United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172019
OR
☐ | 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)
Delaware |
| 41-2118289 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
395 W. Passaic Street, Rochelle Park, New Jersey 07662
(Address of principal executive offices)
703-433-6300
(Registrant’s telephone number)
N/A
(Former name, former address and formalformer fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.001 per share | ORBC | The Nasdaq Stock Market, LLC |
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 ☒ No ☐
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Act:
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of October 30, 201728, 2019 is 74,293,015.
78,286,252.
PART I – FINANCIALFINANCIAL INFORMATION
ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value and share data)
(Unaudited)
| September 30, |
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| September 30, |
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| December 31, |
| 2019 |
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| December 31, |
| ||||
| 2017 |
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| 2016 |
| (Unaudited) |
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| 2018 |
| ||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 37,412 |
|
| $ | 25,023 |
| $ | 50,904 |
|
| $ | 53,766 |
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Cash held for acquisition |
| 34,500 |
|
|
| — |
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Accounts receivable, net of allowance for doubtful accounts of $1,298 and $1,057, respectively |
| 51,987 |
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| 31,937 |
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Accounts receivable, net of allowance for doubtful accounts of $4,334 and $4,072, respectively |
| 61,563 |
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| 57,665 |
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Inventories |
| 36,186 |
|
|
| 23,217 |
|
| 38,224 |
|
|
| 34,300 |
|
Prepaid expenses and other current assets |
| 13,152 |
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|
| 8,031 |
|
| 19,314 |
|
|
| 15,553 |
|
Total current assets |
| 173,237 |
|
|
| 88,208 |
|
| 170,005 |
|
|
| 161,284 |
|
Satellite network and other equipment, net |
| 176,104 |
|
|
| 215,841 |
|
| 149,769 |
|
|
| 160,070 |
|
Goodwill |
| 132,994 |
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|
| 114,033 |
|
| 166,129 |
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| 166,129 |
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Intangible assets, net |
| 98,747 |
|
|
| 82,545 |
|
| 76,529 |
|
|
| 86,264 |
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Other assets |
| 11,021 |
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| 5,447 |
|
| 25,153 |
|
|
| 12,603 |
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Deferred income taxes |
| 86 |
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|
| 80 |
|
| 127 |
|
|
| 109 |
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Total assets | $ | 592,189 |
|
| $ | 506,154 |
| $ | 587,712 |
|
| $ | 586,459 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable | $ | 21,237 |
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| $ | 12,481 |
| $ | 17,395 |
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| $ | 15,527 |
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Accrued liabilities |
| 34,090 |
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| 30,431 |
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| 41,754 |
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| 35,735 |
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Current portion of deferred revenue |
| 6,738 |
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| 7,414 |
|
| 2,308 |
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| 5,954 |
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Total current liabilities |
| 62,065 |
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| 50,326 |
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| 61,457 |
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| 57,216 |
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Note payable - related party |
| 1,343 |
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| 1,195 |
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| 1,241 |
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| 1,298 |
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Note payable, net of unamortized deferred issuance costs |
| 244,937 |
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| 147,458 |
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Notes payable, net of unamortized deferred issuance costs |
| 246,489 |
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| 245,907 |
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Deferred revenue, net of current portion |
| 2,559 |
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|
| 2,978 |
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| 8,771 |
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| 5,471 |
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Deferred tax liabilities |
| 19,402 |
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|
| 18,645 |
|
| 15,012 |
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| 16,109 |
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Other liabilities |
| 12,261 |
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| 3,684 |
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| 14,162 |
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|
| 2,600 |
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Total liabilities |
| 342,567 |
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| 224,286 |
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| 347,132 |
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| 328,601 |
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Commitments and contingencies |
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Equity: |
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ORBCOMM Inc. stockholders' equity |
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Series A Convertible Preferred Stock, par value $0.001; 1,000,000 shares authorized; 37,544 and 36,466 shares issued and outstanding |
| 376 |
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| 364 |
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Common stock, par value $0.001; 250,000,000 shares authorized; 74,114,319 and 71,111,863 shares issued at September 30, 2017 and December 31, 2016 |
| 74 |
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| 71 |
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Series A Convertible Preferred Stock, par value $0.001; 1,000,000 shares authorized; 40,624 and 39,442 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
| 406 |
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| 394 |
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Common stock, par value $0.001; 250,000,000 shares authorized; 78,286,252 and 79,008,243 shares issued at September 30, 2019 and December 31, 2018, respectively |
| 78 |
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| 79 |
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Additional paid-in capital |
| 407,616 |
|
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| 386,920 |
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| 448,833 |
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| 449,343 |
|
Accumulated other comprehensive loss |
| (319 | ) |
|
| (1,089 | ) |
| (1,132 | ) |
|
| (381 | ) |
Accumulated deficit |
| (158,726 | ) |
|
| (104,949 | ) |
| (208,441 | ) |
|
| (192,507 | ) |
Less treasury stock, at cost; 29,990 shares at September 30, 2017 and December 31, 2016 |
| (96 | ) |
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| (96 | ) | |||||||
Less treasury stock, at cost; 98,276 and 29,990 shares at September 30, 2019 and December 31, 2018, respectively |
| (433 | ) |
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| (96 | ) | |||||||
Total ORBCOMM Inc. stockholders' equity |
| 248,925 |
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| 281,221 |
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| 239,311 |
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| 256,832 |
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Noncontrolling interest |
| 697 |
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| 647 |
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Noncontrolling interests |
| 1,269 |
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| 1,026 |
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Total equity |
| 249,622 |
|
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| 281,868 |
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| 240,580 |
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| 257,858 |
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Total liabilities and equity | $ | 592,189 |
|
| $ | 506,154 |
| $ | 587,712 |
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| $ | 586,459 |
|
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
|
| Quarter Ended September 30, |
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| Nine Months Ended September 30, |
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| Quarters Ended September 30, |
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| Nine Months Ended September 30, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Revenues: |
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Service revenues |
| $ | 35,040 |
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| $ | 28,846 |
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| $ | 95,629 |
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| $ | 83,454 |
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| $ | 40,550 |
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| $ | 38,473 |
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| $ | 119,295 |
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| $ | 114,940 |
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Product sales |
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| 34,326 |
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| 17,442 |
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| 82,615 |
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| 56,458 |
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| 28,643 |
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| 32,569 |
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| 83,036 |
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| 94,863 |
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Total revenues |
|
| 69,366 |
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| 46,288 |
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| 178,244 |
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| 139,912 |
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| 69,193 |
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| 71,042 |
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| 202,331 |
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| 209,803 |
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Cost of revenues, exclusive of depreciation and amortization shown below: |
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Cost of services |
|
| 13,638 |
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| 9,791 |
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| 33,856 |
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| 28,330 |
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|
| 12,568 |
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| 12,764 |
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| 39,123 |
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| 40,704 |
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Cost of product sales |
|
| 29,676 |
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| 13,218 |
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| 67,614 |
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| 41,868 |
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| 19,640 |
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| 24,679 |
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| 58,275 |
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| 73,363 |
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Operating expenses: |
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Selling, general and administrative |
|
| 13,755 |
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| 12,031 |
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| 39,329 |
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| 34,843 |
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| 18,211 |
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| 14,823 |
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| 52,842 |
|
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| 51,352 |
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Product development |
|
| 2,453 |
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| 1,217 |
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| 5,964 |
|
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| 5,126 |
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| 3,686 |
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| 3,816 |
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| 11,385 |
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| 9,671 |
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Depreciation and amortization |
|
| 12,041 |
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| 11,158 |
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| 34,463 |
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| 31,668 |
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| 12,794 |
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| 12,081 |
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| 37,998 |
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| 36,146 |
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Impairment loss - satellite network |
|
| 31,224 |
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| 10,680 |
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| 31,224 |
|
|
| 10,680 |
| ||||||||||||||||
Acquisition - related and integration costs |
|
| 800 |
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| 246 |
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| 2,290 |
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| 1,179 |
| ||||||||||||||||
Loss from operations |
|
| (34,221 | ) |
|
| (12,053 | ) |
|
| (36,496 | ) |
|
| (13,782 | ) | ||||||||||||||||
Acquisition-related and integration costs |
|
| 4 |
|
|
| 395 |
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|
| 693 |
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| 1,495 |
| ||||||||||||||||
Income (loss) from operations |
|
| 2,290 |
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| 2,484 |
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| 2,015 |
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| (2,928 | ) | ||||||||||||||||
Other income (expense): |
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Interest income |
|
| 266 |
|
|
| 100 |
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|
| 522 |
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| 283 |
|
|
| 444 |
|
|
| 648 |
|
|
| 1,408 |
|
|
| 1,576 |
|
Other (expense) income |
|
| (32 | ) |
|
| 426 |
|
|
| (210 | ) |
|
| 335 |
| ||||||||||||||||
Other income (expense) |
|
| 188 |
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|
| 120 |
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| 130 |
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|
| 108 |
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Interest expense |
|
| (5,197 | ) |
|
| (2,471 | ) |
|
| (12,466 | ) |
|
| (6,615 | ) |
|
| (5,287 | ) |
|
| (5,232 | ) |
|
| (15,850 | ) |
|
| (15,733 | ) |
Loss on debt extinguishment |
|
| — |
|
|
| — |
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| (3,868 | ) |
|
| — |
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Total other expense |
|
| (4,963 | ) |
|
| (1,945 | ) |
|
| (16,022 | ) |
|
| (5,997 | ) |
|
| (4,655 | ) |
|
| (4,464 | ) |
|
| (14,312 | ) |
|
| (14,049 | ) |
Loss before income taxes |
|
| (39,184 | ) |
|
| (13,998 | ) |
|
| (52,518 | ) |
|
| (19,779 | ) |
|
| (2,365 | ) |
|
| (1,980 | ) |
|
| (12,297 | ) |
|
| (16,977 | ) |
Income taxes |
|
| 479 |
|
|
| (9 | ) |
|
| 1,192 |
|
|
| 369 |
|
|
| 1,504 |
|
|
| 1,242 |
|
|
| 3,354 |
|
|
| 3,410 |
|
Net loss |
|
| (39,663 | ) |
|
| (13,989 | ) |
|
| (53,710 | ) |
|
| (20,148 | ) |
|
| (3,869 | ) |
|
| (3,222 | ) |
|
| (15,651 | ) |
|
| (20,387 | ) |
Less: Net income attributable to the noncontrolling interests |
|
| 19 |
|
|
| 52 |
|
|
| 55 |
|
|
| 158 |
| ||||||||||||||||
Less: Net income attributable to noncontrolling interests |
|
| 144 |
|
|
| 73 |
|
|
| 271 |
|
|
| 216 |
| ||||||||||||||||
Net loss attributable to ORBCOMM Inc. |
| $ | (39,682 | ) |
| $ | (14,041 | ) |
| $ | (53,765 | ) |
| $ | (20,306 | ) |
| $ | (4,013 | ) |
| $ | (3,295 | ) |
| $ | (15,922 | ) |
| $ | (20,603 | ) |
Net loss attributable to ORBCOMM Inc. common stockholders |
| $ | (39,694 | ) |
| $ | (14,048 | ) |
| $ | (53,777 | ) |
| $ | (20,313 | ) |
| $ | (4,025 | ) |
| $ | (3,295 | ) |
| $ | (15,934 | ) |
| $ | (20,614 | ) |
Per share information-basic: |
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Net loss attributable to ORBCOMM Inc. common stockholders |
| $ | (0.54 | ) |
| $ | (0.20 | ) |
| $ | (0.74 | ) |
| $ | (0.29 | ) |
| $ | (0.05 | ) |
| $ | (0.04 | ) |
| $ | (0.20 | ) |
| $ | (0.27 | ) |
Per share information-diluted: |
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Net loss attributable to ORBCOMM Inc. common stockholders |
| $ | (0.54 | ) |
| $ | (0.20 | ) |
| $ | (0.74 | ) |
| $ | (0.29 | ) |
| $ | (0.05 | ) |
| $ | (0.04 | ) |
| $ | (0.20 | ) |
| $ | (0.27 | ) |
Weighted average common shares outstanding: |
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Basic |
|
| 73,762 |
|
|
| 70,997 |
|
|
| 72,396 |
|
|
| 70,866 |
|
|
| 79,695 |
|
|
| 78,649 |
|
|
| 79,591 |
|
|
| 77,158 |
|
Diluted |
|
| 73,762 |
|
|
| 70,997 |
|
|
| 72,396 |
|
|
| 70,866 |
|
|
| 79,695 |
|
|
| 78,649 |
|
|
| 79,591 |
|
|
| 77,158 |
|
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
|
| Quarter Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net loss |
| $ | (39,663 | ) |
| $ | (13,989 | ) |
| $ | (53,710 | ) |
| $ | (20,148 | ) |
| $ | (3,869 | ) |
| $ | (3,222 | ) |
| $ | (15,651 | ) |
| $ | (20,387 | ) |
Other comprehensive income - Foreign currency translation adjustments |
|
| 154 |
|
|
| 191 |
|
|
| 765 |
|
|
| 863 |
| ||||||||||||||||
Other comprehensive income |
|
| 154 |
|
|
| 191 |
|
|
| 765 |
|
|
| 863 |
| ||||||||||||||||
Other comprehensive loss - foreign currency translation adjustments |
|
| (561 | ) |
|
| (159 | ) |
|
| (779 | ) |
|
| (561 | ) | ||||||||||||||||
Other comprehensive loss |
|
| (561 | ) |
|
| (159 | ) |
|
| (779 | ) |
|
| (561 | ) | ||||||||||||||||
Comprehensive loss |
|
| (39,509 | ) |
|
| (13,798 | ) |
|
| (52,945 | ) |
|
| (19,285 | ) |
|
| (4,430 | ) |
|
| (3,381 | ) |
|
| (16,430 | ) |
|
| (20,948 | ) |
Less: Comprehensive (income) attributable to noncontrolling interests |
|
| (19 | ) |
|
| (51 | ) |
|
| (50 | ) |
|
| (151 | ) | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interests |
|
| (133 | ) |
|
| (71 | ) |
|
| (243 | ) |
|
| (209 | ) | ||||||||||||||||
Comprehensive loss attributable to ORBCOMM Inc. |
| $ | (39,528 | ) |
| $ | (13,849 | ) |
| $ | (52,995 | ) |
| $ | (19,436 | ) |
| $ | (4,563 | ) |
| $ | (3,452 | ) |
| $ | (16,673 | ) |
| $ | (21,157 | ) |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||
Cash flows from operating activities: |
|
|
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|
|
|
|
|
|
|
|
|
Net loss | $ | (53,710 | ) |
| $ | (20,148 | ) |
| $ | (15,651 | ) |
| $ | (20,387 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in allowance for doubtful accounts |
| 241 |
|
|
| 146 |
|
|
| 1,766 |
|
|
| 2,995 |
|
Change in the fair value of acquisition-related contingent consideration |
| (1,276 | ) |
|
| (213 | ) |
|
| (2,063 | ) |
|
| (5,494 | ) |
Amortization of the fair value adjustment related to warranty liabilities acquired through acquisitions |
| — |
|
|
| (57 | ) | ||||||||
Amortization and write off of deferred financing fees |
| 2,912 |
|
|
| 611 |
| ||||||||
Amortization and write-off of deferred financing fees |
|
| 582 |
|
|
| 582 |
| |||||||
Depreciation and amortization |
| 34,463 |
|
|
| 31,668 |
|
|
| 37,998 |
|
|
| 36,146 |
|
Impairment loss - satellite network |
| 31,224 |
|
|
| 10,680 |
| ||||||||
Stock-based compensation |
| 4,314 |
|
|
| 3,824 |
|
|
| 5,406 |
|
|
| 5,747 |
|
Foreign exchange loss |
| 366 |
|
|
| 482 |
| ||||||||
Foreign exchange (gain) loss |
|
| (194 | ) |
|
| 64 |
| |||||||
Deferred income taxes |
| 758 |
|
|
| 538 |
|
|
| (1,097 | ) |
|
| (1,847 | ) |
Other |
|
| 1,971 |
|
|
| — |
| |||||||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| (18,010 | ) |
|
| (3,925 | ) |
|
| (5,972 | ) |
|
| (14,490 | ) |
Inventories |
| (11,893 | ) |
|
| (336 | ) |
|
| (3,973 | ) |
|
| 5,554 |
|
Prepaid expenses and other assets |
| (4,156 | ) |
|
| 134 |
|
|
| (3,338 | ) |
|
| 601 |
|
Accounts payable and accrued liabilities |
| 8,929 |
|
|
| (1,013 | ) |
|
| 6,960 |
|
|
| (11,493 | ) |
Deferred revenue |
| (1,106 | ) |
|
| (2,540 | ) |
|
| (348 | ) |
|
| 1,687 |
|
Other liabilities |
| (262 | ) |
|
| (664 | ) |
|
| (1,246 | ) |
|
| (595 | ) |
Net cash (used in) provided by operating activities |
| (7,206 | ) |
|
| 19,187 |
| ||||||||
Net cash provided by (used in) operating activities |
|
| 20,801 |
|
|
| (930 | ) | |||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired |
| (34,236 | ) |
|
| (3,452 | ) | ||||||||
Cash held for acquisition |
| (34,500 | ) |
|
| — |
| ||||||||
Capital expenditures |
| (21,410 | ) |
|
| (22,519 | ) |
|
| (16,234 | ) |
|
| (17,163 | ) |
Change in restricted cash |
| — |
|
|
| 1,000 |
| ||||||||
Other |
| (650 | ) |
|
| (198 | ) |
|
| — |
|
|
| 650 |
|
Net cash (used in) investing activities |
| (90,796 | ) |
|
| (25,169 | ) | ||||||||
Net cash used in investing activities |
|
| (16,234 | ) |
|
| (16,513 | ) | |||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
| 15,000 |
|
|
| — |
| ||||||||
Payment of long-term debt |
| (150,000 | ) |
|
| — |
| ||||||||
Proceeds received from issuance of long-term debt |
| 250,000 |
|
|
| — |
| ||||||||
Cash paid for debt issuance costs |
| (5,359 | ) |
|
| — |
| ||||||||
Proceeds from employee stock purchase plan |
| 529 |
|
|
| — |
| ||||||||
Payment of deferred purchase consideration |
| (347 | ) |
|
| (342 | ) | ||||||||
Net cash provided by (used in) financing activities |
| 109,823 |
|
|
| (342 | ) | ||||||||
Proceeds from public offering of common stock, net of underwriters’ discounts and commissions and offering costs of $1,705 |
|
| — |
|
|
| 27,967 |
| |||||||
Payments under revolving credit facility |
|
| — |
|
|
| (14,000 | ) | |||||||
Proceeds under revolving credit facility |
|
| — |
|
|
| 14,000 |
| |||||||
Proceeds from issuance of common stock under employee stock purchase plan |
|
| 604 |
|
|
| 668 |
| |||||||
Purchases of common stock under share repurchase program |
|
| (7,875 | ) |
|
| — |
| |||||||
Net cash (used in) provided by financing activities |
|
| (7,271 | ) |
|
| 28,635 |
| |||||||
Effect of exchange rate changes on cash and cash equivalents |
| 568 |
|
|
| 520 |
|
|
| (158 | ) |
|
| (128 | ) |
Net increase (decrease) in cash and cash equivalents |
| 12,389 |
|
|
| (5,804 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents |
|
| (2,862 | ) |
|
| 11,064 |
| |||||||
Beginning of period |
| 25,023 |
|
|
| 27,077 |
|
|
| 53,766 |
|
|
| 34,830 |
|
End of period | $ | 37,412 |
|
| $ | 21,273 |
|
| $ | 50,904 |
|
| $ | 45,894 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for |
|
|
|
|
|
|
| ||||||||
Cash paid for: |
|
|
|
|
|
|
|
| |||||||
Interest | $ | 3,411 |
|
| $ | 6,581 |
|
| $ | 10,000 |
|
| $ | 10,036 |
|
Income taxes | $ | 508 |
|
| $ | (110 | ) |
| $ | 2,439 |
|
| $ | 3,221 |
|
Supplemental schedule of noncash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid | $ | 725 |
|
| $ | 1,090 |
|
| $ | 785 |
|
| $ | 332 |
|
Capital expenditure milestone payable incurred not yet paid | $ | — |
|
| $ | 5,070 |
| ||||||||
Stock-based compensation related to capital expenditures | $ | 357 |
|
| $ | 219 |
|
| $ | 539 |
|
| $ | 410 |
|
Series A convertible preferred stock dividend paid in kind | $ | 12 |
|
| $ | 7 |
| ||||||||
Common stock issued in connection with the acquisition of businesses | $ | 764 |
|
| $ | — |
| ||||||||
Common stock issued as payment for contingent consideration | $ | 347 |
|
| $ | 352 |
| ||||||||
Acquisition-related contingent consideration | $ | 9,835 |
|
| $ | 514 |
| ||||||||
Series A convertible preferred stock dividend paid-in-kind |
| $ | 12 |
|
| $ | 11 |
| |||||||
Common stock issued as payment for MPUs |
| $ | 502 |
|
| $ | 827 |
|
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
6
Condensed Consolidated Statements of Changes in Equity
Quarters Ended September 30, 2019 and 2018
(in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Series A convertible |
|
|
|
|
|
|
|
|
|
| Additional |
|
| other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Preferred stock |
|
| Common stock |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| Treasury stock |
|
| Noncontrolling |
|
| Total |
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| income (loss) |
|
| deficit |
|
| Shares |
|
| Amount |
|
| interests |
|
| equity |
| |||||||||||
Balances, July 1, 2019 |
|
| 39,442 |
|
| $ | 394 |
|
|
| 79,753,545 |
|
| $ | 80 |
|
| $ | 454,587 |
|
| $ | (582 | ) |
| $ | (204,416 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 1,136 |
|
| $ | 251,103 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 46,450 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,782 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,782 |
|
Common stock repurchased under share repurchase program |
|
| — |
|
|
| — |
|
|
| (1,513,743 | ) |
|
| (2 | ) |
|
| (7,536 | ) |
|
| — |
|
|
| — |
|
|
| 68,286 |
|
|
| (337 | ) |
|
| — |
|
|
| (7,875 | ) |
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,013 | ) |
|
| — |
|
|
| — |
|
|
| 144 |
|
|
| (3,869 | ) |
Series A convertible preferred stock dividend |
|
| 1,182 |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (550 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11 | ) |
|
| (561 | ) |
Balances, September 30, 2019 |
|
| 40,624 |
|
| $ | 406 |
|
|
| 78,286,252 |
|
| $ | 78 |
|
| $ | 448,833 |
|
| $ | (1,132 | ) |
| $ | (208,441 | ) |
|
| 98,276 |
|
| $ | (433 | ) |
| $ | 1,269 |
|
| $ | 240,580 |
|
Balances, July 1, 2018 |
|
| 38,672 |
|
| $ | 387 |
|
|
| 78,593,002 |
|
| $ | 79 |
|
| $ | 444,069 |
|
| $ | (141 | ) |
| $ | (183,564 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 871 |
|
| $ | 261,605 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 29,013 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,338 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,338 |
|
Exercise of SARs |
|
| — |
|
|
| — |
|
|
| 177,358 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,295 | ) |
|
| — |
|
|
| — |
|
|
| 73 |
|
|
| (3,222 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (157 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| (159 | ) |
Balances, September 30, 2018 |
|
| 38,672 |
|
| $ | 387 |
|
|
| 78,799,373 |
|
| $ | 79 |
|
| $ | 446,407 |
|
| $ | (298 | ) |
| $ | (186,859 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 942 |
|
| $ | 260,562 |
|
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
7
ORBCOMM Inc.
