information needed
to complete this assessment is not available as of the date of this report. The
maximum amount we can recover under the policy from third party insurers for all six satellites
covered by the policy is $50 million, which includes the one-satellite deductible described above,
and less any salvage value that can be established. Any payments that are made under this policy
may not be sufficient to compensate us for the losses we may suffer.
ORBCOMM Japan
On March 25, 2008, we received a 37% equity interest in ORBCOMM Japan, which was accounted for
as an investment in affiliates at March 31, 2008. ORBCOMM Japans results of operations were not
significant for the period from March 25, 2008 through March 31, 2008. On May 15, 2008, we received
an additional 14% equity interest in Japan and, as a result, our ownership
interest increased to 51%. On June 9, 2008, we entered into an agreement with the
noncontrolling stockholder, which terminated its substantive participatory rights in the governance
of ORBCOMM Japan and as a result, we obtained the controlling interest in ORBCOMM Japan.
We consolidated the results of ORBCOMM Japan as though the controlling interest was acquired
on April 1, 2008.
GE
On April 3, 2009, we entered into a Settlement Agreement ( the Settlement Agreement) with
GE with respect to the supply agreement dated October 10, 2006 (the 2006 Agreement) to
supply up to 412,000 units of in-production and future models of subscriber communicators through
December 31, 2009 to support GEs applications utilizing our data communications system. 270,000
of these units were non-cancelable except for specified early termination provisions.
Pursuant to the Settlement Agreement, we received $0.8 million as settlement for GEs
obligation under the 2006 Agreement. GE did not purchase its minimum committed volumes for 2007 and 2008.
The
Company and GE terminated the 2006 Agreement and all
their respective obligations relating to it, and released each other from any claims relating to
their obligations arising under the 2006 Agreement, except for certain obligations related to
warranties, indemnities, confidentiality and intellectual property.
Concurrent with the Settlement Agreement, we and GE entered into a Services Agreement (the
Services Agreement) with a term of January 1, 2009 through December 31 2013, pursuant to which we and GE
agreed to expand the scope of services provided or that may in the future be provided to include
other satellite, cellular or dual mode (cellular plus satellite) data communications services, in
addition to the low-earth-orbit-satellite-based data communication services (the Low-Earth
Services).
Under the Services Agreement, GE will activate and provide telematics and machine-to-machine
data communications services on all communicators sold or managed by or on behalf of GE in the
United States, Canada and Mexico for purposes of communications between (i) subscriber
communicators sold or managed by or on behalf of GEs asset tracking and monitoring business and
(ii) communications centers or customers of GEs asset tracking and monitoring business, whether
satellite, cellular or dual mode (cellular plus satellite), exclusively (subject to certain
restrictions and qualifications) on ORBCOMMs communications system that provides the Low-Earth
Services and terrestrial-based cellular communication services through reseller agreements with
major cellular wireless providers and that may in the future provide communication services through
other third party communication networks in each case as long as we provide competitive services at competitive
rates with appropriate regulatory approval, subject to the terms of the Services Agreement.
Assets Held for Sale
We
have been focusing on our network business and are in the process of identifying interested
parties to pursue a sale of our subsidiary, Stellar Satellite Communications, Ltd (Stellar). The GE Settlement and Services Agreements discussed above provides
us with the ability to dispose of Stellar without disrupting ORBCOMMs growth prospects with GE and allows us to concentrate on our
service-based data communications business. Beginning with the second quarter of 2009, we will reclassify
the net assets of Stellar as assets held for sale on our consolidated balance sheet and reclassify
Stellars results of operations as discontinued operations in our consolidated statements of operations
for the periods presented. As of March 31, 2009, the major classes of assets and
liabilities of Stellar were as follows:
|
|
|
|
|
Accounts receivable |
|
$0.5 million |
Inventories, current |
|
1.7 million |
Current assets |
|
2.3 million |
Other equipment, net |
|
0.5 million |
Inventories, long term |
|
1.5 million |
Current liabilities |
|
0.4 million |
26
Critical Accounting Policies
Our discussion and analysis of our results of operations, liquidity and capital resources are
based on our condensed consolidated financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates
and judgments, including those related to revenue recognition, costs of revenues, accounts
receivable, inventory valuation, satellite network and other equipment, capitalized development
costs, intangible assets, the valuation of deferred tax assets, uncertain tax positions and the
fair value of securities underlying share-based payment arrangements. We base our estimates on
historical and anticipated results and trends and on various other assumptions that we believe are
reasonable under the circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates are subject to an inherent degree
of uncertainty. Actual results may differ from our estimates and could have a significant adverse
effect on our results of operations and financial position. For a discussion of our critical
accounting policies see Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2008. There have been no material changes to our critical accounting policies during
the three months ended March 31, 2009.