Condensed Consolidated Statements of Changes in Equity
Nine Months Ended 2017September 30, 2019 and 20162018
(in thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Series A convertible |
|
|
|
|
|
|
|
|
|
| Additional |
|
| other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Preferred stock |
|
| Common stock |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| Treasury stock |
|
| Noncontrolling |
|
| Total |
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| income |
|
| deficit |
|
| Shares |
|
| Amount |
|
| interests |
|
| equity |
| |||||||||||
Balances, January 1, 2017 |
|
| 36,466 |
|
| $ | 364 |
|
|
| 71,111,863 |
|
| $ | 71 |
|
| $ | 386,920 |
|
| $ | (1,089 | ) |
| $ | (104,949 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 647 |
|
| $ | 281,868 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 566,156 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,058 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,058 |
|
Proceeds received from issuance of common stock in connection with a private offering |
|
| — |
|
|
| — |
|
|
| 1,552,795 |
|
|
| 2 |
|
|
| 14,998 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 15,000 |
|
Issuance of common stock in connection with the acquisition of Inthinc |
|
| — |
|
|
| — |
|
|
| 76,796 |
|
|
| — |
|
|
| 764 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 764 |
|
Series A convertible preferred stock dividend |
|
| 1,078 |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of common stock under employees stock purchase plan |
|
| — |
|
|
| — |
|
|
| 75,888 |
|
|
| — |
|
|
| 529 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 529 |
|
Payment of contingent consideration |
|
| — |
|
|
| — |
|
|
| 40,372 |
|
|
| — |
|
|
| 347 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 347 |
|
Exercise of SARs |
|
| — |
|
|
| — |
|
|
| 690,449 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (53,765 | ) |
|
| — |
|
|
| — |
|
|
| 55 |
|
|
| (53,710 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 770 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| 765 |
|
Balances, September 30, 2017 |
|
| 37,544 |
|
| $ | 376 |
|
|
| 74,114,319 |
|
| $ | 74 |
|
| $ | 407,616 |
|
| $ | (319 | ) |
| $ | (158,726 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 697 |
|
| $ | 249,622 |
|
Balances, January 1, 2016 |
|
| 35,759 |
|
| $ | 357 |
|
|
| 70,613,642 |
|
| $ | 71 |
|
| $ | 381,659 |
|
| $ | (1,174 | ) |
| $ | (81,424 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 363 |
|
| $ | 299,756 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 261,730 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,417 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,417 |
|
Conversion of preferred stock to common stock |
|
| (708 | ) |
|
| (7 | ) |
|
| 1,178 |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Series A convertible preferred stock dividend |
|
| 706 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Payment of contingent consideration |
|
| — |
|
|
| — |
|
|
| 35,464 |
|
|
| — |
|
|
| 352 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 352 |
|
Exercise of SARs |
|
| — |
|
|
| — |
|
|
| 131,774 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,306 | ) |
|
| — |
|
|
| — |
|
|
| 158 |
|
|
| (20,148 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 870 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| 863 |
|
Balances, September 30, 2016 |
|
| 35,757 |
|
| $ | 357 |
|
|
| 71,043,788 |
|
| $ | 71 |
|
| $ | 385,435 |
|
| $ | (304 | ) |
| $ | (101,737 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 514 |
|
| $ | 284,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Series A convertible |
|
|
|
|
|
|
|
|
|
| Additional |
|
| other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Preferred stock |
|
| Common stock |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| Treasury stock |
|
| Noncontrolling |
|
| Total |
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| income (loss) |
|
| deficit |
|
| Shares |
|
| Amount |
|
| interests |
|
| equity |
| |||||||||||
Balances, January 1, 2019 |
|
| 39,442 |
|
| $ | 394 |
|
|
| 79,008,243 |
|
| $ | 79 |
|
| $ | 449,343 |
|
| $ | (381 | ) |
| $ | (192,507 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 1,026 |
|
| $ | 257,858 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 614,132 |
|
|
| 1 |
|
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| 5,920 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,920 |
|
Issuance of common stock under employee stock purchase plan |
|
| — |
|
|
| — |
|
|
| 113,703 |
|
|
| — |
|
|
| 604 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 604 |
|
Common stock issued as payment for MPUs |
|
| — |
|
|
| — |
|
|
| 60,885 |
|
|
| — |
|
|
| 502 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 502 |
|
Common stock repurchased under share repurchase program |
|
| — |
|
|
| — |
|
|
| (1,513,743 | ) |
|
| (2 | ) |
|
| (7,536 | ) |
|
| — |
|
|
| — |
|
|
| 68,286 |
|
|
| (337 | ) |
|
| — |
|
|
| (7,875 | ) |
Series A convertible preferred stock dividend |
|
| 1,182 |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercise of SARs |
|
| — |
|
|
| — |
|
|
| 3,032 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,922 | ) |
|
| — |
|
|
| — |
|
|
| 271 |
|
|
| (15,651 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (751 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28 | ) |
|
| (779 | ) |
Balances, September 30, 2019 |
|
| 40,624 |
|
| $ | 406 |
|
|
| 78,286,252 |
|
| $ | 78 |
|
| $ | 448,833 |
|
| $ | (1,132 | ) |
| $ | (208,441 | ) |
|
| 98,276 |
|
| $ | (433 | ) |
| $ | 1,269 |
|
| $ | 240,580 |
|
Balances, January 1, 2018 |
|
| 37,544 |
|
| $ | 376 |
|
|
| 74,436,579 |
|
| $ | 74 |
|
| $ | 411,298 |
|
| $ | 256 |
|
| $ | (166,245 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 733 |
|
| $ | 246,396 |
|
Vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
| 519,362 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,650 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,650 |
|
Proceeds from public offering of common stock, net of underwriters' discounts and commissions and offering costs of $1,705 |
|
| — |
|
|
| — |
|
|
| 3,450,000 |
|
|
| 3 |
|
|
| 27,964 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27,967 |
|
Common stock issued as payment for MPUs |
|
| — |
|
|
| — |
|
|
| 81,277 |
|
|
| — |
|
|
| 827 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 827 |
|
Issuance of common stock under employee stock purchase plan |
|
| — |
|
|
| — |
|
|
| 81,525 |
|
|
| — |
|
|
| 668 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 668 |
|
Series A convertible preferred stock dividend |
|
| 1,128 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercise of SARs |
|
| — |
|
|
| — |
|
|
| 230,630 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,603 | ) |
|
| — |
|
|
| — |
|
|
| 216 |
|
|
| (20,387 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (554 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| (561 | ) |
Balances, September 30, 2018 |
|
| 38,672 |
|
| $ | 387 |
|
|
| 78,799,373 |
|
| $ | 79 |
|
| $ | 446,407 |
|
| $ | (298 | ) |
| $ | (186,859 | ) |
|
| 29,990 |
|
| $ | (96 | ) |
| $ | 942 |
|
| $ | 260,562 |
|
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
78
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(All amounts in thousands, except share amounts, per share amounts or unless otherwise noted)
1. Organization and Business
ORBCOMM Inc. (“ORBCOMM” or the “Company”), a Delaware corporation, is a global provider of industrial Internet of Things (“IoT”) solutions, including network connectivity, devices, device management and web reporting applications. The Company’s industrial IoT products and services are designed to track, monitor, control and enhance security for a variety of assets, such as trailers, trucks, rail cars, sea containers, power generators, fluid tanks, marine vessels, diesel or electric powered generators (“gensets”), oil and gas wells, pipeline monitoring equipment, irrigation control systems and utility meters, in industries forthe transportation &and supply chain, heavy equipment, fixed asset monitoring, and maritime and government.industries, as well as for governments. Additionally, the Company provides satellite Automatic Identification Service (“AIS”) data services to assist in vessel navigation and to improve maritime safety for government and commercial customers worldwide. Through 2 acquisitions in 2017, the Company added vehicle fleet management, as well as in-cab and vehicle fleet solutions to its transportation product portfolio. The Company provides theseits services using multiple network platforms, including aits own constellation of low-Earth orbit (“LEO”) satellites and accompanying ground infrastructure, as well as terrestrial-based cellular communication services obtained through reseller agreements with major cellular (Tier One) wireless providers. The Company also offers customer solutions utilizing additional satellite network service options that the Company obtains through service agreements entered into with multiple mobile satellite providers. The Company’s satellite-based customer solution offerings use small, low power,low-power, mobile satellite subscriber communicators for remote asset connectivity, and the Company’s terrestrial-based solutions utilize cellular data modems with subscriber identity modules (“SIMS”SIMs”). The Company also resells service using the two-way Inmarsat plc satellite network to provide higher bandwidth, low-latency satellite products and services, leveraging the Company’s IsatDataPro (“IDP”) technology. The Company’s customer solutions provide access to data gathered over these systems via connections to other public or private networks, including the Internet. The Company providesis dedicated to providing what it believes isare the most versatile, leading-edge industrial IoT solutions in the Company’sits markets to enable its customers to run their businessbusinesses more efficiently.
2. Summary of Significant Accounting PrinciplesPolicies
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 (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. The accompanying financial statements are unaudited and, in the opinion of management, include all adjustments (including normal recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations, comprehensive income 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 inon the condensed consolidated balance sheets.
Investments
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 Company’s proportionate share of the net income or loss of such investeeinvestees is reflected in the Company’s condensed consolidated results of operations. When the Company does not exercise significant influence over the investee, the investment is accounted for under the cost method.
Although the Company owns interests in companies that it accounts for pursuant to the equity method, the investments in those entities had no0 carrying value as of September 30, 20172019 and December 31, 2016.2018. The Company has no0 guarantees or other funding obligations to those entities. Theentities and the Company had no0 equity in the earnings or losses of those investees for the quarters and nine months ended September 30, 20172019 and 2016.2018.
89
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Acquisition-relatedAcquisition-Related and Integration Costs
Acquisition-related and integration costs are expensed as incurred and are presented separately on the condensed consolidated statement of operations. These costs may include professional services expenses and identifiable integration costs directly attributable to acquisitions.
Revenue Recognition
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”). The Company reviewed its contract portfolio and determined its application of ASU 2014-09 did not have a material impact on the comparability of revenue recognized prior to the adoption of ASU 2014-09.
The Company derives recurring service revenues primarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on its satellite network, other satellite networks and cellular wireless networks that the Company resells to its resellers, Market Channel Partners (“MCPs”) and Market Channel Affiliates (“MCAs”), and direct customers. In addition, the Company earns recurring service revenues from subscription-based services providing recurring AIS data services to government and commercial customers worldwide. The Company also earns recurring service revenues from activations of subscriber communicators and SIMs, optional separately-priced extended warranty service agreements extending beyond the initial warranty period, typically one year, which are billed to the customer upon shipment of a subscriber communicator, and royalty fees relating to acquisitions.the manufacture of subscriber communicators under a manufacturing agreement.
Service revenues derived from usage fees are generally based upon the data transmitted by a customer, the overall number of subscriber communicators and/or SIMs activated by each customer, and whether the Company provides services through its value-added portal. Using the output method, these service revenues are recognized over time, as services are rendered, or at a point in time, based on the contract terms. AIS service revenues are generated over time from monthly subscription-based services supplying AIS data to its customers and resellers, using the output method. In addition, data analytics service revenues are generated from monthly subscription-based services supplying analytical data to its customers, using the output method. Revenues from the activation of both subscriber communicators and SIMs are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over three years, the estimated life of the subscriber communicator. Revenues from separately-priced extended warranty service agreements extending beyond the initial warranty period, typically one year, are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over two to five years. Revenues generated from royalties relating to the manufacture of subscriber communicators by third parties are recognized as earned when the third party notifies the Company of the units it has manufactured and a unique serial number is assigned to each unit by the Company.
The Company earns other service revenues from installation services and engineering, technical and management support services. Revenues generated from installation services are recognized at a point in time when the services are completed. Revenues generated from engineering, technical and management support services to customers are recognized over time as the service is provided. The Company also generates other service revenues through the sale of software licenses to its customers, which are recognized at a point in time when the license is provided to the customer.
Product sales are derived from sales of industrial IoT subscriber communicators, including telematics devices, modems or cellular wireless SIMs (for the Company’s terrestrial-communication services) to the Company’s resellers (i.e., MCPs and MCAs) and direct customers. Product sales are recognized at a point in time when title transfers, when the products are shipped or when customers accept the products, depending on the specific contractual terms. Sales of subscriber communicators and SIMs are not subject to return, and title and risk of loss pass to the customer generally at the time of shipment.
Amounts received prior to the performance of services under customer contracts are recognized as deferred revenues and revenue recognition is deferred until such time that all revenue recognition criteria have been met. Deferred revenue as of September 30, 2019 and December 31, 2018 consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Service activation fees |
| $ | 3,026 |
|
| $ | 2,813 |
|
Prepaid services |
|
| 6,891 |
|
|
| 7,816 |
|
Extended warranty revenues |
|
| 1,162 |
|
|
| 796 |
|
|
|
| 11,079 |
|
|
| 11,425 |
|
Less current portion |
|
| (2,308 | ) |
|
| (5,954 | ) |
Long-term portion |
| $ | 8,771 |
|
| $ | 5,471 |
|
10
During the quarter and nine months ended September 30, 2019, the Company recognized revenue of $1,330 and $4,752, respectively, which was included as deferred revenue as of December 31, 2018.
Shipping costs billed to customers are included in product sales and the related costs are included as cost of product sales.
The Company generates revenue from leasing arrangements of subscriber communicators, under FASB Accounting Standards Codification (“ASC”) Topic 842 “Leases” (“ASC 842”), using the estimated selling prices for each of the deliverables recognized. Product and installation revenues associated with these arrangements are recognized upon shipment or installation of the subscriber communicator, depending on the specific contractual terms. Service and warranty revenues 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.
The following table summarizes the components of revenue from contracts with customers, as well as revenue recognized under ASC 842:
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenue from contracts with customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring service revenues |
| $ | 39,161 |
|
| $ | 37,192 |
|
| $ | 115,196 |
|
| $ | 111,010 |
|
Other service revenues |
|
| 1,389 |
|
|
| 1,281 |
|
|
| 4,099 |
|
|
| 3,930 |
|
Total service revenues |
|
| 40,550 |
|
|
| 38,473 |
|
|
| 119,295 |
|
|
| 114,940 |
|
Product sales |
|
| 27,157 |
|
|
| 31,136 |
|
|
| 78,257 |
|
|
| 90,017 |
|
Total revenue from contracts with customers |
|
| 67,707 |
|
|
| 69,609 |
|
|
| 197,552 |
|
|
| 204,957 |
|
Revenue recognized under ASC 842 |
|
| 1,486 |
|
|
| 1,433 |
|
|
| 4,779 |
|
|
| 4,846 |
|
Total revenues |
| $ | 69,193 |
|
| $ | 71,042 |
|
| $ | 202,331 |
|
| $ | 209,803 |
|
Revenue Recognition for Arrangements with Multiple Performance Obligations
The Company enters into contracts with its customers that include multiple performance obligations, which typically include subscriber communicators, monthly usage fees and optional extended warranty service agreements. The Company evaluates each item to determine whether it represents a promise to transfer a distinct good or service to the customer and therefore is a separate performance obligation under ASU 2014-09. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative stand-alone selling price of each performance obligation. The Company uses an observable price to determine the stand-alone selling price for each separate performance obligation when sold on its own or a cost-plus margin approach when an observable price is not available.
If an arrangement provided to a customer has a significant and incremental discount on future revenue, such discount is considered a performance obligation and a proportionate amount of the discount should be allocated to each element based on the relative stand-alone selling price of each element, regardless of the discount. The Company has determined that arrangements provided to its customers do not include significant and incremental discounts.
Fair Value of Financial Instruments
The Company has no financial assets or liabilities that are measured at fair value on a recurring basis. However, if certain triggering events occur, the Company is required to evaluate itsthe non-financial assets for impairment and any resulting asset impairment would require that a non-financial asset be recorded at the fair value. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)FASB ASC Topic 820 “Fair Value Measurement Disclosure,”Disclosure” prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1 –- unadjusted quoted prices for identical assets or liabilities traded in active markets; Level 2 –- inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3 –- unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.
The carrying valueamounts of the Company’s financial instruments, including cash, accounts receivable and accounts payable approximated their fair valuevalues due to the short-term nature of these items. As of September 30, 2017,2019, the fair value of the Senior Secured Notes, as defined below, is based on observable relevant market information. Fluctuation between the carrying amount and the fair value of the Company’s Senior Secured Notes (described in “Note 11 – Notes Payable”) were $250,000 and $268,125, respectively. The fair values of the Senior Secured Notes are based on observable relevant market information. Fluctuations between the carrying amounts and the fair values of the Senior Secured Notes for the period presented areis associated with changes in market interest rates. The Company may redeem all or part of the Senior Secured Notes at any time or from time to time at its option at specified redemption prices that would include “make-whole” premiums. Refer to “Note 1110 – Notes Payable” for more information.
11
The carrying amounts and fair values of the Company’s Senior Secured Notes are shown in the following table:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| ||||
Senior Secured Notes |
| $ | 250,000 |
|
| $ | 256,875 |
|
| $ | 250,000 |
|
| $ | 255,000 |
|
The fair value of the $1,343note payable - related party, $1,241 book value Note payable-related party isat September 30, 2019, has a de minimus.minimis value.
Concentration of Credit Risk
The Company’s customers are primarily commercial organizations. Accounts receivable are generally unsecured.
Accounts receivable are due in accordance with payment terms includedset forth in contracts negotiated with customers. Amounts due from customers are stated net of an allowance for doubtful accounts. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts are past due, the customer’s current ability to pay its obligations to the Company and the condition of the general economy and the industry as a whole. The Company writes-offwrites off accounts receivable when they are deemed uncollectible.
For the quarter ended September 30, 2017, JB Hunt Transport Services, Inc. (“JB Hunt Transport”) comprised 14.9% of the Company’s consolidated total revenues. There were no0 customers withwho generated revenues greater than 10% of the Company’s consolidated total revenues for the nine months ended September 30, 2017. There were no customers with revenues greater than 10% of the Company’s consolidated total revenues for the quarterquarters and nine months ended September 30, 2016.2019 and 2018.
TwoThere were 0 customers JB Hunt Transport and AT&T Solutions, Inc. comprised 11.5% and 10.2%, respectively,who generated accounts receivable greater than 10% of the Company’s consolidated accounts receivable as of September 30, 2017. One customer, Caterpillar, Inc.2019 and December 31, 2018.
The Company is dependent on 1 vendor, Sanmina Corporation (“Sanmina”), comprised 10.5%a contract manufacturer with significant operations in Mexico, for the manufacture of subscriber communicators that the Company designs and sells. For the quarters ended September 30, 2019 and 2018, approximately $18,974, or 66.2%, and $23,104, or 70.9%, respectively, of the Company’s consolidated accounts receivable asproduct sales was generated from the sale of December 31, 2016. the Company’s core products produced by Sanmina. For the nine months ended September 30, 2019 and 2018, approximately $54,286, or 65.4%, and $62,552, or 65.9%, respectively, of the Company’s product sales was generated from the sale of the Company’s core products produced by Sanmina.
As of September 30, 2017,2019, the Company did not maintain in-orbit insurance coverage for its ORBCOMM Generation 1 (“OG1”) or ORBCOMM Generation 2 (“OG2”) satellites to address the risk of potential systemic anomalies, failures or catastrophic events affecting its satellite constellation.
Inventories
Inventories are stated at the lower of cost or market,net realizable value, determined on a first-in, first-out basis.weighted average cost basis. At September 30, 20172019 and December 31, 2016,2018, inventory, net of inventory obsolescence, consisted primarily of finished goods and purchased parts to be utilized by its contract manufacturer totaling $29,863$30,958 and $14,531,$27,701, respectively, and $6,323 and $8,686, respectively, of raw materials net of inventory obsolescence. totaling $7,266 and $6,599, respectively. 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. A provision, recorded in cost of product sales on the Company’s condensed consolidated statementstatements of operations, is made for potential losses on slow movingslow-moving and obsolete inventories when identified.
9
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Valuation of Long-livedLong-Lived Assets
Property and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that thetheir carrying amount may not be recoverable. The Company measures recoverability by comparing the carrying amountamounts of the assets to the projected undiscounted cash flows the assets are expected to generate. An impairment loss is recognized to the extent thatthe carrying value exceeds the fair value.
The Company’s satellite constellation and related assets are evaluated as a single asset group whenever facts or circumstances indicate that the carrying value may not be recoverable. If indicators of impairment are identified, recoverability of long-lived assets is measured by comparing their carrying amount to the projected cash flows the assets are expected to generate.
Determining whether an impairment has occurred typically requires the use of significant estimates and assumptions, including the allocation of cash flows to assets or asset groups and, if required, an estimate of fair value for those assets or asset groups.
If a satellite were to fail while in-orbit, the resulting loss would be charged to expense in the period it is determined that the satellite is not recoverable. An impairment loss of $31,224 related to three of the Company’s OG2 satellites was recorded for the quarter ended September 30, 2017. Refer to “Note 6 – Satellite Network and Other Equipment”Equipment, Net” for more information.
12
Warranty Costs
The Company accrues for one-year warranty coverage on product sales estimated at the time of sale based on historical costs to repair or replace products for customers compared to historical product revenues.sales. The warranty accrual is included in accrued liabilities on the Company’s condensed consolidated balance sheet. sheets.
Separately-priced extended warranty coverage is recorded as warranty revenue over the term of the extended warranty coverage and the related warranty costs are recorded as incurred during the coverage period.
Warranty coverage that includes additional services, such as repairs and maintenance of the product, is treated as a separate performance obligation and the related warranty and repairs/maintenance costs are recorded as incurred.
Refer to “Note 8 – Accrued Liabilities” for more information.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB deferred the effective date of ASU No. 2014-09 for all entities by one year. As a result, the new standard is effective for the Company on January 1, 2018. Early adoption prior to the original effective date is not permitted. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has substantially completed its review of its contract portfolio and is currently finalizing its evaluation of the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company will complete this process during the fourth quarter of 2017 and anticipates a modified retrospective application upon adoption in the first quarter of 2018.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which is effective for the fiscal years beginning after December 15, 2018. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financingfinance and operating leases, along with additional qualitative and quantitative disclosures. Early adoption is permitted. The Company is inadopted the processguidance prospectively as of evaluatingJanuary 1, 2019, the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, if any.
In August 2016, the FASB issued ASU No. 2016-15 “Statementsdate of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”) and is effective for the fiscal years beginning after December 15, 2017. ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Early adoption is permitted. The adoption of this standard, which is required to be applied using the retrospective transition method, is not expected to have a material impact on the Company’s consolidated statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) and is effective for the fiscal years beginning after December 15, 2017. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the natureinitial application. As part of the restrictions. The guidance requires application using a retrospective transition method.adoption, the Company elected the package of practical expedients, the short-term lease exemption and the practical expedient to not separate lease and non-lease components. The Company intendscompleted its comprehensive review of its lease portfolio for all lease types and embedded leases throughout each region. Refer to adopt this standard on January 1, 2018 and expects the retrospective application to impact its classification of certain restricted cash activity in its statement
10
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
of cash flows in future interim filings. The Company is evaluating other potential effects, if any, that the adoption of this guidance will have on the Company’s financial statements.“Note 15 – Leases” for more information.
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) and is, which will be effective for fiscal years beginning with the fiscal year endingafter December 31, 2020.15, 2019. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. AUnder ASU 2017-04, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The adoption of this standard, which will be applied prospectively, is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which will be effective for fiscal years beginning after December 15, 2019. ASU 2016-13 introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets. Upon initial recognition, an entity will be required to estimate a credit loss expected over the life of an exposure. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
3. Acquisitions
inthinc Technology Solutions, Inc.
On June 9, 2017, pursuant to the asset purchase agreement (the “Asset Purchase Agreement”) entered into by the Company and inthinc, Inc., inthinc Technology Solutions, Inc., tiwi, Inc., inthinc Telematics, Inc., DriveAware, Inc., inthinc Chile, SP and inthinc Investors, L.P. (collectively, “inthinc”“Inthinc”), the Company completed the acquisition of inthincInthinc for an aggregate consideration of (i) $34,236 in cash subject to net working capital adjustments, on a debt free, cash freedebt-free, cash-free basis; (ii) issuance of 76,796 shares of the Company’s common stock, valued at $9.95 per share, which reflected a 2020-trading day trading average price of the Company’s stock ending June 8, 2017; and (iii) additional contingent consideration of up to $25,000, subject to certain operational milestones, payable in stock or a combination of cash and stock at the Company’s election (the “inthinc Acquisition”). As the inthinc Acquisition was effective on June 9, 2017, the results of operations of inthinc were included in the condensed consolidated financial statements beginning June 9, 2017.
Preliminary Estimated Purchase Price Allocation
The inthinc Acquisition has been accounted for using the acquisition method of accounting. This method requires that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The excess of the preliminary purchase price over the preliminary net assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and the estimates and assumptions are subject to change during the one year measurement period. During the nine months ended September 30, 2017, the Company recorded a measurement period adjustment related to the intangible asset valuation and other working capital accounts, which resulted in a decrease in goodwill of $4,403. The total consideration for the inthinc Acquisition was $44,835, of which $9,835 represents acquisition date contingent consideration at fair value, in a debt free, cash free transaction. The preliminary estimated purchase price allocation for the acquisition is as follows:
|
| Amount |
| |
Accounts receivable |
| $ | 1,833 |
|
Inventories |
|
| 906 |
|
Prepaid expenses and other current assets |
|
| 112 |
|
Property, plant and equipment |
|
| 258 |
|
Lease receivable |
|
| 5,812 |
|
Intangible assets |
|
| 24,300 |
|
Total identifiable assets acquired |
|
| 33,221 |
|
Accounts payable |
|
| 5,214 |
|
Accrued expenses |
|
| 506 |
|
Other current and non-current liabilities |
|
| 1,627 |
|
Total liabilities assumed |
|
| 7,347 |
|
Net identifiable assets acquired |
|
| 25,874 |
|
Goodwill |
|
| 18,961 |
|
Total preliminary purchase price |
| $ | 44,835 |
|
Intangible Assets
The estimated fair value of the technology intangible assets was determined using the “relief from royalty method” under the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on the costs savings that are
11
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
available through ownership of the asset by the avoidance of paying royalties to license the use of the assets from another owner. The estimated fair value of the customer lists was determined using the “excess earnings method” under the income approach, which represents the total income to be generated by the asset. Some of the more significant assumptions inherent in the development of those asset valuations include the projected revenue associated with the asset, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, as well as other factors. The discount rate used to arrive at the present value at the acquisition date of the customer lists and technology was 12%. The remaining useful lives of the technology were based on historical product development cycles, the projected rate of technology migration and a market participant’s use of these intangible assets and the pattern of projected economic benefit of this intangible asset. The remaining useful lives of customer lists were based on the customer attrition and the projected economic benefit of these customers.
|
| Estimated |
|
|
|
|
| |
|
| Useful life |
|
|
|
|
| |
|
| (years) |
|
| Amount |
| ||
Customer lists |
|
| 20 |
|
|
| 18,300 |
|
Technology |
|
| 10 |
|
|
| 6,000 |
|
|
|
|
|
|
| $ | 24,300 |
|
Goodwill
The inthinc Acquisition allows the Company to offer fleet management and driver safety solutions to more than 100 enterprises and industrial companies around the world, who operate large commercial vehicle fleets. These factors contributed to a preliminary estimated purchase price resulting in the recognition of goodwill. The goodwill attributable to the inthinc Acquisition is deductible for tax purposes.
Indemnification Asset
In connection with the Asset Purchase Agreement, the Company entered into an Escrow Agreement with inthinc and an escrow agent (the “Escrow Agreement”). Under the terms of this Escrow Agreement, $500 was placed in an escrow account through September 9, 2019 (the “Escrow Amount”) to fund any indemnification obligations to the Company under the Asset Purchase Agreement. Under the terms of the Escrow Agreement, as of any release date for any portion of the Escrow Amount, the value of any then submitted and unresolved indemnification claims shall be retained in the Escrow Amount until such time as the applicable claims are resolved.
Acquired Customer Product Liability
As a result of the inthinc Acquisition, the Company acquired customer product obligations on inthinc’s product sales. The Company’s analysis of the customer product liabilities are estimated based on the historical costs of inthinc to replace or fix products for customers, as well as installations costs associated with these obligations. As the Company continues to gather additional information, these accrual estimates may differ from actual results and adjustments to the estimated customer product liability would be required. The Company continues to evaluate customer product liabilities relating to the inthinc Acquisition throughout the measurement period. If the Company determines that adjustments to these amounts are required during the remainder of the measurement period, such amounts will be recorded as an adjustment to goodwill. On June 9, 2017, the Company had estimated additional product liabilities obligations of $1,333 relating to customer product obligations it was investigating associated with the inthinc Acquisition.
12
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Additional consideration is conditionally due to the inthinc sellers upon achievement of certain financial milestones through June 2019. The fair value measurement of the contingent consideration obligation is determined using Level 3 unobservable inputs supported by little or no market activity based on the Company’s own assumptions. The estimated fair value of the contingent consideration was determined based on the Company’s preliminary estimates using the probability-weighted discounted cash flow approach. As of September 30, 2017, the Company recorded $9,040 in other non-current liabilities on the condensed consolidated balance sheet in connection with the contingent consideration. The first financial milestone for this additional consideration is not expected to be met, and therefore, the Company recorded a reduction of the contingent liability of $795 in selling, general and administrative (“SG&A”) expenses in the condensed consolidated statement of operations for the quarter and nine months ended September 30, 2017.
Skygistics Ltd.
On May 26, 2016, pursuant to an asset purchase agreement entered into on April 11, 2016 among a wholly owned subsidiary of the Company, Skygistics Propriety Limited and Satconnect Propriety Limited (the “Skygistics Sellers”), the Company completed the acquisition of substantially all of the assets of Skygistics (PTY) Ltd. (“Skygistics”) for a purchase price of $3,835 and additional contingent consideration of up to $954, subject to certain operational milestones (the “Skygistics Acquisition”). The Skygistics Acquisition provides a broad range of satellite and cellular connectivity options as well as telematics solutions centered on the management of remote and mobile assets to more than 250 telematics and enterprise customers.election.
Contingent Consideration
Additional consideration was conditionally due to the Skygistics SellersInthinc sellers upon achievement of certain financial milestones through April 2017.June 2019. The fair value measurement of the contingent consideration obligation was determined using Level 3 unobservable inputs supported by little or no market activity and based on the Company’s own assumptions. The estimated fair value of the contingent consideration was determined based on the Company’s preliminary estimates using the probability-weighted discounted cash flow approach. TheAs of September 30, 2019 and December 31, 2018, the Company recorded $0 and $2,063, respectively, in accrued liabilities on the condensed consolidated balance sheets in connection with the contingent consideration. All four financial milestonemilestones for this additional consideration haswere not been met, and therefore,met. Therefore, the Company recorded a reduction of the contingent liability of $519$2,063 in selling,
13
general and administrative (“SG&A&A”) expenses inon the condensed consolidated statement of operations infor the threenine months ended March 31, 2017.
Euroscan Holding B.V.
On March 11, 2014, pursuant to the share purchase agreement entered into by the Company and MWL Management B.V., R.Q. Management B.V., WBB GmbH, ING Corporate Investments Participaties B.V. and Euroscan Holding B.V., as sellers, the Company completed the acquisition of 100% of the outstanding equity of Euroscan Holding B.V., including, indirectly, its wholly-owned subsidiaries Euroscan B.V., Euroscan GmbH Vertrieb Technischer Geräte, Euroscan Technology Ltd. and Ameriscan, Inc. (collectively, the “Euroscan Group” or “Euroscan”) for an aggregate consideration of (i) $29,163, inclusive of net working capital adjustments and net cash (on a debt free, cash free basis); (ii) issuance of 291,230 shares of the Company’s common stock, valued at $7.70 per share, which reflected the Company’s closing price on the acquisition date; and (iii) additional contingent consideration of up to $6,547 (the “Euroscan Acquisition”). The Euroscan Acquisition allowed the Company to complement its North American operations in IoT by adding a significant distribution channel in Europe and other key geographies where Euroscan has market share.
Contingent Consideration
Additional consideration was conditionally due to MWL Management B.V. and R.Q. Management B.V. upon achievement of financial and operational milestones through March 2017. The fair value measurement of the contingent consideration obligation was determined using Level 3 unobservable inputs supported by little or no market activity based on our own assumptions. The estimated fair value of the contingent consideration was determined based on the Company’s preliminary estimates using the probability-weighted discounted cash flow approach. As of December 31, 2016, the Company recorded $655 in accrued expenses on the condensed consolidated balance sheet in connection with the contingent consideration. Changes in the fair value of the contingent consideration obligations are recorded in the condensed consolidated statement of operations. A total of $694 was paid to MWL Management B.V. and R.Q. Management B.V. in cash and common stock of the Company during the quarter ended JuneSeptember 30, 2017 upon achievement of one milestone.2019.
13
ORBCOMM Inc.4. Stock-Based Compensation
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
On April 20, 2016, the stockholdersThe Company’s stock-based compensation plan consists of the Company approved the ORBCOMM Inc.its 2016 Long-Term Incentives Plan (the “2016 LTIP”). The 2016 LTIP replaces the Company’s 2006 Long-Term Incentives Plan (the “2006 LTIP”). The number of shares authorized for delivery under the 2016 LTIP is 6,949,400 shares, including 1,949,400 shares that remained available under the 2006 LTIP as of February 17, 2016, plus any shares previously subject to awards under the 2006 LTIP that are cancelled, forfeited or lapse unexercised since that date. As of September 30, 2017,2019, there were 5,136,6862,965,109 shares available for grant under the 2016 LTIP.
Total stock-based compensation recorded by the Company for the quarters ended September 30, 20172019 and 20162018 was $1,345$1,663 and $1,219,$2,312, respectively, and for the nine months ended September 30, 20172019 and 20162018 was $4,314$5,406 and $3,824,$5,747, respectively. Total capitalized stock-based compensation for the quarters ended September 30, 20172019 and 20162018 was $114$80 and $88,$166, respectively, and for the nine months ended September 30, 20172019 and 20162018 was $357$539 and $219,$410, respectively.
The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations for the quarters and nine months ended September 30, 20172019 and 2016:2018:
|
| Quarters Ended |
|
| Nine Months Ended |
|
| Quarters Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Cost of services |
| $ | 130 |
|
| $ | 116 |
|
| $ | 403 |
|
| $ | 449 |
|
| $ | 136 |
|
| $ | 167 |
|
| $ | 442 |
|
| $ | 475 |
|
Cost of product sales |
|
| 19 |
|
|
| 11 |
|
|
| 61 |
|
|
| 33 |
|
|
| 35 |
|
|
| 45 |
|
|
| 114 |
|
|
| 108 |
|
Selling, general and administrative |
|
| 1,104 |
|
|
| 1,028 |
|
|
| 3,606 |
|
|
| 3,062 |
|
|
| 1,199 |
|
|
| 1,750 |
|
|
| 4,046 |
|
|
| 4,396 |
|
Product development |
|
| 92 |
|
|
| 64 |
|
|
| 244 |
|
|
| 280 |
|
|
| 293 |
|
|
| 350 |
|
|
| 804 |
|
|
| 768 |
|
Total |
| $ | 1,345 |
|
| $ | 1,219 |
|
| $ | 4,314 |
|
| $ | 3,824 |
|
| $ | 1,663 |
|
| $ | 2,312 |
|
| $ | 5,406 |
|
| $ | 5,747 |
|
As of September 30, 2017,2019, the Company had unrecognized compensation costs for stock appreciation rights (“SARs”) and restricted stock units (“RSUs”)all share-based payment arrangements totaling $4,041.$3,278.
Time-Based Stock Appreciation Rights
A summary of the Company’s time-based SARsstock appreciation rights (“SARs”) for the nine months ended September 30, 20172019 is as follows:
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Average |
|
| Aggregate |
| ||
|
|
|
|
|
| Weighted- |
|
| Remaining |
|
| Intrinsic |
| |||
|
| Number of |
|
| Average |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| Exercise Price |
|
| Term (years) |
|
| (In thousands) |
| ||||
Outstanding at January 1, 2017 |
|
| 3,789,394 |
|
| $ | 5.23 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 90,000 |
|
|
| 8.58 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (1,214,000 | ) |
|
| 4.91 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 2,665,394 |
|
| $ | 5.34 |
|
|
| 5.00 |
|
| $ | 12,888 |
|
Exercisable at September 30, 2017 |
|
| 2,561,694 |
|
| $ | 5.26 |
|
|
| 4.73 |
|
| $ | 12,903 |
|
Vested and expected to vest at September 30, 2017 |
|
| 2,665,394 |
|
| $ | 5.34 |
|
|
| 5.00 |
|
| $ | 12,888 |
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Average |
|
| Aggregate |
| ||
|
|
|
|
|
| Weighted- |
|
| Remaining |
|
| Intrinsic |
| |||
|
| Number of |
|
| Average |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| Exercise Price |
|
| Term (years) |
|
| (in thousands) |
| ||||
Outstanding at January 1, 2019 |
|
| 2,199,094 |
|
| $ | 5.36 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (6,000 | ) |
|
| 6.09 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 |
|
| 2,193,094 |
|
| $ | 5.34 |
|
|
| 2.93 |
|
| $ | 2,182 |
|
Exercisable at September 30, 2019 |
|
| 2,163,094 |
|
| $ | 5.42 |
|
|
| 2.87 |
|
| $ | 2,261 |
|
Vested and expected to vest at September 30, 2019 |
|
| 2,193,094 |
|
| $ | 5.34 |
|
|
| 2.93 |
|
| $ | 2,182 |
|
For the quarters ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $133 and $48, respectively, relatingrelated to these SARs.time-based SARs of $37 and $43, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $428 and $213, respectively, relatingrelated to these SARs.time-based SARs of $109 and $151, respectively. As of September 30, 2017, $4662019, $37 of total unrecognized compensation cost related to thesethe SARs is expected to be recognized through December 2019.
The intrinsic value of the time-based SARs exercised during the nine months ended September 30, 20172019 was $7,515.$18.
14
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Performance-Based Stock Appreciation Rights
A summary of the Company’s performance-based SARs for the nine months ended September 30, 20172019 is as follows:
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Average |
|
| Aggregate |
| ||
|
|
|
|
|
| Weighted- |
|
| Remaining |
|
| Intrinsic |
| |||
|
| Number of |
|
| Average |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| Exercise Price |
|
| Term (years) |
|
| (In thousands) |
| ||||
Outstanding at January 1, 2017 |
|
| 589,424 |
|
| $ | 6.06 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (28,640 | ) |
|
| 3.40 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| (44,611 | ) |
|
| 11.00 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 516,173 |
|
| $ | 5.78 |
|
|
| 3.95 |
|
| $ | 3,588 |
|
Exercisable at September 30, 2017 |
|
| 516,173 |
|
| $ | 5.78 |
|
|
| 3.95 |
|
| $ | 3,588 |
|
Vested and expected to vest at September 30, 2017 |
|
| 516,173 |
|
| $ | 5.78 |
|
|
| 3.95 |
|
| $ | 3,588 |
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Average |
|
| Aggregate |
| ||
|
|
|
|
|
| Weighted- |
|
| Remaining |
|
| Intrinsic |
| |||
|
| Number of |
|
| Average |
|
| Contractual |
|
| Value |
| ||||
|
| Shares |
|
| Exercise Price |
|
| Term (years) |
|
| (in thousands) |
| ||||
Outstanding at January 1, 2019 |
|
| 233,496 |
|
| $ | 6.02 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 |
|
| 233,496 |
|
| $ | 6.00 |
|
|
| 3.87 |
|
| $ | 367 |
|
Exercisable at September 30, 2019 |
|
| 233,496 |
|
| $ | 6.00 |
|
|
| 3.87 |
|
| $ | 367 |
|
Vested and expected to vest at September 30, 2019 |
|
| 233,496 |
|
| $ | 6.00 |
|
|
| 3.87 |
|
| $ | 367 |
|
For the quarters and nine months ended September 30, 2016,2019 and 2018, the Company recordeddid 0t record any stock-based compensation expense of $2 relatingrelated to these SARs, respectively.the performance-based SARs. As of September 30, 2017,2019, there is nowas 0 unrecognized compensation cost related to these SARs expected to be recognized.
The intrinsic value of the performance-based SARs exercised during the nine months ended September 30, 20172019 was $215.$0.