EBITDA
EBITDA is defined as earnings before interest income (expense), provision for income taxes and
depreciation and amortization. We believe EBITDA is useful to our management and investors in
evaluating our operating performance because it is one of the primary
measures we use to
evaluate the economic productivity of our operations, including our ability to obtain and maintain
our customers, our ability to operate our business effectively, the efficiency of our employees and
the profitability associated with their performance. It also helps our management and investors to
meaningfully evaluate and compare the results of our operations from period to period on a
consistent basis by removing the impact of our financing transactions and the depreciation and
amortization impact of capital investments from our operating results. In addition, our management
uses EBITDA in presentations to our board of directors to enable it to have the same measurement of
operating performance used by management and for planning purposes, including the preparation of
our annual operating budget.
EBITDA is not a performance measure calculated in accordance with accounting principles
generally accepted in the United States, or GAAP. While we consider EBITDA to be an important
measure of operating performance, it should be considered in addition to, and not as a substitute
for, or superior to, net loss or other measures of financial performance prepared in accordance
with GAAP and may be different than EBITDA measures presented by other companies.
The following table (in thousands) reconciles our net loss to EBITDA for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Net loss |
|
$ |
(9,135 |
) |
|
$ |
(534 |
) |
Interest income |
|
|
(41 |
) |
|
|
(766 |
) |
Interest expense |
|
|
48 |
|
|
|
50 |
|
Depreciation and amortization |
|
|
1,302 |
|
|
|
648 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(7,826 |
) |
|
$ |
(602 |
) |
|
|
|
|
|
|
|
EBITDA during the three
months ended March 31, 2009 decreased by $7.2 million over the three
months ended March 31, 2008. This decrease was due to a non-cash impairment charge of $7.0 million for one of
our quick-launch satellites and an increase in operating expenses of $1.7 million, offset by higher
net service revenue of $1.8 million. Operating expenses increased during the three months ended
March 31, 2009 due to $0.4 million in operating expenses of ORBCOMM Japan, unanticipated
expenses of $0.2 million for a contested proxy vote, $0.1 million in severance payments
and $0.1 million in legal fees related to the preparation of our pending satellite insurance claim. We also had an increase of $0.5
million for bad debt reserves. These increases were offset by a decrease of $0.4 million in
stock-based compensation expense. Also during the three months ended March 31, 2008, we recognized
a $0.9 million gain from the settlement of claims from ORBCOMM Japan which did not recur during
the three months ended March 31, 2009.
27
Results of Operations
Revenues
We derive service revenues from our resellers and direct customers from utilization of
satellite subscriber communicators on our communications system and the reselling of airtime from
the utilization of terrestrial-based subscriber communicators using SIMS on the cellular providers
wireless networks. These service revenues generally consist of a one-time activation fee for each
subscriber communicator and SIMS activated for use on our communications system and monthly usage
fees. Usage fees that we charge our customers are based upon the number, size and frequency of data
transmitted by the customer and the overall number of subscriber communicators and SIMS activated
by each customer. Revenues for usage fees from currently billing subscriber communicators and SIMS
are recognized on an accrual basis, as services are rendered, or on a cash basis, if collection
from the customer is not reasonably assured at the time the service is provided. Usage fees charged
to our resellers and direct customers are charged primarily at wholesale
rates based on the overall number of subscriber communicators activated by them and the total
amount of data transmitted. Service revenues also includes AIS data transmissions, services to the
United States Coast Guard for the Concept Validation Project, royalty
fees from third
parties for the use of our proprietary communications protocol
charged on a one-time basis for each satellite subscriber communicator
connected to our M2M data communications system, and fees from providing engineering,
technical and management support services to customers.