The fair value of each time-based and performance-based 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, the expected volatility was based on the Company’s historical volatility over the expected terms of the SAR awards. Estimated forfeitures were based on voluntary and involuntary termination behavior, as well as analysis of actual 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. The Company did not0t grant time-based or performance-based SARs during the nine months ended September 30, 2016.2019.
| ||
| ||
|
| |
|
| |
|
| |
|
|
Time-basedTime-Based Restricted Stock Units
A summary of the Company’s time-based RSUsrestricted stock units (“RSUs”) for the nine months ended September 30, 20172019 is as follows:
|
| Shares |
|
| Weighted- Average Grant Date Fair Value |
|
| Number of Shares |
|
| Weighted- Average Grant Date Fair Value |
| ||||
Balance at January 1, 2017 |
|
| 691,952 |
|
| $ | 8.28 |
| ||||||||
Balance at January 1, 2019 |
|
| 920,024 |
|
| $ | 9.60 |
| ||||||||
Granted |
|
| 184,370 |
|
|
| 10.05 |
|
|
| 130,496 |
|
|
| 7.84 |
|
Vested |
|
| (370,331 | ) |
|
| 7.15 |
|
|
| (452,379 | ) |
|
| 9.84 |
|
Forfeited or expired |
|
| (4,559 | ) |
|
| 8.78 |
|
|
| (38,467 | ) |
|
| 8.93 |
|
Balance at September 30, 2017 |
|
| 501,432 |
|
| $ | 9.76 |
| ||||||||
Balance at September 30, 2019 |
|
| 559,674 |
|
| $ | 9.15 |
|
15
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
For the quarters ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $717 and $605, respectively, related to these RSUs.the time-based RSUs of $1,018 and $1,392, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $2,096 and $1,755, respectively, related to these RSUs.the time-based RSUs of $2,857 and $3,166, respectively. As of September 30, 2017, $2,8972019, $2,187 of total unrecognized compensation cost related to these RSUs is expected to be recognized through September 2020.2021.
Performance-basedPerformance-Based Restricted Stock Units
A summary of the Company’s performance-based RSUs for the nine months ended September 30, 20172019 is as follows:
|
| Shares |
|
| Weighted- Average Grant Date Fair Value |
|
| Number of Shares |
|
| Weighted- Average Grant Date Fair Value |
| ||||
Balance at January 1, 2017 |
|
| 473,608 |
|
| $ | 7.80 |
| ||||||||
Balance at January 1, 2019 |
|
| 613,605 |
|
| $ | 9.44 |
| ||||||||
Granted |
|
| — |
|
|
| — |
|
|
| 12,246 |
|
|
| 7.90 |
|
Vested |
|
| (214,835 | ) |
|
| 6.78 |
|
|
| (262,685 | ) |
|
| 9.90 |
|
Forfeited or expired |
|
| (40,174 | ) |
|
| 7.01 |
|
|
| (29,970 | ) |
|
| 9.46 |
|
Balance at September 30, 2017 |
|
| 218,599 |
|
| $ | 7.80 |
| ||||||||
Balance at September 30, 2019 |
|
| 333,196 |
|
| $ | 8.92 |
|
15
For the quarters ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $274 and $301, respectively, related to these RSUs.the performance-based RSUs of $578 and $597, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $1,016 and $1,180, respectively, related to these RSUs.the performance-based RSUs of $2,203 and $1,694, respectively. As of September 30, 2017, $6782019, $1,054 of total unrecognized compensation cost related to these RSUs is expected to be recognized through March 2018.2020.
The fair valuesvalue of the time-based and performance-based RSU awards are based upon the closing stock price of the Company’s common stock on the date of grant.
Market Performance Units
The Company grants market performance unitsMarket Performance Units (“MPUs”) to its senior executives based on stock price performance over a three-year period measured on December 31 of each year in the performance period. The MPUs will vest in equal installments at the end of each year in the performance period only if the Company satisfies the stock price performance targets and continued employment by the senior executives continue their employment through the dates the Compensation Committee has determined that the targets have been achieved. The value of the MPUs that will be earned each year ranges up to 15% of each of the senior executives’ annual base salaries in the year of the grant depending on the Company’s stock price performance target for that year. The value of the MPUs can be paid in either cash or common stock or a combination of cash and common stock, at the Company’s option.discretion. The MPUs are classified as a liability on the condensed consolidated balance sheets and are revalued at the end of each reporting period based on the awards’ fair value of the awards over a three-year period.
As the MPUs contain both a performance and service condition, the MPUsconditions, they have been treated as a series of three separate awards, or tranches, for purposes of recognizing stock-based compensation expense. The Company recognizes stock-based compensation expense on a tranche-by-tranche basis over the requisite service period for that specific tranche. The Company estimated the fair value of the MPUs using a Monte Carlo Simulation Modelsimulation model that used the following assumptions:
|
| Nine Months Ended September 30, |
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 |
| 2019 |
| 2018 |
Risk-free interest rate |
| 1.06% to 1.51% |
| 0.29% to 0.80% |
| 1.61% to 1.88% |
| 2.19% to 2.84% |
Estimated volatility factor |
| 23.0% to 31.0% |
| 29.0% to 34.0% |
| 40.0% to 54.0% |
| 25.0% to 28.0% |
Expected dividends |
| None |
| None |
| NaN |
| NaN |
For the quarters ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $175 and $229, respectively, relatingrelated to these MPUs.MPUs of $(39) and $197, respectively. For the nine months ended September 30, 20172019 and 2016,2018, the Company recorded stock-based compensation expense of $639 and $626, respectively, relatingrelated to these MPUs.MPUs of $25 and $501, respectively.
As of September 30, 2017,2019, the Company recorded $666$84 and $223$16 in accrued expensesliabilities and other non-current liabilities related to the MPUs, respectively, inon its condensed consolidated balance sheet. As of December 31, 2016,2018, the Company recorded $715$527 and $260 $131 in accrued expensesliabilities and other non-current liabilities related to the MPUs, respectively, inon its condensed consolidated balance sheet.
16
ORBCOMM Inc.
NotesIn January 2019, the Company issued 60,885 shares of common stock as payment in connection with MPUs for achieving the fiscal year 2018, 2017 and 2016 MPU awards’ stock performance targets with respect to the Condensed Consolidated Financial Statements2018 performance year.
(All amountsIn January 2018, the Company issued 81,277 shares of common stock as payment in thousands except share amounts, per share amounts or unless otherwise noted)-continuedconnection with MPUs for achieving the fiscal year 2017, 2016 and 2015 MPU awards’ stock performance targets with respect to the 2017 performance year.
TheOn February 16, 2016, the Company’s Boardboard of Directorsdirectors adopted the ORBCOMM Inc. Employee Stock Purchase Plan (“ESPP”) on February 16, 2016 and, which was approved by the Company’s shareholders approved the ESPP on April 20, 2016. Under the terms of the ESPP, 5,000,000 shares of the Company’s common stock are available for issuance and eligible employees may have up to 10% of their gross pay deducted from their payroll, up to a maximum of $25 per year, to purchase shares of the Company’sORBCOMM common stock at a discount of up to 15% of the common stock’sits fair market value, subject to certain conditions and limitations. For the quarter and nine monthsquarters ended September 30, 2017,2019 and 2018, the Company recorded stock-based compensation expense of $46$69 and $135 relating$83, respectively, related to the ESPP. Purchases of the Company’s Common Stock under the ESPP were 75,888 shares at a price of $6.97 duringFor the nine months ended September 30, 2017.2019 and 2018, the Company recorded stock-based compensation expense of $212 and $235, respectively, related to the ESPP. During the nine months ended September 30, 2019, 113,703 shares of the Company’s common stock were purchased under the ESPP at a price of $5.68 per share. During the nine months ended September 30, 2018, 81,525 shares of the Company’s common stock were purchased under the ESPP at a price of $8.21 per share.
16
5. Net LossIncome (Loss) Attributable to ORBCOMM Inc. Common Stockholders
The Company accounts for earnings per share (“EPS”) in accordance with FASB ASC Topic 260, “Earnings Per Share” (“ASC 260”) and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. The numerator in calculating basic and diluted EPS is an amount equal to the net lossincome (loss) attributable to ORBCOMM Inc. common stockholders for the periods presented. The denominator in calculating basic EPS is the weighted-averageweighted average shares outstanding for the respective periods. The denominator in calculating diluted EPS is the weighted-averageweighted average shares outstanding, plus the dilutive effect of stock option grants, unvested SAR and RSU grants and shares of Series A convertible preferred stock, if any, for the respective periods. The following table sets forth the basic and diluted EPS calculations of EPS for the quarterquarters and nine months ended September 30, 20172019 and 2016:2018:
|
| Quarter Ended |
|
| Nine Months Ended |
|
| Quarters Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net loss attributable to ORBCOMM Inc. common stockholders |
| $ | (39,694 | ) |
| $ | (14,048 | ) |
| $ | (53,777 | ) |
| $ | (20,313 | ) |
| $ | (4,025 | ) |
| $ | (3,295 | ) |
| $ | (15,934 | ) |
| $ | (20,614 | ) |
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of common shares outstanding |
|
| 73,762 |
|
|
| 70,997 |
|
|
| 72,396 |
|
|
| 70,866 |
|
|
| 79,695 |
|
|
| 78,649 |
|
|
| 79,591 |
|
|
| 77,158 |
|
Dilutive effect of unvested SARs and RSUs and shares of Series A convertible preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Dilutive effect of grants of stock options, unvested SARs and RSUs and shares of Series A convertible preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Diluted number of common shares outstanding |
|
| 73,762 |
|
|
| 70,997 |
|
|
| 72,396 |
|
|
| 70,866 |
|
|
| 79,695 |
|
|
| 78,649 |
|
|
| 79,591 |
|
|
| 77,158 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.54 | ) |
| $ | (0.20 | ) |
| $ | (0.74 | ) |
| $ | (0.29 | ) |
| $ | (0.05 | ) |
| $ | (0.04 | ) |
| $ | (0.20 | ) |
| $ | (0.27 | ) |
Diluted |
| $ | (0.54 | ) |
| $ | (0.20 | ) |
| $ | (0.74 | ) |
| $ | (0.29 | ) |
| $ | (0.05 | ) |
| $ | (0.04 | ) |
| $ | (0.20 | ) |
| $ | (0.27 | ) |
The computation of net loss attributable to ORBCOMM Inc. common stockholders for the quarters and nine months ended September 30, 20172019 and 20162018 is as follows:
|
| Quarter Ended |
|
| Nine Months Ended |
|
| Quarters Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net loss attributable to ORBCOMM Inc. |
| $ | (39,682 | ) |
| $ | (14,041 | ) |
| $ | (53,765 | ) |
| $ | (20,306 | ) |
| $ | (4,013 | ) |
| $ | (3,295 | ) |
| $ | (15,922 | ) |
| $ | (20,603 | ) |
Preferred stock dividends on Series A convertible preferred stock |
|
| (12 | ) |
|
| (7 | ) |
|
| (12 | ) |
|
| (7 | ) |
|
| (12 | ) |
|
| — |
|
|
| (12 | ) |
|
| (11 | ) |
Net loss attributable to ORBCOMM Inc. common stockholders |
| $ | (39,694 | ) |
| $ | (14,048 | ) |
| $ | (53,777 | ) |
| $ | (20,313 | ) |
| $ | (4,025 | ) |
| $ | (3,295 | ) |
| $ | (15,934 | ) |
| $ | (20,614 | ) |
17
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
6. Satellite Network and Other Equipment, Net
Satellite network and other equipment, net consisted of the following:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||
Land |
| $ | 381 |
|
| $ | 381 |
|
| $ | 381 |
|
| $ | 381 |
|
Satellite network |
|
| 193,358 |
|
|
| 231,782 |
|
|
| 197,916 |
|
|
| 195,886 |
|
Capitalized software |
|
| 42,243 |
|
|
| 30,758 |
|
|
| 77,918 |
|
|
| 67,509 |
|
Computer hardware |
|
| 5,245 |
|
|
| 4,707 |
|
|
| 6,343 |
|
|
| 5,850 |
|
Other |
|
| 7,974 |
|
|
| 7,522 |
|
|
| 7,592 |
|
|
| 5,610 |
|
Assets under construction |
|
| 14,748 |
|
|
| 11,284 |
|
|
| 15,217 |
|
|
| 12,489 |
|
|
|
| 263,949 |
|
|
| 286,434 |
|
|
| 305,367 |
|
|
| 287,725 |
|
Less: accumulated depreciation and amortization |
|
| (87,845 | ) |
|
| (70,593 | ) |
|
| (155,598 | ) |
|
| (127,655 | ) |
|
| $ | 176,104 |
|
| $ | 215,841 |
|
| $ | 149,769 |
|
| $ | 160,070 |
|
During the quarters ended September 30, 20172019 and 2016, 2018, the Company capitalized internal costs attributable to the design, development and enhancementsenhancement of the Company’s products and services in the amountand internal-use software of $3,232 $3,435 and $2,215,$3,224, respectively. During the nine months ended September 30, 20172019 and 2016, 2018, the Company capitalized internal costs attributable to the design, development and enhancementsenhancement of the Company’s products and services in the amountand internal-use software of $9,840 $10,728 and $6,947,$9,873, respectively.
17
Depreciation and amortization expense for the quarters ended September 30, 20172019 and 20162018 was $8,850$9,544 and $8,048,$8,764, respectively, including depreciation amortization of internal-use software of $1,602 $767 and $889,$818, respectively. Depreciation and amortization expense for the nine months ended September 30, 20172019 and 20162018 was $25,891$28,263 and $22,429,$26,321, respectively, including depreciation amortization of internal-use software of $4,437 $2,373 and $2,534,$2,590, respectively.
For the quarters ended September 30, 20172019 and 2016, 61%2018, $4,236 and 72%$4,295 of depreciation and amortization expense, respectively, relate to cost of services and 8%$712 and 7%,$735, respectively, relate to cost of product sales, as these assets support the Company’s revenue generating activities. For the nine months ended September 30, 20172019 and 2016, 63%2018, $12,735 and 69%$12,872 of depreciation and amortization expense, respectively, relate to cost of services and 8%$2,110 and 10%,$2,524, respectively, relate to cost of product sales, as these assets support the Company’s revenue generating activities.
As of September 30, 2017,2019 and December 31, 2016,2018, assets under construction primarily consistconsisted of costs associated with acquiring, developing and testing software and hardware for internal and external use that have not yet been placed into service.
During the three months ended March 31, 2016, the Company recorded an impairment loss on one of its leased AIS satellites. The impairment loss of $466 was determined based on the net carrying value of the asset at the time of the impairment and was recorded in depreciation and amortization in the condensed consolidated statement of operations for the three months ended March 31, 2016. In addition, the Company decreased satellite network and other equipment, net and the associated accumulated depreciation on the condensed consolidated balance sheet by $2,374 and $1,908, respectively.
In August 2016, the Company lost communication with one of its OG2 satellites launched in July 2014. The Company recorded a non-cash impairment charge of $10,680 to write-off the net book value of the satellite. In addition, the Company decreased satellite network and other equipment by $13,474 and associated accumulated depreciation by $2,794 to remove the asset as of September 30, 2016.
In December 2016, the Company lost communication with one of its OG1 Plane D satellites. In the year ended December 31, 2016, the Company decreased each of satellite network and other equipment, net and associated accumulated depreciation by $137, representing the fully depreciated value of the satellite.
One OG2 satellite that was launched in December 2015 experienced a solar array anomaly in July 2016 that resulted in the satellite entering a safe mode and being taken out of commercial service. This satellite had previously been intermittently providing AIS service and regularly communicating with the ground infrastructure. In April 2017, communication was lost with this OG2 satellite. The Company’s satellite engineering team developed and uploaded new software designed to prevent a similar solar array anomaly from occurring on other OG2 satellites.
18
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
In June 2017, there was a loss of communication with the prototype OG2 satellite that was launched in December 2015, and in July 2017 there was a loss of communication with an OG2 satellite that was launched in July 2014. The Company established a comprehensive investigative team that included outside independent consultants, internal engineering and OG2 contractors to determine the root cause of the anomalies affecting these three OG2 satellites (described in this and the prior paragraph) and associated corrective measures. The investigative team identified two primary potential causes for the loss of communication and developed operational procedures and software enhancements to mitigate the risk of a similar anomaly from occurring on other OG2 satellites. The investigative team did not identify a systemic design flaw in the OG2 satellites.
On October 31, 2017, the Company’s Audit Committee of the Board of Directors concluded, based on management’s recommendation and the information provided by the investigative team, that a non-cash impairment charge of $31,224 should be recorded as a recognized subsequent event in accordance with FASB ASC Topic 855 “Subsequent Events” to write-off the net book value of the three OG2 satellites for the quarter ended September 30, 2017 and decreased satellite network and other equipment by $39,576 and associated accumulated depreciation by $8,352 to remove the assets as of September 30, 2017. The impairment charge is reflected in the accompanying condensed consolidated financial statements. No amount of the impairment charge represents a cash expenditure. Satellite network capacity remains multiple times more capable than current demand, while there has been a small effect on message delivery times.
7. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair values of the underlying net tangible and intangible assets.
Goodwill consisted of the following:
|
| Amount |
| |
Balance at January 1, 2017 |
| $ | 114,033 |
|
Additions through acquisitions |
|
| 18,961 |
|
Balance at September 30, 2017 |
| $ | 132,994 |
|
During the nine months ended September 30, 2017, the Company recognized goodwill of $18,961 in connection with the inthinc Acquisition.
Goodwill is allocated to the Company’s one reportable segment, which is its only reporting unit.
The Company’s intangibleIntangible assets, net consisted of the following:
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||||||||||||||
|
| Useful life |
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| Useful life |
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||
|
| (years) |
| Cost |
|
| amortization |
|
| Net |
|
| Cost |
|
| amortization |
|
| Net |
|
| (years) |
| Cost |
|
| amortization |
|
| Net |
|
| Cost |
|
| amortization |
|
| Net |
| ||||||||||||
Customer lists |
| 5-20 |
| $ | 110,057 |
|
| $ | (26,876 | ) |
| $ | 83,181 |
|
| $ | 91,757 |
|
| $ | (20,026 | ) |
| $ | 71,731 |
|
| 5 - 15 |
| $ | 113,357 |
|
| $ | (47,835 | ) |
| $ | 65,522 |
|
| $ | 113,357 |
|
| $ | (39,966 | ) |
| $ | 73,391 |
|
Patents and technology |
| 5-10 |
|
| 23,032 |
|
|
| (7,534 | ) |
|
| 15,498 |
|
|
| 16,556 |
|
|
| (5,990 | ) |
|
| 10,566 |
|
| 3 - 10 |
|
| 23,424 |
|
|
| (12,417 | ) |
|
| 11,007 |
|
|
| 23,424 |
|
|
| (10,551 | ) |
|
| 12,873 |
|
Trade names and trademarks |
| 1-2 |
|
| 2,883 |
|
|
| (2,815 | ) |
|
| 68 |
|
|
| 2,885 |
|
|
| (2,637 | ) |
|
| 248 |
|
| 1 - 2 |
|
| 3,003 |
|
|
| (3,003 | ) |
|
| — |
|
|
| 3,003 |
|
|
| (3,003 | ) |
|
| — |
|
|
|
|
| $ | 135,972 |
|
| $ | (37,225 | ) |
| $ | 98,747 |
|
| $ | 111,198 |
|
| $ | (28,653 | ) |
| $ | 82,545 |
|
|
|
| $ | 139,784 |
|
| $ | (63,255 | ) |
| $ | 76,529 |
|
| $ | 139,784 |
|
| $ | (53,520 | ) |
| $ | 86,264 |
|
TheAt September 30, 2019, the weighted-average amortization period for the intangible assets is 11.4was 10.5 years. TheAt September 30, 2019, the weighted-average amortization periodperiods for customer lists, patents and technology and trade names and trademarks is 12.1, 9.4were 10.9, 9.3 and 1.2 years, respectively.
Amortization expense was $3,191$3,250 and $3,110$3,317 for the quarterquarters ended September 30, 20172019 and 2016,2018, respectively. Amortization expense was $8,572$9,735 and $9,239$9,825 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
19
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Estimated annualfuture amortization expense for intangible assets subsequent to September 30, 2017 is as follows:
|
| Amount |
|
| Amount |
| ||
2017 (remaining) |
| $ | 3,097 |
| ||||
2018 |
|
| 12,044 |
| ||||
2019 |
|
| 12,008 |
| ||||
2019 (remaining) |
| $ | 3,250 |
| ||||
2020 |
|
| 11,727 |
|
|
| 12,721 |
|
2021 |
|
| 11,262 |
|
|
| 12,112 |
|
2022 |
|
| 10,807 |
|
|
| 11,686 |
|
2023 |
|
| 11,408 |
| ||||
2024 |
|
| 11,122 |
| ||||
Thereafter |
|
| 37,802 |
|
|
| 14,230 |
|
|
| $ | 98,747 |
|
| $ | 76,529 |
|
18
8. Accrued Liabilities
The Company’s accruedAccrued liabilities consisted of the following:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||
Accrued compensation and benefits |
| $ | 7,407 |
|
| $ | 7,456 |
|
| $ | 7,866 |
|
| $ | 9,367 |
|
Warranty |
|
| 3,471 |
|
|
| 1,842 |
| ||||||||
Accrued warranty obligations |
|
| 5,922 |
|
|
| 5,624 |
| ||||||||
Acquired customer product liabilities |
|
| 1,306 |
|
|
| — |
|
|
| — |
|
|
| 546 |
|
Corporate income tax payable |
|
| 235 |
|
|
| 453 |
|
|
| 3,385 |
|
|
| 1,521 |
|
Contingent consideration amount |
|
| — |
|
|
| 1,174 |
|
|
| — |
|
|
| 2,063 |
|
VAT payable |
|
| 1,963 |
|
|
| 2,286 |
| ||||||||
Accrued satellite network and other equipment |
|
| 530 |
|
|
| 497 |
|
|
| 227 |
|
|
| 227 |
|
Accrued inventory purchases |
|
| 1,280 |
|
|
| 4,292 |
|
|
| 625 |
|
|
| 219 |
|
OG2 satellite milestone payable |
|
| — |
|
|
| 4,609 |
| ||||||||
Accrued interest expense |
|
| 9,444 |
|
|
| 1,031 |
|
|
| 10,000 |
|
|
| 5,000 |
|
Accrued professional fees |
|
| 671 |
|
|
| 876 |
|
|
| 761 |
|
|
| 303 |
|
Accrued airtime charges |
|
| 843 |
|
|
| 994 |
|
|
| 1,818 |
|
|
| 901 |
|
Short-term lease liability |
|
| 2,791 |
|
|
| — |
| ||||||||
Other accrued expenses |
|
| 8,903 |
|
|
| 7,207 |
|
|
| 6,396 |
|
|
| 7,678 |
|
|
| $ | 34,090 |
|
| $ | 30,431 |
|
| $ | 41,754 |
|
| $ | 35,735 |
|
For the nine months ended September 30, 2017 and 2016, changesChanges in accrued warranty obligations consisted of the following:
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Beginning balance |
| $ | 1,842 |
|
| $ | 2,321 |
|
Warranty liabilities assumed through acquisition |
|
| 152 |
|
|
| — |
|
Amortization of fair value adjustment of warranty liabilities acquired through acquisitions |
|
| — |
|
|
| (57 | ) |
Reduction and amortization of fair value adjustment of warranty liabilities acquired through acquisitions |
|
| (119 | ) |
|
| (384 | ) |
Warranty expense |
|
| 1,825 |
|
|
| 722 |
|
Warranty charges |
|
| (229 | ) |
|
| (607 | ) |
Ending balance |
| $ | 3,471 |
|
| $ | 1,995 |
|
|
| 2019 |
|
| 2018 |
| ||
Balance at January 1, |
| $ | 5,624 |
|
| $ | 4,153 |
|
Warranty liabilities assumed from acquisitions |
|
| — |
|
|
| 151 |
|
Reduction of warranty liabilities assumed in connection with acquisitions |
|
| (476 | ) |
|
| (486 | ) |
Warranty expense |
|
| 811 |
|
|
| 2,970 |
|
Warranty charges |
|
| (37 | ) |
|
| (604 | ) |
Balance at September 30, |
| $ | 5,922 |
|
| $ | 6,184 |
|
20
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
Deferred revenues consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Service activation fees |
| $ | 5,837 |
|
| $ | 7,594 |
|
Prepaid services |
|
| 2,979 |
|
|
| 2,777 |
|
Extended warranty revenues |
|
| 481 |
|
|
| 21 |
|
|
|
| 9,297 |
|
|
| 10,392 |
|
Less current portion |
|
| (6,738 | ) |
|
| (7,414 | ) |
Long-term portion |
| $ | 2,559 |
|
| $ | 2,978 |
|
10. Note Payable-RelatedPayable - Related Party
In connection with the acquisition of a majority interest in Satcom International Group plc 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 each of September 30, 20172019 and December 31, 2016,2018, the principal balance of the note payable was €1,138, and it hadwith a carrying value of $1,343$1,241 at September 30, 2019 and $1,195, respectively.$1,298 at December 31, 2018. The carrying value was based on the note’s estimated fair value at the time of acquisition. The difference between the carrying value and principal balance was being amortized to interest expense over the six-year estimated life, of the note of six years which ended inon September 30, 2011. This note does not bear interest and has no fixed repayment term. Repayment of the note will be made from the distribution profits as(as defined in the note agreement,agreement) of ORBCOMM Europe LLC, a wholly ownedwholly-owned subsidiary of the Company. The note has been classified as long-term, andas the Company does not expect any repayments to be required prior to September 30, 2018.2020.
11. Note10. Notes Payable
Senior Secured Notes
On April 10, 2017, the Company issued $250,000 aggregate principal amount of 8.0% senior secured notes due 2024 (the “Senior Secured Notes”). The Senior Secured Notes were issued pursuant to an indenture, dated as of April 10, 2017, among the Company, certain of its domestic subsidiaries party thereto (the “Guarantors”) and U.S. Bank National Association, as trustee and collateral agent (the “Indenture”). The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by the Guarantors, and are secured on a first priority basis by (i) pledges of capital stock of certain of the Company’s directly and indirectly owned subsidiaries; and (ii) substantially all of the other property and assets of the Company and the Guarantors, to the extent a first priority security interest is able to be granted or perfected therein, and subject, in all cases, to certain specified exceptions.exceptions, and an intercreditor agreement with the collateral agent for the Company’s revolving credit facility described below. Interest payments are due on the Senior Secured Notes semi-annually in arrears on April 1 and October 1, beginning October 1, 2017.
19
The Company will havehas the option to redeem some or all of the Senior Secured Notes at any time on or after April 1, 2020, at redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. The Company will also havehas the option to redeem some or all of the Senior Secured Notes at any time before April 1, 2020 at a redemption price of 100% of the principal amount of the Senior Secured Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before April 1, 2020, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption, with the proceeds from certain equity issuances.
The Indenture contains covenants that, among other things, limit the Company’s and its restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various exceptions and baskets as set forth in the Indenture, including the incurrence by the Company and its restricted subsidiaries of indebtedness under potential new credit facilities in the aggregate principal amount at any one time outstanding not to exceed $50 million.$50,000.
21
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
In connection with the issuance of the Senior Secured Notes, the Company incurred debt issuance costs of approximately $5,431. For the quarterquarters and nine months ended September 30, 2017,2019 and 2018, amortization of the debt issuance costs was $194 and $368,$582, respectively. The Company recorded charges of $5,197$5,194 and $9,824$15,582 to interest expense on its statementcondensed consolidated statements of operations for the quarterquarters and nine months ended September 30, 2017,2019 and 2018, respectively, related to interest expense and amortization of debt issuance costs associated with the Senior Secured Notes.
Termination of SecuredRevolving Credit Facilities
On April 10, 2017, a portion of the proceeds of the issuance of the Senior Secured Notes was used to repay in full the Company’s outstanding obligations under, and to terminate the Company’s $150,000 outstanding credit facilities incurred pursuant to the Credit Agreement, as defined below, resulting in an early payment fee of $1,500 and an additional expense associated with the remaining unamortized debt issuance cost and fees of $2,368.Facility
Secured Credit Facilities
On September 30, 2014,December 18, 2017, the Company and certain of its subsidiaries entered into a senior secured revolving credit agreement (the “Credit“Revolving Credit Agreement”) with Macquarie CAF LLC (the “Lender”JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) in order to refinance the Company’s $45,000 9.5% per annum senior notes. Pursuant to the, as administrative agent and collateral agent. The Revolving Credit Agreement the Lender provided securedprovides for a revolving credit facilitiesfacility (the “Secured“Revolving Credit Facilities”Facility”) in an aggregate amount of $160,000 comprised of (i) a term loan facility in an aggregate principal amount of up to $70,000 (the “Initial Term Loan Facility”); (ii) a $10,000 revolving credit facility (the “Revolving$25,000 for working capital and general corporate purposes and matures on December 18, 2022. The Revolving Credit Facility”); (iii) a term loan facility in an aggregate principal amount of up to $10,000 (the “Term B2 Facility”), the proceeds of which were used to partially finance the acquisition of InSync Solutions, Inc. in 2015; and (iv) a term loan facility in an aggregate principal amount of up to $70,000 (the “Term B3 Facility”), the proceeds of which were used partially finance the acquisition of SkyWave Mobile Communications, Inc. in 2015. The Secured Credit FacilitiesFacility will bear interest at the Company’s election, of a per annum rate equal to either (a) aan alternative base rate plus 3.75% or (b)an adjusted LIBOR, plus 4.75%, with aan applicable margin of 1.50% in the case of alternative base rate loans and 2.50% in the case of adjusted LIBOR floor of 1.00%.
In connection with entering into the Credit Agreement, and the subsequent funding of the Initial Term Loan Facility,loans. The Revolving Credit Facility Term B2 Facilityis secured by a first priority security interest in substantially all of the Company’s and the Term B3 Facility,its subsidiaries’ assets under a security agreement among the Company, incurred debt issuance costsits subsidiaries and JPMorgan Chase, subject to an intercreditor agreement with the indenture trustee for the Senior Secured Notes. The Revolving Credit Facility has no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Revolving Credit Agreement, the Company may borrow, repay and reborrow amounts under the Revolving Credit Facility at any time prior to the maturity date.
The Revolving Credit Agreement contains customary representations and warranties, conditions to funding, covenants and events of approximately $4,481. Fordefault. The Revolving Credit Agreement contains covenants that, among other things, limit the quarterCompany’s and nine months endedits restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various baskets as set forth in the Revolving Credit Agreement.
At September 30, 2017, amortization2019, 0 amounts were outstanding under the Revolving Credit Facility. As of the debt issuance costs was $0 and $229, respectively. For the quarter and nine months ended September 30, 2016, amortization of2019, the debt issuance costsCompany was $227 and $681, respectively. The Company recorded charges of $0 and $2,642 to interest expense on its statement of operations forin compliance with all financial covenants under the quarter and nine months ended September 30, 2017, respectively, related to interest expense and amortization of debt issuance costs associated with the Initial Term Loan Facility, the Term B2 and the Term B3 Facilities.Revolving Credit Agreement.
12.11. Stockholders’ Equity
Preferred stockStock
The Company currently has 50,000,000 shares of preferred stock authorized.
Series A convertible preferred stockConvertible Preferred Stock
During the quarter and nine months ended September 30, 2017,2019, the Company issued dividends into the amount of 1,078 sharesholders of Series A convertible preferred stock toin the holdersamount of the1,182 shares of Series A convertible preferred stock. As of September 30, 2017,2019, dividends in arrears were $4.
20
Common Stock
As of September 30, 2017,2019, the Company has reserved 16,741,37115,161,182 shares of common stock for future issuances related to employee stock compensation plans.
On June 15, 2017,April 10, 2018, the Company completed a private placementpublic offering of 1,552,7953,450,000 shares of its common stock, including 450,000 shares sold upon exercise in full of the underwriters’ option to purchase additional shares at a price of $8.60 per share. The Company received net proceeds of approximately $28,000 after deducting underwriters’ discounts and commissions and offering costs.
On April 13, 2018, the Company filed a shelf registration statement with the SEC, registering an unspecified amount of debt and/or equity securities that the Company may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement was automatically effective upon filing and superseded and replaced the Company’s previous shelf registration statement declared effective on April 14, 2015, which was due to expire on April 14, 2018.
On August 5, 2019, the Company’s Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $25,000 of the Company’s outstanding shares of common stock through open market transactions and privately negotiated transactions, until August 5, 2020. In addition, open market repurchases of common stock may be made pursuant to applicable securities laws and regulations, including Rule 10b-18, as well as Rule 10b5-1 under Securities Exchange Act of 1934, as amended. During the quarter ended September 30, 2019, the Company repurchased 1,582,029 shares at an average share price of $4.96, of which 1,513,743 shares were cancelled and 68,286 shares are held as treasury shares, to be cancelled during the fourth quarter of 2019. As of September 30, 2019, authorization for approximately $17,124 of the Company’s common stock at a purchase price of $9.66 per share,remained available for an aggregate purchase price of $15,000. The per share price of $9.66 was calculated as 95% offuture purchases under the volume-weighted average trading price of common stock 30 trading days ending on June 14, 2017.repurchase program.
22
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
The Company operates in one1 reportable segment, industrial IoT services. Other than satellites in orbit, goodwill and intangible assets, long-lived assets outside of the United States are not significant. The Company’s foreign exchange exposure is limited as approximately 88%83% of the Company’s consolidated revenue is collected in USU.S. dollars. The following table summarizes revenues on a percentage basis by geographic regions,region, based on the region in which the customer is located.
|
| Quarter Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
United States |
|
| 71 | % |
|
| 59 | % |
|
| 68 | % |
|
| 62 | % |
|
| 54 | % |
|
| 58 | % |
|
| 52 | % |
|
| 64 | % |
South America |
|
| 8 | % |
|
| 11 | % |
|
| 9 | % |
|
| 11 | % |
|
| 11 | % |
|
| 9 | % |
|
| 11 | % |
|
| 10 | % |
Japan |
|
| 2 | % |
|
| 3 | % |
|
| 2 | % |
|
| 2 | % |
|
| 6 | % |
|
| 7 | % |
|
| 7 | % |
|
| 4 | % |
Europe |
|
| 14 | % |
|
| 21 | % |
|
| 15 | % |
|
| 19 | % |
|
| 18 | % |
|
| 18 | % |
|
| 18 | % |
|
| 15 | % |
Other |
|
| 5 | % |
|
| 6 | % |
|
| 6 | % |
|
| 6 | % |
|
| 11 | % |
|
| 8 | % |
|
| 12 | % |
|
| 7 | % |
|
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
14.13. Income taxesTaxes
For the quarterquarters ended September 30, 2017,2019 and 2018, the Company’s income tax expense was $479, compared to a$1,504 and $1,242, respectively. For the nine months ended September 30, 2019 and 2018, the Company’s income tax benefit of $9 for the prior year period.expense was $3,354 and $3,410, respectively. The changeincrease in the income tax provision for the quarter ended September 30, 20172019 primarily related to a changethe provision to return true-ups for multiple international entity tax returns. This resulted in an international tax expense recorded in the geographical mix of income which increased taxable non-U.S. earnings before income taxes when compared to the prior year period.
For the nine months ended September 30, 2017,2019, the Company’s incometrue-up was offset by lower deferred tax expense was $1,192, compared to a tax provision of $369 for the prior year period. The change in the income tax provision for the nine months ended September 30, 2017 primarily related to a change in the geographical mixamortization of income which increased taxable non-U.S. earnings before income taxes when compared to the prior year period. goodwill.
As of September 30, 20172019 and December 31, 2016,2018, the Company maintained a valuation allowance against its net deferred tax assets primarily attributable to operations in the United States, as the realization of such assets was not considered more likely than not.
There were no0 changes to the Company’s unrecognized tax benefits during the nine months ended September 30, 2017.2019. 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. NoNaN interest and penalties related to uncertain tax positions were recognized during the nine months ended September 30, 2017.2019.
15.21
14. Commitments and Contingencies
Legal Proceedings
ORBCOMM v. CalAmp Corp.
On April 7, 2016, the Company filed a complaint against defendant CalAmp Corp. (“CalAmp”) in the U.S. District Court for the Eastern District of Virginia alleging infringement of five patents, seeking compensatory damages, treble damages, and an injunction.
On May 27, 2016, CalAmp filed a motion to dismiss the Company’s claims on the basis, inter alia, that the Company’s patents are directed at ineligible subject matter and are therefore invalid under 35 U.S.C. § 101. On July 22, 2016, the court denied CalAmp’s motion; however, CalAmp filed a motion for reconsideration of its motion to dismiss. On October 19, 2016, the court denied CalAmp’s motion for reconsideration with respect to four of the five patents in suits and granted CalAmp’s motion to invalidate one of the Company’s patents in-suit as an unpatentable abstract idea.
On July 18, 2016, CalAmp filed its answer to the Company’s complaint and counterclaim for (1) declaratory judgment of unenforceability of ORBCOMM’s patents in-suit; (2) inequitable conduct related to the U.S. Patent and Trademark Office action to correct one of the patents in-suit; and (3) an award of legal fees to CalAmp.
23
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
On January 25, 2017, the court ruled on the disputed claim construction issues with respect to the remaining patent in-suit, in which it ruled that the claim term “wireless network” is limited to wireless pager networks. While this claim construction resulted in a stipulation of non-infringement, the Company believes this claim construction to be incorrect and, prior to the global settlement described below, was in the process of filing an appeal which would have requested that this claim construction ruling be reviewed on a de novo basis.
Each of the Company and CalAmp filed motions for summary judgment with respect to CalAmp’s counterclaim for inequitable conduct related to the U.S. Patent and Trademark Office action to correct the one remaining patent-in-suit. CalAmp’s motion requested summary judgment finding inequitable conduct rendering the patent unenforceable and providing a basis to seek an award of its legal fees. The Company’s motion requested summary judgment to dismiss such counterclaim.
In April 2017, the parties settled the litigation pursuant to the CalAmp Settlement Agreement, as defined below.
CalAmp Wireless Networks Corporation v. ORBCOMM Inc.
On October 26, 2016, a patent infringement lawsuit was filed against the Company by CalAmp Wireless Networks Corporation (“CalAmp Wireless”) in the U.S. District Court for the Eastern District of Virginia. CalAmp Wireless alleged that certain of the Company’s modems, devices and geofencing systems for tracking and monitoring vehicles, machinery, and other assets infringe on two patents asserted by CalAmp Wireless. CalAmp Wireless did not make a specific damages claim, but sought compensatory damages, treble damages, and equitable relief.
On February 9, 2017, the court invalidated the majority of the claims in one of the two patents in-suit brought by CalAmp Wireless.
On April 24, 2017, the Company and CalAmp Wireless entered into a Confidential Settlement, General Release, and License Agreement (the “CalAmp Settlement Agreement”). The CalAmp Settlement Agreement resolves both pending litigation matters between the parties, described above, and provides that each of the Company and CalAmp Wireless grant the other royalty free licenses and covenants not to sue for the patents-in-suit described above, as well as general releases. Neither party made a settlement payment to the other party. Each of the Company and CalAmp will bear its own costs and fees associated with the prior litigation.
In addition to the foregoing matters, fromFrom time to time, the Company is involved in various litigation claims or matters involving ordinary and routine claims incidental to its business.business and acquisitions, including employment matters, acquisition related claims, patent infringement and contractual matters, among other issues. While the outcome of any such claims or litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings, including the matters described below, either individually or in the aggregate, will not have a material adverse effect on the Company’sits business, results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
Joseph Smith v. ORBCOMM Inc.
Joseph Smith filed a complaint on June 3, 2014 against ORBCOMM Inc. and StarTrak Information Technologies LLC in the Eastern District of Texas alleging infringement of U.S. Patent No. 6,611,686 (“the ’686 Patent”). On October 8, 2015, the Company and Joseph Smith entered into a Settlement and Patent Licensing Agreement (the “Smith Settlement Agreement”), which resulted in a dismissal of the pending litigation alleging infringement of the ’686 Patent. The Smith Settlement Agreement granted an exclusive license and transfer of all rights under the ’686 Patent to the Company in exchange for a one-time payment by the Company of $100 to Mr. Smith and the sharing between Mr. Smith and the Company of any net proceeds from the licensing or enforcement of the ’686 Patent.
In accordance with the terms of the Smith Settlement Agreement, the Company brought suit against CalAmp Corp. (“CalAmp”) in April 2016, which was settled on April 24, 2017 (the “CalAmp Settlement”). Pursuant to the CalAmp Settlement, no payments were made by either the Company or CalAmp and each of the Company and CalAmp granted the other royalty-free licenses and covenants not to sue for the patents-in-suit as well as general releases in order to resolve the litigation between CalAmp and the Company.
Mr. Smith claims that the Company received significant non-monetary consideration in the CalAmp Settlement (by virtue of the releases and covenants not to sue for the counterclaims and countersuits brought by CalAmp) in excess of the costs incurred by the Company to pursue CalAmp and is entitled to 50% of the value of such claimed non-monetary net proceeds under the Smith Settlement Agreement. On February 22, 2019, Mr. Smith filed a Demand for Arbitration asserting these claims, for an amount of $4,000 plus attorney’s fees. The Company believes these claims by Mr. Smith to be without merit and intends to defend itself vigorously.
Pursuant to a Settlement and General Release Agreement dated August 20, 2019 (“Second Smith Settlement Agreement”), Mr. Smith and the Company settled the pending arbitration action described above in part. Under the Second Smith Settlement Agreement, the parties agreed that the arbitrator’s award, if any, shall not exceed the amount of $800 and shall not be less than the amount of $200. If the award in the arbitrator’s final decision is greater than the amount of $800, the amount of the award shall be considered modified to reflect the amount of $800. If the award in the arbitrator’s final decision is less than the amount of $200, the award shall be considered modified to reflect the amount of $200. On or about August 23, 2019, the Company paid Mr. Smith the $200 minimum payment called for under the Second Smith Settlement Agreement. To the extent the arbitrator’s award exceeds $200, within five (5) business days after the award is issued, the Company is required to pay Mr. Smith or his designee the excess or balance of the award over the $200 minimum amount previously paid (up to the aggregate $800 maximum).
Timothy Slifkin v. ORBCOMM Inc.
The Company received a letter dated January 3, 2017 from Timothy Slifkin, containing a Demand for Arbitration asserting fraudulent misrepresentations and various contractual claims based on his employment with StarTrak Information Technologies LLC and seeking a declaratory judgment establishing his ownership of the stock appreciation rights that were forfeited as a result of his termination of employment, with a total monetary claim against of the Company of $1,000, plus attorney’s fees and punitive damages. The Company believes the claims in the Demand for Arbitration to be without merit and intends to defend itself vigorously. The Company filed a motion for summary judgment.
On September 20, 2019, the arbitrator granted the Company’s motion for summary judgment dismissing all of Mr. Slifkin’s claims.