The table below presents our revenues for the three months ended March 31, 2009 and 2008,
together with the percentage of total revenue represented by each revenue category in (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Service revenues |
|
$ |
6,627 |
|
|
|
90.0 |
% |
|
$ |
4,855 |
|
|
|
82.6 |
% |
Product sales |
|
|
734 |
|
|
|
10.0 |
% |
|
|
1,024 |
|
|
|
17.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,361 |
|
|
|
100.0 |
% |
|
$ |
5,879 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the three months ended March 31, 2009 increased $1.5 million, or 25.2%, to
$7.4 million from $5.9 million for the three months ended
March 31, 2008. Total revenues for the three months ended
March 31, 2009 included $0.5 million from ORBCOMM Japan.
Service revenues
Service revenues increased $1.8 million for the three months ended March 31, 2009, or 36.5%, to
$6.6 million, or approximately 90% of total revenues, from $4.9 million, or approximately 82.6%
of total revenues for the three months ended March 31, 2008.
The increase in service revenues were primarily due to an increase in the number of billable
subscriber communicators activated on our communications system and AIS revenue of $0.4 million. As of March 31, 2009, we had
approximately 477,000 billable subscriber communicators on the ORBCOMM System compared to
approximately 380,000 billable subscriber communicators as of March 31, 2008, an increase of
approximately 25.4%.
Service revenue growth can be impacted by the customary lag between subscriber communicator
activations and recognition of service revenue from these units.
Product sales
Revenue from product sales decreased $0.3 million for the three months ended March 31, 2009, or
28.3%, to $0.7 million, or approximately 10.0% of total revenues, from $1.0 million, or
approximately 17.4% of total revenues for the three months ended March 31, 2008. Included in
product sales in 2009 is $0.1 million from ORBCOMM Japan. This decrease was primarily due to
lower demand for subscriber communicators by VARs in the
transportation sector.
Costs of services
Costs of services is comprised of usage fees to our cellular wireless providers for the data
transmitted by our resellers on our network, payroll and related costs, including stock-based
compensation associated with our network engineers, materials and supplies, depreciation
associated with our communications system and amortization of licenses acquired used to deliver
the services.
28
Costs of services increased by $1.2 million, or 58.4%, to $3.2 million for the three months
ended March 31, 2009 from $2.0 million during the three months ended March 31, 2008. The
increase is primarily due to increases in network telecommunications
costs to support higher service revenues, gateway maintenance costs,
the consolidation of ORBCOMM Japan and depreciation expense of $0.6 million primarily related to the Coast Guard
demonstration satellite placed in service during the third quarter of 2008. As a percentage of
service revenues, cost of services were 48.6% of service revenues for the three months ended
March 31, 2009 compared to 41.9% for the three months ended March 31, 2008.
Costs of product sales
Costs of product sales include the purchase price of subscriber communicators, SIMS and related
peripheral equipment, shipping charges and operational costs to fulfill customer orders,
including costs for employees.
Costs of product sales decreased by $0.2 million, or 13.4%, to $1.1 million for the three months
ended March 31, 2009 from $1.3 million for the three months ended March 31, 2008. Product cost
represented 47.2% of the cost of product sales for the three months ended March 31, 2009, which
decreased by $0.3 million, or 38.1%, to $0.5 million for the three months ended March 31, 2009
from $0.8 million for the three months ended March 31, 2008. We had a gross loss from product
sales (revenues from
product sales minus costs of product sales including distribution costs) of $0.4 million and
$0.3 million for the three months ended March 31, 2009 and 2008. The gross loss from product
sales was related to lower revenues from subscriber communicator sales which was not enough to
cover costs associated with distribution, fulfillment and customer service costs associated with
completing customer orders.
Selling, general and administrative expenses
Selling, general and administrative expenses relate primarily to compensation and associated
expenses for employees in general management, sales and marketing and finance, legal expenses
and regulatory matters.
Selling, general and administrative expenses increased by $0.4 million, or 8.1%, to $4.8 million
for the three months ended March 31, 2009 from $4.4 million for the three months ended March 31,
2008. This increase is primarily due to expenses of $0.2 million for a contested proxy,
$0.1 million in severance payments and $0.1 million in legal fees related to the preparation of our pending satellite insurance claim.