22
Airtime creditsCredits
In 2001, in connection with the organization of ORBCOMM Europe 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;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 quarters ended September 30, 20172019 and 2016,2018, airtime credits used totaled approximately $8$7 and $7,$8, respectively. For both the nine months ended September 30, 20172019 and 2016,2018, airtime credits used totaled approximately $23 and $21, respectively.$22. As of September 30, 20172019 and 2016,2018, unused credits granted by the Company were approximately $1,986$1,926 and $2,016,$1,955, respectively.
15. Leases
16. Subsequent EventsLessee
On October 2, 2017, ORBCOMM Technology Ireland Limited,The Company determines whether an arrangement is a wholly owned subsidiarylease at inception. The Company has operating leases for land, office space, data centers and storage facilities, as well as office equipment and vehicles. The Company’s leases have remaining lease terms of less than one year to 14 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. The Company considered these options in determining the lease term used to establish the Company’s right-of use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The operating lease ROU assets also include any lease payments made in advance of lease commencements and exclude lease incentives. The lease terms used in the calculations of the operating ROU assets and operating lease liabilities include options to extend or terminate the lease when the Company entered intois reasonably certain that it will exercise those options. Lease expense for lease payments is recognized on a share purchase agreementstraight-line basis over the lease term.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company has lease agreements with Blue Tree Systems Limited, a global leaderlease and non-lease components, which are generally not accounted for separately.
Components of lease expense are as follows:
|
| Nine Months Ended September 30, |
| |
|
| 2019 |
| |
Operating lease cost |
| $ | 2,918 |
|
The Company has lease arrangements which are classified as short-term in enterprise fleet management softwarenature. These leases meet the criteria for operating lease classification. In addition, the Company has variable lease costs associated with certain leases. Lease costs associated with the short-term leases and variable lease components, included in SG&A expenses on the Company’s condensed consolidated statements of operations, are not material.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
|
| Nine Months Ended September 30, |
| |
|
| 2019 |
| |
Operating cash flow information: |
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
| $ | 3,128 |
|
Non-cash activity: |
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations |
| $ | 15,794 |
|
23
Supplemental balance sheet information related to the Company’s operating leases is as follows:
|
|
| September 30, |
| |
| Balance Sheet Classification |
| 2019 |
| |
Right-of-use assets | Other assets |
| $ | 13,823 |
|
Current lease liabilities | Accrued liabilities |
| $ | 2,791 |
|
Non-current lease liabilities | Other liabilities |
| $ | 14,124 |
|
Weighted-average remaining lease term and discount rate for the trucking and transportation industriesCompany’s operating leases are as follows:
September 30, | ||||
2019 | ||||
Weighted-average remaining lease term (in years) | 7.05 | |||
Weighted-average discount rate | 8.0 | % |
Maturities of lease liabilities by fiscal year for an aggregate consideration of (i) $34,750, subject to a working capital adjustment; (ii) issuance of 191,022 sharesthe Company’s operating leases are as follows:
|
| September 30, |
| |
|
| 2019 |
| |
2019 (remaining) |
| $ | 998 |
|
2020 |
|
| 3,804 |
|
2021 |
|
| 3,257 |
|
2022 |
|
| 2,933 |
|
2023 |
|
| 2,778 |
|
Thereafter |
|
| 8,551 |
|
Total lease payments |
|
| 22,321 |
|
Less: Imputed interest |
|
| (5,406 | ) |
Present value of lease liabilities |
| $ | 16,915 |
|
Lessor
Although most of the Company’s common stock, valued at $10.47 per share, which reflectedrevenue from its product sales comes from the Company’s common stock closing price one business day prior to the closing date; and (iii) additional consideration up to $5,750 based on Blue Tree Systems Limited achieving certain thresholds. On September 30, 2017,sale of subscriber communicators, the Company classified $34,500also leases some subscriber communicators to certain customers. The Company determines the existence of a lease when the customer controls the use of the identified product for a period of time defined in the lease agreement. The Company’s leases range in duration between three to five years, with payment generally collected in monthly installments. Refer to “Note 2 – Summary of Significant Accounting Policies” for more information.
The Company classifies these leases as cash held for acquisitionsales-type leases and recognizes revenue and cost of product sales upon delivery or installation, depending on the condensed consolidated balance sheet forspecific contractual terms. The Company’s leases include certain termination fees, as defined in the acquisitionlease agreements, and do not typically include purchase rights at the end of Blue Tree Systems Limited.the lease.
24
ORBCOMM Inc.
Notes to the Condensed Consolidated Financial Statements
(All amounts in thousands except share amounts, per share amounts or unless otherwise noted)-continued
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.1995
Certain statements discussed in this Part I, Item 2.2, “Management’s 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, estimates, objectives and expectations for future events, as well as projections, business trends, and other statements that are not historical facts. Such forward-looking statements are subject to known and unknown risks and uncertainties, some of which are beyond the Company’sour control, which may cause the Company’sour 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: demand for and market acceptance of our products and services and our ability to successfully implement our business plan; our dependence on our subsidiary companies (Market Channel Affiliates (“MCAs”)) and third partythird-party product and service developers and providers, distributors and resellers (Market Channel Partners (“MCPs”)) to develop, market and sell our products and services, especially in markets outside the United States; substantial losses we have incurred and may continue to incur; substantial competition in the telecommunications, Automatic Identification Service (“AIS”) data and industrial Internet of Things (“IoT”) industries; the inability to effect suitable investments, alliances and acquisitions and even if we are ableor the inability to make acquisitions, thesuccessfully integrate acquired businesses; defects, errors or other insufficiencies in our products or services; failure to integrate and effectively operate the acquired businesses and the exposuremeet minimum service level commitments to additional risks, such as unexpected costs, contingent or other liabilities, or weaknesses in internal controls, and issues related to non-compliance with domestic and foreign laws, particularly in acquisitionscertain of foreign businesses;our customers; our dependence on significant customers for a substantial portion of our revenues, including key customers such as JB Hunt Transport Services, Inc. (“JB Hunt”), Caterpillar Inc., Komatsu Ltd., Hub Group, OnixsatCarrier Transicold and Satlink S.L.; our ability to expand our business outside the United States includingand risks related to the economic, political and other conditions in foreign countries in whichwhere we do business, includingbusiness; fluctuations in foreign currency exchange rates; unanticipated domestic or foreign tax or fee liabilities; the possibility we will be required to collect certain taxes in jurisdictions where we have not historically done so; economic, political and other conditions; extreme events such as a man-made or natural disaster, earthquakes, severe weather or other climate change-related events; our dependence on a few significant vendors, service providers or suppliers, as well as the loss or disruption or slowdown in the supplylimited number of manufacturers for many of our products and services from these key vendors, such as our SkyWave business’s dependence on its commercial relationship with Inmarsat plc and the services provided by Inmarsat plc, including the continued availabilityservices; interruptions, discontinuations, slowdown or loss of Inmarsat plc’s satellites, the supply of subscriber communicators from our vendor Sanmina Corporation and Quake Global, or the supply of application specific integrated circuits (ASICs) from S3 Group; competition from existing and potential telecommunications competitors, including terrestrial-based and satellite-based network providers, some of which provide wireless network services to our customers in connection with our products and services;Corporation; legal proceedings; our reliance on intellectual property rightsproperty; increased regulatory restrictions; lack of in-orbit or other insurance for our ORBCOMM Generation 1 or ORBCOMM Generation 2 satellites; our reliance on third-party wireless and the risk that we,satellite network service providers to deliver existing and developing services in certain areas of our MCAs,business; significant interruptions, discontinuation or loss of satellite network or other services provided by Inmarsat plc; failure to maintain proper and effective internal controls; inaccurate estimates in accounting or incorrect financial assumptions; significant operating risks related to our MCPs and our customers may infringe on the intellectual property rights of others; inability to operatesatellites due to changesvarious types of potential anomalies and potential impacts of space debris or restrictions in the political, legal, regulatory, government, administrative and economic conditions and developments in the United States and other countries and territories in which we provide our services; legal proceedings;spacecraft; the failure of our systemsystems or reductions in levels of service due to technological malfunctions or deficiencies or other events such as in-orbit satellite failures, reduced performanceoutside of our existing satellites,control; difficulty upgrading or man-madereplacing aging hardware and software we use in operating our gateway earth stations and our customers’ subscriber communicators; technical or natural disastersother difficulties with our gateway earth stations; security risks related to our networks and other extreme events; rapiddata processing systems and significant technological changes, pricing pressuresthose of our third-party service providers; liabilities or additional costs as a result of laws, governmental regulations and other competitive factors;evolving views of personal privacy rights; failure of our information technology systems; cybersecurity risks; the level of our substantial indebtedness currentlyand the terms of our $250 million including the restrictive covenants8.0% senior secured note indenture and our revolving credit agreement, under the indenture governing our notes, and other termswhich we may borrow up to $25 million, that could restrict our business activities or our ability to execute our strategic objectives limit our operating flexibility or adversely affect our financial performance, all of which could be exacerbated if we incur additional indebtedness;performance; and the other risks described in our filings with the Securities and Exchange Commission (“SEC”). For more detail on these and other risks, please see our Annual Report on Form 10-K for the year ended December 31, 20162018 (“Annual Report”), and other documents onwe file with the SEC. The Company undertakesWe undertake no obligation to publicly revise any forward-looking statements or cautionary factors, except as required by law.
Unless otherwise noted or the context otherwise requires, references in this Form 10-Q to “ORBCOMM,” “the Company,” “our company,” “we,” “us” or “our” refer to ORBCOMM Inc. and its direct and indirect subsidiaries.
Overview
We are a global provider of Internet of Things (“IoT”)industrial IoT solutions, including network connectivity, devices, device management and web reporting applications. These solutions enable optimal business efficiencies, increased asset utilization and reduced asset write-offs, helping customers realize benefits on a worldwide basis. Our industrial IoT products and services are designed to track, monitor, control and enhance security for a variety of assets, such as trailers, trucks, rail cars, sea containers, power generators, fluid tanks, marine vessels, diesel or electric powered generators (“gensets”), oil and gas wells, pipeline monitoring equipment, irrigation control systems, and utility meters, in industries forthe transportation &and supply chain, heavy equipment, fixed asset monitoring and maritime and government.industries, as well as for governments. Additionally, we provide satellite Automatic Identification Service (“AIS”)AIS data services to assist in vessel navigation and to improve maritime safety for government and commercial customers worldwide. Through two acquisitions in 2017, we added vehicle fleet management, as well as in-cab and vehicle fleet solutions to our transportation product portfolio. We provide theseour services using multiple network platforms, including our own constellation of low-Earth orbit (“LEO”) satellites and our accompanying ground infrastructure, as well as terrestrial-based cellular communication services obtained through reseller agreements with major cellular (Tier One) wireless providers. We also offer customer solutions utilizing additional satellite network service options that we obtain through service agreements we have entered
25
into with multiplethird-party mobile satellite providers. Our satellite-based customer solution offerings use small, low power,low-power, mobile satellite subscriber communicators for remote asset connectivity, and our terrestrial-based solutions utilize cellular data modems with subscriber identity modules (“SIMS”SIMs”). We also resell service using the two-way Inmarsat plc satellite network to provide higher bandwidth, low-latency satellite products and services, leveraging our IsatDataPro (“IDP”) technology. Our customer
solutions provide access to data gathered over these systems through connections to other public or private networks, including the Internet. We are dedicated to providing what we believe are the most versatile, leading-edge industrial IoT solutions in our markets that enable our customers to run their business operationsbusinesses more efficiently and achieve significant return on investment.efficiently.
Customers benefiting from our network, products and solutions include original equipment manufacturers, or OEMs, such as Caterpillar Inc.,Doosan Infracore America, Hitachi Construction Machinery Co., Ltd., John Deere, Komatsu Ltd., and Volvo Construction Equipment; vertical market technology integrators known as value-added resellers (“VARs”) and, international value-added resellers (“IVARs”), such as I.D. Systems, Inc.,American Innovations, and Value-added Solutions Providersvalue-added solutions providers (“SPs”), such as Onixsat, Satlink and Sascar (collectively referred to as Market Channel Partners (“MCPs”))MCPs); and end-to-end solutions customers such as Carrier Transicold, Thermo King, C&S Wholesale, Canadian National Railways, CR England, Hub Group, Inc., JB Hunt, KLLM Transport Services, Marten Transport, Prime Inc., Swift Transportation, Target, Tropicana, Tyson Foods, Walmart and Werner Enterprises.
Critical Accounting Policies and Estimates
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 conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these condensed consolidated 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, accounts receivable, accounting for business combinations, goodwill, intangible assets, satellite network and other equipment, long-lived assets, capitalized development costs, income taxes, warranty costs, loss contingencies and the value of securities underlying stock-based compensation. 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 and estimates, see Part II, Item 7.7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. ThereExcept for Financial Accounting Standards Board Accounting Standards Update 2016-02 “Leases (Topic 842)” as noted in “Note 2 – Summary of Significant Accounting Policies” and “Note 15 – Leases” of the Notes to the Condensed Consolidated Financial Statements, there have been no material changes to our critical accounting policies during 2017.2019.
Revenues
We derive service revenues mostlyprimarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on our satellite network, as well as other satellite networks and cellular wireless networks that we resell to our customers (i.e., our MCPs, MCAs and direct customers). Usage fees are generally based upon the data transmitted by a customer and the overall number of subscriber communicators and SIMSand/or SIMs activated by each customer and whether we provide services through our value-added portal. Service revenues 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. We also generate recurring AIS service revenues from subscription basedsubscription-based services supplying recurring AIS data services to customers and resellers.resellers, as well as data analytic service revenues from monthly subscription-based services supplying analytical data to our customers. In addition, we earn service revenues from extended warranty service agreements extending beyond the initial warranty period of typically one year,year; installation services; royalty fees from third parties for the use of our proprietary communications protocol, charged onrecognized at a one-time basis forpoint in time when the third party notifies us of the units it has manufactured and a unique serial number is assigned to each subscriber communicator connected to our IoT data communications systemunit; and fees from providing engineering, technical and management support services to customers.
We derive product revenuessales primarily from sales of completeindustrial IoT telematics devices, modems and cellular wireless SIMSSIMs (for our terrestrial-communication services) to our resellers (i.e., our MCPs and MCAs) and direct customers. Revenues generated from product revenuessales are typicallyeither recognized either when the products are shipped or when customers accept the product, depending on the specific contractual terms. Shipping costs billed to customers are included in product sales revenues and the related costs are included as costscost of product sales.
Revenues generated from leasing arrangements of subscriber communicators are recognized using the estimated selling price for each deliverable in the arrangement. Product and installation revenues associated with these arrangements are recognized upon shipment or installation of the subscriber communicator, depending on the specific contractual terms. Service and warranty revenues 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.
26
Amounts received prior to the performance of services under customer contracts are recognized as deferred revenues and revenue recognition is deferred until such time that all revenue recognition criteria have been met.
The table below presents our revenues for the quarters and nine months ended September 30, 20172019 and 2016,2018, together with the percentage of total revenuerevenues represented by each revenue category (in thousands):category:
|
| Quarter Ended September 30, |
|
| Quarters Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
| ||||||||||||||||||||||||||
Service revenues |
| $ | 35,040 |
|
|
| 50.5 | % |
| $ | 28,846 |
|
|
| 62.3 | % |
| $ | 40,550 |
|
|
| 58.6 | % |
| $ | 38,473 |
|
|
| 54.2 | % |
Product sales |
|
| 34,326 |
|
|
| 49.5 | % |
|
| 17,442 |
|
|
| 37.7 | % |
|
| 28,643 |
|
|
| 41.4 | % |
|
| 32,569 |
|
|
| 45.8 | % |
|
| $ | 69,366 |
|
|
| 100.0 | % |
| $ | 46,288 |
|
|
| 100.0 | % |
| $ | 69,193 |
|
|
| 100.0 | % |
| $ | 71,042 |
|
|
| 100.0 | % |
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
| ||||||||||||||||||||||||||
Service revenues |
| $ | 95,629 |
|
|
| 53.7 | % |
| $ | 83,454 |
|
|
| 59.6 | % |
| $ | 119,295 |
|
|
| 59.0 | % |
| $ | 114,940 |
|
|
| 54.8 | % |
Product sales |
|
| 82,615 |
|
|
| 46.3 | % |
|
| 56,458 |
|
|
| 40.4 | % |
|
| 83,036 |
|
|
| 41.0 | % |
|
| 94,863 |
|
|
| 45.2 | % |
|
| $ | 178,244 |
|
|
| 100.0 | % |
| $ | 139,912 |
|
|
| 100.0 | % |
| $ | 202,331 |
|
|
| 100.0 | % |
| $ | 209,803 |
|
|
| 100.0 | % |
Total revenues for the quarters ended September 30, 20172019 and 20162018 were $69.4$69.2 million and $46.3$71.0 million, respectively, an increasea decrease of 49.9%2.5%. Total revenues for the nine months ended September 30, 20172019 and 20162018 were $178.2$202.3 million and $139.9$209.8 million, respectively, an increasea decrease of 27.4%3.6%.
Service revenuesRevenues
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Service revenues |
| $ | 35,040 |
|
| $ | 28,846 |
|
| $ | 6,194 |
|
|
| 21.5 | % | ||||||||||||||||
Recurring service revenues |
| $ | 39,161 |
|
| $ | 37,192 |
|
| $ | 1,969 |
|
|
| 5.3 | % | ||||||||||||||||
Other service revenues |
|
| 1,389 |
|
|
| 1,281 |
|
|
| 108 |
|
|
| 8.4 | % | ||||||||||||||||
Total service revenues |
| $ | 40,550 |
|
| $ | 38,473 |
|
| $ | 2,077 |
|
|
| 5.4 | % |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Service revenues |
| $ | 95,629 |
|
| $ | 83,454 |
|
| $ | 12,175 |
|
|
| 14.6 | % | ||||||||||||||||
Recurring service revenues |
| $ | 115,196 |
|
| $ | 111,010 |
|
| $ | 4,186 |
|
|
| 3.8 | % | ||||||||||||||||
Other service revenues |
|
| 4,099 |
|
|
| 3,930 |
|
|
| 169 |
|
|
| 4.3 | % | ||||||||||||||||
Total service revenues |
| $ | 119,295 |
|
| $ | 114,940 |
|
| $ | 4,355 |
|
|
| 3.8 | % |
We derive recurring service revenues from monthly fees from industrial IoT connectivity services, extended warranty service agreements extending beyond the initial warranty period of typically one year, royalty fees from third parties for the use of our proprietary communications protocol and activations of subscriber communicators and SIMs. We derive other service revenues from installation services, fees from providing engineering, technical and management support services to customers and the sale of software licenses to our customers.
The increaseincreases in service revenues for the quartersquarter and nine months ended September 30, 2017,2019, compared to the prior year period, wasperiods, were primarily due to revenue generated from growth in billable subscriber communicators across our services and from our acquisitions.
services. As of September 30, 2017,2019, including the billable subscriber communicators issued by Maersk Lines described below, we had approximately 1,898,0002,583,000 billable subscriber communicators compared to approximately 1,687,0002,304,000 billable subscriber communicators as of September 30, 2016,2018, an increase of 12.5%12.1%.
We were notified that our program with Maersk Lines, through our contract with AT&T Services, Inc., will not be extended and will expire on December 31, 2019. This program provides us with total recurring service revenues of approximately $3.0 million annually for engineering support services, with additional deferred revenues of approximately $0.6 million and $0.9 million recognized in the third quarter and first nine months of 2019, respectively. In addition, we recorded $0.4 million of other service revenues in the quarter ended September 30, 2019, related to device activations that had not been previously recognized. The contract and the accounting of revenues was assumed as part of the WAM Technologies, LLC acquisition in 2015. The program also accounts for approximately 400,000 billable subscribers, which will cease to have recurring service revenues associated with them. We will report billable subscribers both with and without these subscribers through the end of 2019, and without these subscribers beginning in 2020.
27
Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenue from these units.units, as well as the mix of new subscriber activations in the period.
Product salesSales
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Product sales |
| $ | 34,326 |
|
| $ | 17,442 |
|
| $ | 16,884 |
|
|
| 96.8 | % |
| $ | 28,643 |
|
| $ | 32,569 |
|
| $ | (3,926 | ) |
|
| (12.1 | )% |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Product sales |
| $ | 82,615 |
|
| $ | 56,458 |
|
| $ | 26,157 |
|
|
| 46.3 | % |
| $ | 83,036 |
|
| $ | 94,863 |
|
| $ | (11,827 | ) |
|
| (12.5 | )% |
We derive product sales primarily from sales of industrial IoT subscriber communicators, including telematics devices, modems and cellular wireless SIMs, to our resellers and direct customers, as well as through leasing arrangements of subscriber communicators.
The increasedecreases in product sales for the quarter and nine months ended September 30, 2017,2019, compared to the prior year period, wasperiods, were primarily due to a slowdown in the North American transportation market and timing of shipments toassociated with our existing and new customers during the 2019 period and the inclusion of a significant product deployments to new customers.deployment during the nine months ended September 30, 2018.
CostsCost of revenues, exclusiveRevenues, Exclusive of depreciationDepreciation and amortizationAmortization
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Cost of services |
| $ | 13,638 |
|
| $ | 9,791 |
|
| $ | 3,847 |
|
|
| 39.3 | % |
| $ | 12,568 |
|
| $ | 12,764 |
|
| $ | (196 | ) |
|
| (1.5 | )% |
Cost of product sales |
|
| 29,676 |
|
|
| 13,218 |
|
|
| 16,458 |
|
|
| 124.5 | % |
|
| 19,640 |
|
|
| 24,679 |
|
|
| (5,039 | ) |
|
| (20.4 | )% |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Cost of services |
| $ | 33,856 |
|
| $ | 28,330 |
|
| $ | 5,526 |
|
|
| 19.5 | % |
| $ | 39,123 |
|
| $ | 40,704 |
|
| $ | (1,581 | ) |
|
| (3.9 | )% |
Cost of product sales |
|
| 67,614 |
|
|
| 41,868 |
|
|
| 25,746 |
|
|
| 61.5 | % |
|
| 58,275 |
|
|
| 73,363 |
|
|
| (15,088 | ) |
|
| (20.6 | )% |
CostsCost of services is comprised of expenses to operate our network, such as payroll and related costs, including stock-based compensation, installation costs, and usage fees to third-party networks, but excludeexcludes depreciation and amortization discussed below. The increasedecrease in cost of services for the quarter and nine months ended September 30, 2017,2019, compared to the prior year period, was primarily due to an increasecost reductions associated with usage fees to third-party networks. The decrease in service revenues from growth in billable subscribers,cost of services for the nine months ended September 30, 2019, compared to the prior year period, was primarily due to the inclusion of non-recurring installation costs associated with significant product deployments induring the quarternine months ended September 30, 2017 and from our acquisitions.2018.
CostsCost of product sales includes the purchase price of subscriber communicators and SIMSSIMs sold, costs of warranty obligations, shipping charges, as well as operational costs to fulfill customer orders, including costs for employees and inventory management. The increasedecreases in cost of product sales for the quarter and nine months ended September 30, 2017,2019, were primarily due to the decrease in product sales and the lower costs associated with new product offerings and the mix of product shipments, compared to the prior year period, was primarily due to costs associated with the increased product sales and changes in the mix of product shipments.periods.
Selling, generalGeneral and administrative expensesAdministrative Expenses
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Selling, general and administrative expenses |
| $ | 13,755 |
|
| $ | 12,031 |
|
| $ | 1,724 |
|
|
| 14.3 | % |
| $ | 18,211 |
|
| $ | 14,823 |
|
| $ | 3,388 |
|
|
| 22.9 | % |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Selling, general and administrative expenses |
| $ | 39,329 |
|
| $ | 34,843 |
|
| $ | 4,486 |
|
|
| 12.9 | % |
| $ | 52,842 |
|
| $ | 51,352 |
|
| $ | 1,490 |
|
|
| 2.9 | % |
28
Selling, general and administrative (“SG&A”) expenses relate primarily to expenses for general management, sales and marketing, finance, professionalaudit and legal fees and general operating expenses. The increaseincreases in SG&A expenses for the quarter and nine months ended September 30, 2017,2019, compared to the prior year periods, reflected increases in employee-related costs and other operating expenses, mainlyperiod, was largely due to the reduction of the contingent liability related to our acquisitions, and increasesthe acquisition of inthinc Technology Solutions, Inc. in contractor and consulting costs for sales and engineering. In addition, the quarter ended September 30, 2018. The increase in SG&A expenses for the nine months ended September 30, 2016 reflected2019, compared to the prior year period, was primarily due to reductions in the contingent liabilities in 2018 to a refund of regulatory fees that did not repeatlarger extent than in 2017.the 2019 period, as well as other increased operating expenses.
Product development expensesDevelopment Expenses
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Product development |
| $ | 2,453 |
|
| $ | 1,217 |
|
| $ | 1,236 |
|
|
| 101.6 | % |
| $ | 3,686 |
|
| $ | 3,816 |
|
| $ | (130 | ) |
|
| (3.4 | )% |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Product development |
| $ | 5,964 |
|
| $ | 5,126 |
|
| $ | 838 |
|
|
| 16.3 | % |
| $ | 11,385 |
|
| $ | 9,671 |
|
| $ | 1,714 |
|
|
| 17.7 | % |
Product development expenses consist primarily of the expenses associated with our engineering efforts, including the cost of third parties, to provide maintenance and support for our current products and applications. ProductThe increase in product development expenses for the quarter and nine months ended September 30, 2017,2019, compared to the prior year period, increased mainly duereflects increases in employee-related and outside labor costs, as well as other expenses as we continue to develop new solutions and services for our acquisitions.customers.
Depreciation and amortizationAmortization
|
| Quarter Ended September 30, |
|
| Change |
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Depreciation and amortization |
| $ | 12,041 |
|
| $ | 11,158 |
|
| $ | 883 |
|
|
| 7.9 | % |
| $ | 12,794 |
|
| $ | 12,081 |
|
| $ | 713 |
|
|
| 5.9 | % |
|
| Nine Months Ended September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| Dollars |
|
| % |
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||||||
Depreciation and amortization |
| $ | 34,463 |
|
| $ | 31,668 |
|
| $ | 2,795 |
|
|
| 8.8 | % |
| $ | 37,998 |
|
| $ | 36,146 |
|
| $ | 1,852 |
|
|
| 5.1 | % |
The increaseincreases in depreciation and amortization for the quarter and nine months ended September 30, 2017,2019, compared to the prior year period, wasperiods, were primarily due to higher depreciation associated with our capitalized costs attributable to the design, development and enhancements of our products and services as well as additional amortization expense associated with acquired intangibles assets. The increase in depreciationsold to our customers and amortization for the nine months ended September 30, 2017, compared to the prior year period, was primarily due to additional depreciation expense associated with the ORBCOMM Generation 2 (“OG2”) satellites placed into service on March 1, 2016, as well as additional amortization expense associated with acquired intangible assets.our internally developed software.
Acquisition-Related and Integration Costs
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Acquisition-related and integration costs |
| $ | 4 |
|
| $ | 395 |
|
| $ | (391 | ) |
|
| (99.0 | )% |
Impairment loss – satellite network
Between April 2017 and July 2017, there was a loss of communication with three OG2 satellites. The Company established a comprehensive investigative team that included outside independent consultants, internal engineering and OG2 contractors to determine the root cause of the anomalies affecting these three OG2 satellites and associated corrective measures. The investigative team identified two potential primary causes for the loss of communication and developed operational procedures and software enhancements to mitigate the risk of a similar anomaly from occurring on other OG2 satellites. The investigative team did not identify a systemic design flaw in the OG2 satellites.
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Acquisition-related and integration costs |
| $ | 693 |
|
| $ | 1,495 |
|
| $ | (802 | ) |
|
| (53.6 | )% |
On October 31, 2017, the Company’s Audit Committee of the Board of Directors concluded, based on management’s recommendation and the information provided by the investigative team, that a non-cash impairment charge of $31.2 million should be recorded as a recognized subsequent event in accordance with FASB ASC Topic 855 “Subsequent Events” to write-off the net book value of the three OG2 satellites for the quarter ended September 30, 2017 and decreased satellite network and other equipment by $39.6 million and associated accumulated depreciation by $8.4 million to remove the assets as of September 30, 2017. The impairment charge is reflected in the accompanying condensed consolidated financial statements. No amount of the impairment charge represents a cash expenditure. Satellite network capacity remains multiple times more capable than current demand, while there has been a small effect on message delivery times.29
In August 2016, we lost communication with one of our OG2 satellites. For the quarter ended September 30, 2016, we recorded a non-cash impairment charge of $10.7 million to write-off the net book value of the satellite.
Acquisition-related and integration costs
Acquisition-related and integration costs include professional services expenses and identifiable integration costs directly attributable to our acquisitions. For the quarters ended September 30, 2017 and 2016, we incurredThe decreases in acquisition-related and integration costs of $0.8 millionfor the quarter and $0.2 million, respectively. For the nine months ended September 30, 2017 and 2016, we incurred acquisition-related and integration costs of $2.3 million and $1.2 million, respectively. The increase in acquisition-related and integration costs reflect higher acquisition and integration activity in the 2017 periods2019, compared to the prior year periods, reflect lower acquisition and integration activity for the 2019 periods.
Other income (expense)Income (Expense)
Other income (expense) is comprised primarily of interest expense, foreign exchange gains and losses and interest income related to capital leases and from our cash and cash equivalents.equivalents, which can consist of U.S. Treasuries and interest-bearing instruments.
For the quarter ended September 30, 2017,
|
| Quarters Ended September 30, |
|
| Change |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Interest income |
| $ | 444 |
|
| $ | 648 |
|
| $ | (204 | ) |
|
| (31.5 | )% |
Other income (expense) |
|
| 188 |
|
|
| 120 |
|
|
| 68 |
|
|
| 56.7 | % |
Interest expense |
|
| (5,287 | ) |
|
| (5,232 | ) |
|
| (55 | ) |
|
| 1.1 | % |
Total other expense |
| $ | (4,655 | ) |
| $ | (4,464 | ) |
| $ | (191 | ) |
|
| 4.3 | % |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Interest income |
| $ | 1,408 |
|
| $ | 1,576 |
|
| $ | (168 | ) |
|
| (10.7 | )% |
Other income (expense) |
|
| 130 |
|
|
| 108 |
|
|
| 22 |
|
|
| 20.4 | % |
Interest expense |
|
| (15,850 | ) |
|
| (15,733 | ) |
|
| (117 | ) |
|
| 0.7 | % |
Total other expense |
| $ | (14,312 | ) |
| $ | (14,049 | ) |
| $ | (263 | ) |
|
| 1.9 | % |
The increases in other expense was $5.0 million, which consisted primarily of interest expense of $5.2 million relating to our Senior Secured Notes (as defined below), offset, in part, by interest income of $0.3 million. For the quarter ended September 30, 2016, total other expense was $1.9 million, which consisted primarily of interest expense of $2.5 million relating to our Secured Credit Facilities (as defined below), offset, in part, by a gain of $0.4 million as a result of a legal settlement.
For the nine months ended September 30, 2017, total other expense was $16.0 million, which consisted primarily of interest expense of $12.5 million relating to our Senior Secured Notes and Secured Credit Facilities and a loss on extinguishment of our Secured Credit Facilities of $3.9 million, offset, in part, by interest income and other expenses of $0.3 million. For the nine months ended September 30, 2016, total other expense was $6.0 million, consisting of interest expense relating to our Secured Credit Facilities of $6.6 million and foreign currency losses of $0.1 million, offset, in part, by a gain of $0.4 million as a result of a legal settlement and interest income of $0.3 million. The increase in interest expense for the quarter and nine months ended September 30, 2017,2019, compared to the prior year period, wasperiods, were primarily due to higherdecreased interest rates associated withincome related to our Senior Secured Notes issued April 10, 2017. capital leases and our cash and cash equivalents during the period.We believe our foreign exchange exposure is limited as a majority of our revenue is collected in U.S. dollars.
Income taxesTaxes
For the quarter ended September 30, 20172019, our income tax expense was $0.5$1.5 million, compared to an income tax benefit of less than $0.1$1.2 million for the prior year period. For both the nine months ended September 30, 2019 and 2018, our income tax expense was $3.4 million. The changeincrease in the income tax provision for the quarter ended September 30, 20172019 primarily related to a changethe provision to return true-ups for multiple international entity tax returns. This resulted in an international tax expense recorded in the geographical mix of income which increased taxable non-U.S. earnings before income taxes when compared to the prior year period.
For For the nine months ended September 30, 2017, our income2019, the true-up was offset by lower deferred tax expense was $1.2 million, compared to $0.4 million for the prior year period. The change in the income tax provision for the nine months ended September 30, 2017 primarily related to a change in the geographical mixamortization of income which increased taxable non-U.S. earnings before income taxes when compared to the prior year period.goodwill.
As of September 30, 20172019 and 2016,December 31, 2018, we maintained a valuation allowance against our net deferred tax assets primarily attributable to operations in the United States, as the realization of such assets was not considered more likely than not.
Net lossLoss
For the quarter ended September 30, 2017,2019, we had a net loss of $39.7$3.9 million compared to a net loss of $14.0$3.2 million in the prior year period, principallyprimarily due to the $31.2 million satellite impairment, increased interest expense on our Secured Credit Facilities as discussed above, and increased SG&A offset, in part, by a $10.7 million satellite impairment charge included in the 2016 period. costs, as described above.
For the nine months ended September 30, 2017,2019, we had a net loss of $53.7$15.7 million compared to a net loss of $20.1$20.4 million in the prior year period, principallyprimarily due to the $31.2 million satellite impairment, the increased interest expense, the inclusion of the loss on extinguishment ofdecreased costs associated with our Secured Credit Facilities, increased SG&Aproducts and increased depreciation and amortization as discussed above in the 2017 period, compared to the 2016 period, which included the $10.7 million satellite impairment charge.services.
Noncontrolling interestsInterests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.shareholders, representing $0.14 million and $0.27 million for the quarter and nine months ended September 30, 2019, respectively, and $0.07 million and $0.22 million for the quarter and nine months ended September 30, 2018, respectively.
Net loss attributableLoss Attributable to ORBCOMM Inc.
For the quarter ended September 30, 2017,2019, we had a net loss attributable to our company of $39.7$4.0 million compared to a net loss of $14.0$3.3 million in the prior year period. For the nine months ended September 30, 2017,2019, we had a net loss attributable to our company of $53.8$15.9 million compared to a net loss of $20.3$20.6 million in the prior year period.
For the quarters and nine months ended September 30 2016, the net loss attributable to our common stockholders considers dividends of less than $0.1 million paid in shares of Series A convertible preferred stock.
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs, our abilityobligations to make scheduled payments of interest on our indebtedness and our need to fund capital expenditures to support our current operations and to facilitate growth and expansion. We have financed our operations and expansion with cash flows from operating activities, sales of our common stock through public offerings and private placements of debt. At September 30, 2017,2019, we had an accumulated deficit of $158.7$208.4 million. Our primary sources of liquidity consist of cash and cash equivalents totaling $37.4$50.9 million cash heldat September 30, 2019 and an unused Revolving Credit Facility under the Revolving Credit Agreement, as described below, available for acquisition of $34.5 million, as well as cash flows from operating activities,use for working capital and general business purposes, which we believe will be sufficient to provide working capital, supportmake interest payments and make capital expenditures to support operations and facilitate growth and expansion for the next twelve months.
Cash provided by our operating activities for the nine months ended September 30, 2019 was $20.8 million, resulting from a net loss of $15.7 million and cash used by working capital of $7.9 million, offset by non-cash items including $38.0 million for depreciation and amortization and $5.4 million for stock-based compensation. Working capital activities primarily consisted of an increase of $6.0 million in accounts receivable largely related to timing of receivables, an increase of $4.0 million in inventory, an increase of $3.3 million in prepaid expenses and other assets and a decrease of $1.2 million in other liabilities, offset, in part, by an increase of $7.0 million in accounts payable and accrued liabilities primarily related to timing of payments.
Cash used in our operating activities for the nine months ended September 30, 20172018 was $7.2$0.9 million, resulting from a net loss of $53.7$20.4 million and cash used by working capital of $18.7 million, offset by non-cash items including $34.5$36.1 million for depreciation and amortization $31.2 million for an impairment loss on our satellite network, $4.3and $5.7 million for stock-based compensation and $2.9 million for amortization and write-off of deferred financing fees. These non-cash add backs were offset by a working capital use of cash of $26.5 million.compensation. Working capital activities primarily consisted of an increasea decrease of $18.0 million in accounts receivable relating to timing of receivables, an increase of $11.9 million in inventories and an increase of $4.2 million in prepaid expenses and other assets, offset, in part, by an increase of $8.9$11.5 million in accounts payable and accrued expensesliabilities primarily related to timing of payments.
Cash provided by our operating activities for the nine months ended September 30, 2016 was $19.1 million resulting from a net loss of $20.1 million, offset by non-cash items including $31.7 million for depreciationpayments and amortization, $10.7 million for an impairment loss on our satellite network and $3.8 million for stock-based compensation. These non-cash add backs were offset by a working capital use of cash of $8.3 million. Working capital activities primarily consisted of an increase of $3.9$14.5 million in accounts receivable relatingrelated to timing of receivables, offset, in part, by a decrease of $2.5$5.6 million in deferred revenues and a decrease of $1.0 million in accounts payable and accrued expenses primarily related to timing of payments.inventories.
Investing activitiesActivities
Cash used in our investing activities for the nine months ended September 30, 20172019 was $90.8$16.2 million, resulting primarily from cash held for acquisition of $34.5 million for the acquisition of Blue Tree Systems Limited, $34.2 million in cash consideration paid in connection with our acquisition of inthinc Technology Solutions, Inc. (“inthinc”) and capital expenditures of $21.4 million during the period, including approximately $4.0 million related to payments for the OG2 program.period.
Cash used in our investing activities for the nine months ended September 30, 20162018 was $25.1$16.5 million, resulting from capital expenditures of $22.5during the period.
Financing Activities
Cash used in our financing activities for the nine months ended September 30, 2019 was $7.3 million, including approximately $8.3 million relateddue to payments for the OG2 program, and $3.5of $7.9 million in cash consideration paidpurchases of common stock under the Company’s share repurchase program, offset, in connection with our acquisition of Skygistics (PTY), Ltd., partially offsetpart, by $1.0$0.6 million in a returnproceeds from the sale of restricted cash upon reaching certain milestones related to our OG2 satellite constellation.
Financing activitiescommon stock under the employee stock purchase plan.
Cash provided by our financing activities for the nine months ended September 30, 20172018 was $109.8$28.6 million, primarily due to proceeds of $28.0 million received from issuance of our Senior Secured Notes of $250.0 million, proceeds from issuancepublic offering of common stock under a private offering of $15.0 million, offset,completed in part, by payment of $5.4 million of debt issuance costs related to our Senior Secured Notes and the $150.0 million repayment of our Secured Credit Facilities.
Cash used in our financing activities for the nine months ended September 30, 2016 was $0.3 million.April 2018.
Future Liquidity and Capital Resource Requirements
We expectbelieve that our existing cash and cash equivalents, along with expected cash flows from operating activities and additional funds available under our Revolving Credit Facility will be sufficient over the next 12 months to provide working capital, cover interest payments on our Senior Secured Notesdebt facilities and fund growth initiatives and capital expenditures.
On September 30, 2014, we entered into a credit agreement (“Credit Agreement”) with Macquarie CAF LLC in order to refinance our $45 million 9.5% per annum senior notes. Pursuant to the Credit Agreement, the Lender provided secured credit facilities in an aggregate amount of $160 million (our “Secured Credit Facilities”) comprised of (i) an initial term loan facility in an aggregate principal amount of up to $70 million; (ii) a $10 million revolving credit facility; (iii) the Term B2 loan facility in an aggregate principal amount of up to $10 million, the proceeds of which were used to partially finance the acquisition of InSync Solutions Inc. in 2015; and (iv) the Term B3 loan facility in an aggregate principal amount of up to $70 million, the proceeds of which were used to partially finance the acquisition of SkyWave Mobile Communications Inc. in 2015.
On April 10, 2017, we issued $250$250.0 million aggregate principal amount of the senior secured notes8.0% Senior Secured Notes due 2024 (the “Senior Secured Notes”). 2024. The Senior Secured Notes were issued pursuant to an indenture,Indenture, dated as of April 10, 2017, among us, certain of our domestic subsidiaries party thereto (the “Guarantors”) and U.S. Bank National Association, as trustee and collateral agent (the “Indenture”).agent. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by the Guarantors, and the Senior Secured Notes are secured on a first priority basis by (i) pledges of capital stock of certain of our directly- and indirectly-owned subsidiaries; and (ii) substantially all of our and our Guarantors’ other property and assets, to the extent a first priority security interest is able to be granted or perfected therein, and subject, in all cases, to certain specified exceptions.exceptions, and an intercreditor agreement with the collateral agent for our Revolving Credit Facility described below. Interest payments are due on the Senior Secured Notes semi-annually in arrears on April 1 and October 1, beginning October 1, 2017.
31
We will have the option to redeem some or all of the Senior Secured Notes at any time on or after April 1, 2020, at redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption. We will also have the option to redeem some or all of the Senior Secured Notes at any time before April 1, 2020 at a redemption price of 100% of the principal amount of the Senior Secured Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before April 1, 2020, we may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption, with the proceeds from certain equity issuances.
The Indenture contains covenants that, among other things, limit usour ability and our restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting our subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various exceptions and baskets as set forth in the Indenture, including the incurrence by us and our restricted subsidiaries of indebtedness under potential new credit facilities in the aggregate principal amount at any one time outstanding not to exceed $50 million.
On December 18, 2017, we and certain of our subsidiaries entered into a Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent. The Revolving Credit Agreement provides for a Revolving Credit Facility in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes and matures on December 18, 2022. The Revolving Credit Facility will bear interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin of 1.50% in the case of alternative base rate loans and 2.50% in the case of adjusted LIBOR loans. The Revolving Credit Facility is secured by a first priority security interest in substantially all of our and our subsidiaries’ assets under a Security Agreement among the Company, the applicable subsidiaries and JPMorgan Chase Bank, N.A., subject to an intercreditor agreement with the indenture trustee for the Senior Secured Notes. The Revolving Credit Facility has no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Revolving Credit Agreement, we may borrow, repay and reborrow amounts under the Revolving Credit Facility at any time prior to the maturity date.
The Revolving Credit Agreement contains covenants that, among other things, limit us and our restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting our subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets, subject, in all cases, to certain specified exceptions. Such limitations have various baskets as set forth in the Revolving Credit Agreement.
At September 30, 2019, no amounts were outstanding under the Revolving Credit Facility. As of September 30, 2019, we were in compliance with all financial covenants under the Revolving Credit Agreement.
On April 10, 2017, a portion of the proceeds of the issuance of the Senior Secured Notes was used to repay in full our outstanding obligations under, and to terminate our $150 million outstanding Secured Credit Facilities incurred pursuant to the Credit Agreement, resulting in an early payment fee of $1.5 million and an additional expense associated with the remaining unamortized debt issuance cost of $2.4 million.