We also had increases related to the consolidation of
ORBCOMM Japan, an increase of $0.5 million for bad debt reserves, offset by a decrease of $0.3 million in stock-based compensation
expense and decreases in other expenses. We expect to incur
additional costs during the second quarter of 2009 relating to the proxy contest.
Product development expenses
Product development expenses consist primarily of the expenses associated with the staff of our
engineering development team, along with the cost of third parties that are contracted for
specific development projects.
Product development expenses for the three months ended March 31, 2009 and 2008 were
$0.2 million and $0.3 million, respectively, decreasing 12.5% in the current year period over
the same period in the prior year.
Gain on customer claims settlement
On March 25, 2008, we received a 37% equity interest in ORBCOMM Japan and cash of $0.6 million
in satisfaction of claims against ORBCOMM Japan, pursuant to a voluntary reorganization of
ORBCOMM Japan in accordance with the rehabilitation plan approved by the Tokyo district court. The fair value of the consideration we received for settlement of claims
against ORBCOMM Japan exceeded the $0.4 million carrying value of current and long-term
receivables from ORBCOMM Japan by $0.9 million and we recognized a gain for the same amount for
the three months ended March 31, 2008. There was no comparable gain during the three months ended
March 31, 2009.
Impairment Charge Satellite Network
In February 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite. The satellite was not recovered
and we recorded a non-cash impairment charge to write off the cost of the satellite of
$7.0 million during the three months ended March 31, 2009.
Other income (expense)
Other income (expense) is comprised primarily of interest income from our cash and cash
equivalents that consists of U.S. Treasuries and interest bearing instruments, foreign exchange
gains and losses, and interest expense.
Other expense was $0.1 million for the three months ended March 31, 2009 compared to other
income $0.7 million for the three months ended March 31, 2008. This decrease is primarily due to
lower invested cash balances and reduced interest rates. We expect that interest
income will continue to decrease in future periods as cash is used for our capital expenditures,
working capital purposes and to fund operating losses.
Noncontrolling interests
Noncontrolling interests relate to earnings that are attributable to the minority shareholders of
ORBCOMM Japan.
29
Net loss attributable to ORBCOMM Inc.
As a result of the items described above, we have a loss of $9.1 million for the three months
ended March 31, 2009, compared to a net loss of $0.5 million for the three months ended
March 31, 2008, an increase of $8.6 million.
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs and to fund capital expenditures
to support our current operations, and facilitate growth and expansion. Since our inception, we
have financed our operations from sales of our common stock through public offerings and private
placements of debt, convertible redeemable preferred stock, membership interests and common
stock. We have incurred losses from operations since inception, including a net loss of $9.1
million for the three months ended March 31, 2009 and as of March 31, 2009 we have an
accumulated deficit of approximately $77.1 million. As of
March 31, 2009, our primary source of liquidity consisted of cash and cash equivalents totaling $66.9 million.
Operating activities
Cash used in our operating activities for the three months ended March 31, 2009 was $1.3 million
resulting from a net loss of $9.1 million, offset by adjustments for non-cash items of $9.2
million, and $1.3 million used for working capital. Adjustments for non-cash items primarily
consisted of a $7.0 million impairment charge for one of our quick-launch satellites, $1.3 million
for depreciation and amortization and $0.5 million for stock-based compensation. Working capital
activities primarily consisted of a net uses of cash of $0.7 million for an increase in accounts
receivable primarily related to the increase in our service revenues and $0.8 million for a decrease in
accounts payable and accrued expenses primarily related to timing of payments made to vendors.
Cash provided by our operating activities for the three months ended March 31, 2008 was
$0.1 million resulting from a net loss of $0.5 million, offset by adjustments for non-cash items
of $0.7 million. Adjustments for non-cash items primarily consisted of $0.6 million for
depreciation and amortization and $0.8 million for stock-based compensation, offset by decreases
of $0.2 million in the allowance for doubtful accounts and a $0.6 million non-cash gain related
to the 37% interest we received in ORBCOMM Japan in March 2008.
Investing activities
Cash used in our investing activities for the three months ended March 31, 2009 was
$6.9 million, resulting from capital expenditures of $0.4 million for the Coast Guard
demonstration satellite and quick-launch satellites and $6.0 million for next-generation
satellites and $0.5 million of improvements to our internal infrastructure and ground segment.
Cash used in our investing activities for the three months ended March 31, 2008 was
$1.5 million, resulting from capital expenditures of $0.6 million for the quick-launch and next
generation satellites and $0.9 million of improvements to our internal infrastructure and ground
segment.
Financing activities
For the three months ended March 31, 2009, we did not have any cash flows from financing activities.
Cash provided by our financing activities for the three months ended March 31, 2008 was
$0.1 million resulting primarily from proceeds received from the exercise from the issuance of
an aggregate of 54,974 shares of common stock upon the exercise of warrants to purchase common
stock at per share exercise prices ranging from $2.33 to $4.26.
Future Liquidity and Capital Resource Requirements
We expect cash flows from operating activities, along with our existing cash and cash
equivalents will be sufficient to provide working capital and fund capital expenditures, which
primarily includes milestone payments under the procurement agreement for the next-generation
satellites. For the remainder of 2009, we expect to incur approximately $23.0 million of capital
expenditures primarily for our next-generation satellites.
Contractual Obligations
There have been no
material changes in our contractual obligations as of March 31, 2009,
as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
30
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Recent accounting pronouncements
There have been no accounting pronouncements issued but not
yet adopted by us that we believe will have a material impact on our consolidated financial statements.
31
Item 3. Quantitative and Qualitative Disclosures about Market Risks
There has been no material changes in our assessment of our sensitivity to market risk as of
March 31, 2009, as previously disclosed in Part II, Item 7A Quantitative and Qualitative
Disclosures about Market Risks in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Concentration of credit risk
During the three months ended March 31, 2009 and 2008 sales to GE accounted for 15.5% and 28.2%
of our revenues, respectively. In addition during the three months ended March 31, 2009 sales to
Caterpillar accounted for 14.2% of our revenues.
Item 4. Disclosure Controls and Procedures
Evaluation of the Companys disclosure controls and procedures. The Companys management
evaluated, with the participation of the Companys President and Chief Executive Officer and
Executive Vice President and Chief Financial Officer, the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of
March 31, 2009. Based on their evaluation, the Companys President and Chief Executive Officer
and Executive Vice President and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of March 31, 2009.
Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We
discuss certain pending legal proceedings in Note 15 to the condensed
consolidated financial statements and refer you to that discussion for important information
concerning those legal proceedings, including the basis for such actions and relief sought.
Item 1A. Risk Factors
There have been no material changes in the risk factors as of March 31, 2009, as previously
disclosed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds from Initial Public Offering
On November 2, 2006, the SEC declared effective our Registration Statement on Form S-1
(Registration No. 333-134088), relating to our initial public offering. After deducting
underwriters discounts and commissions and other offering costs, our net proceeds were
approximately $68.3 million. We intend to use the remaining net proceeds from our initial public
offering to provide working capital and fund capital expenditures, primarily related to the
deployment of additional satellites, which will be comprised of our quick-launch and
next-generation satellites. As of March 31, 2009, we have used $67.1 million for such purposes.
Pending such uses, we are investing the net proceeds in short-term interest bearing cash
equivalents.
32
Exercise of Warrants
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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|
|
|
|
|
31.1 |
|
|
Certification of President and Chief Executive Officer required by Rule 13a-14(a). |
|
|
|
|
|
|
31.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(a). |
|
|
|
|
|
|
32.1 |
|
|
Certification of President and Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(b) and 18
U.S.C. Section 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ORBCOMM Inc.
(Registrant)
|
|
Date: May 11, 2009 |
/s/ Marc J. Eisenberg
|
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|
Marc J. Eisenberg, |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: May 11, 2009 |
/s/ Robert G. Costantini
|
|
|
Robert G. Costantini, |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
33
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer and President required by Rule 13a-14(a). |
|
|
|
|
|
|
31.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(a). |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer and President required by Rule 13a-14(b) and 18 U.S.C.
Section 1350. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350. |
34