On May 26, 2016,2018, we completed the acquisitiona public offering of Skygistics (PTY), Ltd. for cash consideration of $3.8 million and additional contingent consideration of up to $1.0 million, subject to meeting certain operational milestones.
On June 9, 2017, we completed the acquisition of inthinc for cash consideration of $34.2 million, issuance of 76,7963,450,000 shares of our common stock, valued at $9.95 per share, andincluding 450,000 shares sold upon exercise in full of the underwriters’ option to purchase additional contingent consideration of up to $25.0 million, subject to meeting certain operational milestones.
On June 15, 2017, we completed a private placement of 1,552,795 shares of our common stock at a price of $9.66$8.60 per share, calculated as 95% of the volume-weighted average trading price of our common stock for the 30 trading days ending on June 14, 2017, for which weshare. We received net proceeds of $15.0 million.approximately $28.0 million after deducting underwriters’ discounts and commissions and offering costs.
On October 2, 2017,April 13, 2018, we entered intofiled a share purchase agreementshelf registration statement with Blue Tree Systems Limited, a global leaderthe SEC, registering an unspecified amount of debt and/or equity securities that we may offer in enterprise fleet management software forone or more offerings on terms to be determined at the truckingtime of sale. The shelf registration statement was automatically effective upon filing and transportation industries for an aggregate consideration of (i) $34.8 million, subjectsuperseded and replaced our previous shelf registration statement declared effective on April 14, 2015, which was due to a working capital adjustment; (ii) issuance of 191,022 shares of the Company’s common stock, valued at $10.47 per share, which reflected the Company’s common stock closing price one business day prior to the closing date;expire on April 14, 2018.
Non-GAAP Financial Measures
EBITDA and (iii) additional consideration up to $5.8 million based on Blue Tree Systems Limited achieving certain thresholds.
Adjusted EBITDA
EBITDA is defined as earnings attributable to ORBCOMM Inc. before interest income (expense), provision for income taxes, and depreciation and amortization.amortization and loss on debt extinguishment. 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.We also
32
believe Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, noncontrolling interests, impairment loss, non-capitalized satellite launch and in-orbit insurance, and acquisition-related and integration costs, is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the condensed consolidated statements of operations.
EBITDA isand Adjusted EBITDA are not a performance measuremeasures calculated in accordance with U.S. GAAP. While we consider EBITDA and Adjusted EBITDA to be an important measuremeasures of operating performance, itthey should be considered in addition to, and not as a substitutesubstitutes for, or superior to, net incomeloss or other measures of financial performance prepared in accordance with U.S. GAAP and may be different than EBITDA and Adjusted EBITDA measures presented by other companies.
The following table reconciles our net loss attributable to ORBCOMM Inc. to EBITDA and Adjusted EBITDA for the periods shown:
|
| Quarter Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
Net loss attributable to ORBCOMM Inc. |
| $ | (39,682 | ) |
| $ | (14,041 | ) |
| $ | (53,765 | ) |
| $ | (20,306 | ) |
| $ | (4,013 | ) |
| $ | (3,295 | ) |
| $ | (15,922 | ) |
| $ | (20,603 | ) |
Income tax expense |
|
| 479 |
|
|
| (9 | ) |
|
| 1,192 |
|
|
| 369 |
|
|
| 1,504 |
|
|
| 1,242 |
|
|
| 3,354 |
|
|
| 3,410 |
|
Interest income |
|
| (266 | ) |
|
| (100 | ) |
|
| (522 | ) |
|
| (283 | ) |
|
| (444 | ) |
|
| (648 | ) |
|
| (1,408 | ) |
|
| (1,576 | ) |
Interest expense |
|
| 5,197 |
|
|
| 2,471 |
|
|
| 12,466 |
|
|
| 6,615 |
|
|
| 5,287 |
|
|
| 5,232 |
|
|
| 15,850 |
|
|
| 15,733 |
|
Loss on debt extinguishment |
|
| — |
|
|
| — |
|
|
| 3,868 |
|
|
| — |
| ||||||||||||||||
Depreciation and amortization |
|
| 12,041 |
|
|
| 11,158 |
|
|
| 34,463 |
|
|
| 31,668 |
|
|
| 12,794 |
|
|
| 12,081 |
|
|
| 37,998 |
|
|
| 36,146 |
|
EBITDA |
| $ | (22,231 | ) |
| $ | (521 | ) |
| $ | (2,298 | ) |
| $ | 18,063 |
|
|
| 15,128 |
|
|
| 14,612 |
|
|
| 39,872 |
|
|
| 33,110 |
|
Stock-based compensation |
|
| 1,663 |
|
|
| 2,312 |
|
|
| 5,406 |
|
|
| 5,747 |
| ||||||||||||||||
Net income attributable to noncontrolling interests |
|
| 144 |
|
|
| 73 |
|
|
| 271 |
|
|
| 216 |
| ||||||||||||||||
Acquisition-related and integration costs |
|
| 4 |
|
|
| 395 |
|
|
| 693 |
|
|
| 1,495 |
| ||||||||||||||||
Adjusted EBITDA |
| $ | 16,939 |
|
| $ | 17,392 |
|
| $ | 46,242 |
|
| $ | 40,568 |
|
For the third quarter of 2017ended September 30, 2019 compared to the third quarter of 2016,ended September 30, 2018, EBITDA decreased $21.7increased $0.5 million, while net loss attributable to ORBCOMM Inc. increased $25.6$0.7 million and Adjusted EBITDA decreased $0.5 million. For the quarter ended September 30, 2017, the net loss included a $31.2 million impairment charge on our satellite network. The rate of decrease for EBITDA compared to the net loss increase for the quarter ended September 30, 2017, compared to the prior year period, primarily reflects increased interest expense associated with our Senior Secured Notes issued in April 2017 at a higher interest rate.
For the nine months ended September 30, 20172019 compared to the nine months ended September 30, 2016,2018, EBITDA decreased $20.4increased $6.8 million, while net loss attributable to ORBCOMM Inc. decreased $4.7 million and Adjusted EBITDA increased $33.5$5.7 million. For
Non-GAAP Gross Margin
Non-GAAP Service Gross Margin is defined as Non-GAAP Service gross profit divided by service revenues. Non-GAAP Service gross profit is defined as service revenues, minus cost of services (including depreciation and amortization expense) plus depreciation and amortization expense. Non-GAAP Product Gross Margin is defined as Non-GAAP Product gross profit divided by product sales. Non-GAAP Product gross profit is defined as product sales, minus cost of product sales (including depreciation and amortization expense) plus depreciation and amortization expense. We believe that Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are useful to evaluate and compare the results of our operations from period to period on a consistent basis by removing the depreciation and amortization impact of capital investments from our operating results.
Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are not performance measures calculated in accordance with U.S. GAAP. While we consider Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin to be important measures of operating performance, they should be considered in addition to, and not as substitutes for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP and may be different than Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin measures presented by other companies.
The following tables reconcile GAAP Service Gross Margin to Non-GAAP Service Gross Margin and GAAP Product Gross Margin to Non-GAAP Product Gross Margin for the periods shown:
33
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
(In thousands, except margin data) |
|
|
|
|
|
| ||||||||||
Service revenues |
| $ | 40,550 |
|
| $ | 38,473 |
|
| $ | 119,295 |
|
| $ | 114,940 |
|
Minus - Cost of services, including depreciation and amortization expense |
|
| 16,804 |
|
|
| 17,059 |
|
|
| 51,858 |
|
|
| 53,576 |
|
GAAP Service gross profit |
| $ | 23,746 |
|
| $ | 21,414 |
|
| $ | 67,437 |
|
| $ | 61,364 |
|
Plus - Depreciation and amortization expense |
|
| 4,236 |
|
|
| 4,295 |
|
|
| 12,735 |
|
|
| 12,872 |
|
Non-GAAP Service gross profit |
| $ | 27,982 |
|
| $ | 25,709 |
|
| $ | 80,172 |
|
| $ | 74,236 |
|
GAAP Service Gross Margin |
|
| 58.6 | % |
|
| 55.7 | % |
|
| 56.5 | % |
|
| 53.4 | % |
Non-GAAP Service Gross Margin |
|
| 69.0 | % |
|
| 66.8 | % |
|
| 67.2 | % |
|
| 64.6 | % |
|
| Quarters Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
(In thousands, except margin data) |
|
|
|
|
|
| ||||||||||
Product sales |
| $ | 28,643 |
|
| $ | 32,569 |
|
| $ | 83,036 |
|
| $ | 94,863 |
|
Minus - Cost of product sales, including depreciation and amortization expense |
|
| 20,352 |
|
|
| 25,414 |
|
|
| 60,385 |
|
|
| 75,887 |
|
GAAP Product gross profit |
| $ | 8,291 |
|
| $ | 7,155 |
|
| $ | 22,651 |
|
| $ | 18,976 |
|
Plus - Depreciation and amortization expense |
|
| 712 |
|
|
| 735 |
|
|
| 2,110 |
|
|
| 2,524 |
|
Non-GAAP Product gross profit |
| $ | 9,003 |
|
| $ | 7,890 |
|
| $ | 24,761 |
|
| $ | 21,500 |
|
GAAP Product Gross Margin |
|
| 28.9 | % |
|
| 22.0 | % |
|
| 27.3 | % |
|
| 20.0 | % |
Non-GAAP Product Gross Margin |
|
| 31.4 | % |
|
| 24.2 | % |
|
| 29.8 | % |
|
| 22.7 | % |
GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 58.6% in the third quarter of 2019, compared to 55.7% in the prior year period. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 69.0% in the third quarter of 2019, compared to 66.8% in the prior year period. This increase was primarily due to recurring service revenue growth and reduced costs. GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 56.5% in the nine months ended September 30, 2017 and 2016, the net loss included a $31.2 million and $10.7 million impairment charge on our satellite network, respectively. The rate of decrease for EBITDA2019 compared to 53.4% in the net loss increase forprior year period. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.2% in the nine months ended September 30, 2017,2019, compared to 64.6% in the prior year period. These improvements were due to bringing onboard new subscribers at higher margins and limiting product installations at negative margins in the nine months ended September 30, 2019, compared to the prior period,year period.
GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 28.9% in the third quarter of 2019, compared to 22.0% in the prior year period. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 31.4% in the third quarter of 2019, compared to 24.2% in the prior year period. GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 27.3% in the nine months ended September 30, 2019, compared to 20.0% in the prior year period. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 29.8% in the nine months ended September 30, 2019, compared to 22.7% in the prior year period. These improvements were primarily reflects increased interest expense associated with our Senior Secured Notes issueddue to a better mix of higher-margin products shipped in April 2017 at a higher interest rategreater volumes in the quarter and a loss on debt extinguishment incurred uponnine months ended September 30, 2019, compared to the repayment of our Secured Credit Facilities, as well as higher depreciation associated with the OG2 satellites placed into service on March 1, 2016 and higher amortization expenses associated with acquired intangible assets from the acquisition of inthinc.prior year periods.
Contractual Obligations
With the exceptionAs of the Senior Secured Notes and the associated interest as described above,September 30, 2019, there have been no material changes in our contractual obligations as of September 30, 2017, as previously disclosed in our Annual Report.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
ThereAs of September 30, 2019, there have been no material changes in our assessment of our sensitivity to market risk, as of September 30, 2017, as previously disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risks” in our Annual Report.
34
Concentration of credit riskCredit Risk
For the quarter ended September 30, 2017, JB Hunt Transport Services Inc. comprised 14.9% of our consolidated total revenues. There were no customers withwho generated revenues greater than 10% of our consolidated total revenues for the nine months ended September 30, 2017. There were no customers with revenues greater than 10% of ourCompany’s consolidated total revenues for the quarters and nine months ended September 30, 2016.2019 and 2018.
Item 4. Disclosure Controls and Procedures
Evaluation of the Company’s disclosure controlsDisclosure Controls and procedures.Procedures
The Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s 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”))amended), as of September 30, 2017.2019. Based on their evaluation, the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.2019.
Changes in Internal Control over Financial Reporting.Reporting
We reviewed our internal control over financial reporting at September 30, 2017.2019. As a result of the acquisitionacquisitions of inthinc, inc. (“Inthinc”) in June 2017 and Blue Tree Systems Limited (“Blue Tree”) in October 2017, we have beguncontinue to integrate certain business processes and systems of inthinc. Inthinc and Blue Tree. Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as this integration is complete. In reliance on interpretive guidance issued by the SEC staff, management has chosen to exclude disclosure of changes in internal control over financial reporting related to inthinc.
There have been no other changes in our internal control over financial reporting identified in an evaluation thereof that occurred during the quarternine months ended September 30, 20172019, that materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
From time to time, weWe are involved in various litigation claims or matters involving ordinary and routine claims incidental to our business. While the outcome of any suchbusiness and acquisitions, including employment matters, acquisition related claims, orpatent infringement and contractual matters, cannot be predicted with certainty, weamong other issues. Management currently believebelieves that the outcome of these proceedings, either individually or in the aggregate, will not have a material adverse effect on our business, results of operations or financial condition. We record reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
See “Note 1514 – Commitments and Contingencies” to our notesof the Notes to the condensed consolidated financial statementsCondensed Consolidated Financial Statements for the nine months ended September 30, 20172019 included in this Quarterly Report on Form 10-Q for a description of our significant legal proceedings, which is incorporated by reference herein.
ThereAs of September 30, 2019, there have been no material changes in the risk factors as of September 30, 2017 previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report, except that the risk factors under the heading “Risks Related to Our Debt” are replaced in their entirety with the following:Report.
Risks Related to Our Debt
Our substantial indebtedness may adversely affect our business, financial condition and operating results.
We have $250 million in aggregate principal amount of total debt outstanding under our 8.0% senior secured notes due 2024 (the “Senior Secured Notes”). Our level of indebtedness may have material adverse effects on our business, financial condition and operating results, including to:
make it more difficult for us to satisfy our debt service obligations or refinance our indebtedness;
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general operating requirements;
limit our ability to obtain additional financing to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general corporate requirements;
restrict us from making strategic acquisitions, taking advantage of favorable business opportunities or executing our strategic priorities;
place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt;
limit our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations;
increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions; and
limit our ability, or increase the cost, to refinance our indebtedness.
Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.
As a result of our indebtedness, we may be restricted in pursuing desirable business activities and in our operations, and as a result our business and ability to repay the notes may be adversely affected.
We are subject to restrictive debt covenants under the indenture governing the Senior Secured Notes, which may limit our operating flexibility.
The indenture governing the Senior Secured Notes and our other financing agreements contain covenants that may limit our ability to finance future operations or capital needs or to engage in other business activities, including, among other things, our ability to:
incur or guarantee additional indebtedness;
pay dividends on, redeem or repurchase our capital stock;
create or incur certain liens;
transfer or sell certain assets or make other fundamental changes;
make certain restricted payments and investments; and
enter into certain transactions with affiliates.
These covenants could limit our ability to finance our future operations and capital needs and our ability to pursue acquisitions and other business activities that may be in our interest. Our ability to observe these covenants may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to do so.
In addition, we may in the future become subject to agreements that may include stricter covenants than those contained in the indenture governing the notes or require us to meet and maintain certain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our current or future business plans. General business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests.
We may not have enough cash available to service our debt and to sustain our operations.
Our ability to make scheduled interest payments on the Senior Secured Notes and to meet our other debt service obligations when due and to fund our ongoing operations or to refinance our debt, depends on our future operating and financial performance and our ability to generate cash, which will be affected by our ability to successfully implement our business strategy as well as general economic, financial, competitive, regulatory, legal, technical and other factors, including those discussed in these “Risk Factors,” beyond our control. If we cannot generate sufficient cash to meet our debt service requirements, we may, among other things, need to refinance all or a portion of our debt, including the Senior Secured Notes, obtain additional financing, delay planned capital expenditures or sell assets. If we are not able to refinance any of our debt, obtain additional financing or sell assets on commercially reasonable terms or at all, we may not be able to satisfy our obligations with respect to our debt, including the Senior Secured Notes. In that event, borrowings under other debt agreements or instruments that contain cross-default or cross-acceleration provisions may become payable on demand, and we may not have sufficient funds to repay all of our debts, including the Senior Secured Notes.
Our failure to comply with the indenture governing the Senior Secured Notes and any agreements governing any future indebtedness could result in an event of default that could materially and adversely affect our results of operations and our financial condition.
If there were an event of default under the indenture governing the Senior Secured Notes or any agreements relating to our future indebtedness, if any, or, if applicable, a failure to maintain a required ratio or meet a required test thereunder, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under such debt instruments if accelerated upon an event of default. In addition, any event of default or declaration of acceleration under any such debt instrument could also result in an event of default under one or more of other debt instruments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.Issuer Repurchases
The table below sets forth information with respect to purchases of shares of our common stock made by us or on our behalf during the quarter ended September 30, 2019:
Issuer Purchases of Equity Securities (1) |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid Per Share (2) |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| ||||
July 1-31, 2019 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
August 1-31, 2019 |
|
| 1,150,460 |
|
| $ | 4.98 |
|
|
| 1,150,460 |
|
| $ | 19,292,914 |
|
September 1-30, 2019 |
|
| 431,569 |
|
| $ | 4.95 |
|
|
| 1,582,029 |
|
| $ | 17,123,934 |
|
Total |
|
| 1,582,029 |
|
| $ | 4.96 |
|
|
| 1,582,029 |
|
|
|
|
|
(1) | On August 5, 2019, our Board of Directors authorized the repurchase of up to $25 million of our common stock through various means, including open market transactions and privately negotiated transactions, until August 5, 2020. In addition, open market repurchases of common stock may be made pursuant to applicable securities laws and regulations, including Rule 10b-18, as well as Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. |
(2) | The average per-share cost for repurchases under the repurchase program from inception through September 30, 2019 was $4.96. |
Item 3. Defaults UponUpon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
36
Impairment loss – satellite network
For information regardingOn October 29, 2019, we entered into an employment agreement (the “Employment Agreement”) with Constantine “Dean” Milcos, our Executive Vice President and Chief Financial Officer, effective as of November 1, 2019. The Employment Agreement has an initial term ending on December 31, 2019. Upon the impairment charge related to three of our OG2 satellites, refer to “Note 6 – Satellite Network and Other Equipment”expiration of the Notesinitial term or any extension thereof, the term of the Employment Agreement will be automatically extended by twelve additional calendar months through the next December 31st, unless either party notifies the other party in writing at least 90 days in advance of such expiration that he or it does not want such extension to occur, in which case the term of the Employment Agreement will not be further extended, and Mr. Milcos’s employment will terminate upon such expiration. Notwithstanding the foregoing, Mr. Milcos’s employment with us may be terminated prior to the Condensed Consolidated Financial Statements.expiration of the term of the Employment Agreement pursuant to the provisions described below.
The Employment Agreement provides for an annual base salary, currently of $280,000. In addition to his salary, Mr. Milcos is entitled to certain employee benefits, including medical and disability insurance, term life insurance, paid holiday and vacation time and other employee benefits paid by us. Under the Employment Agreement, each calendar year (beginning with calendar year 2019), Mr. Milcos is eligible to receive a bonus with a target bonus opportunity equal up to 75% of his annual base salary and subject to a maximum payment in an amount, payable in cash, dependent upon achieving certain performance targets (both financial and qualitative) established each year by the board of directors, provided that Mr. Milcos is actively employed by us on the last day of the fiscal year for which the bonus is paid and is not terminated with “cause” (as defined in the Employment Agreement) prior to the payment of such bonus. Mr. Milcos is entitled to participate in any profit sharing and/or pension plan generally provided for our executives, and in any equity incentive plan established by us in which our senior executives are generally permitted to participate.
If Mr. Milcos’s employment is terminated (1) by us without cause or (2) as a result of a notice of non-extension of the Employment Agreement provided by us during the term of the Employment Agreement, he will be entitled to receive an amount equal to the sum of (A) his base salary for a period of one year, payable beginning on the 60th day following his termination of employment (subject to any delay that may be required by Section 409A) and (B) the amount equal to the target bonus opportunity for the calendar year in which his termination of employment occurs, payable in equal installments over a twelve-month period (the “Post-Termination Payments”), and continued health insurance coverage for one year following such termination. If Mr. Milcos’s employment is terminated as a result of his disability during the term of the Employment Agreement, he will be entitled to continue to receive an amount equal to his base salary for a period of one year following such termination and continued health insurance coverage for one year following such termination. The Post-Termination Payments, disability payments and insurance coverage are conditioned on his executing a release in favor of us. In addition, the Employment Agreement contains standard covenants relating to confidentiality and assignment of intellectual property rights, a two-year post-employment non-solicitation covenant (only to the extent Mr. Milcos receives the post-termination payments he is entitled to receive under the Employment Agreement), a one-year post-employment non-competition covenant (only to the extent Mr. Milcos receives the post-termination payments he is entitled to receive under the Employment Agreement), and a covenant to comply with Company policies, including any applicable compensation recoupment policy then in effect.
Upon a termination of employment by us without “cause” within the eighteen-month period following a “change of control” (as defined in the Employment Agreement), subject to the execution of a release in favor of us, Mr. Milcos will be entitled to receive an amount equal to one and one-half times the Post-Termination Payments (payable in a lump sum on the 60th day following his termination of employment) and continued health insurance coverage for a period of eighteen months.
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The following exhibits are being filed with or incorporated by reference in this Quarterly Report on Form 10-Q:
3.1 |
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3.2 |
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3.3 |
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10.1 | ||
10.2 | Employment Agreement dated October 28, 2019 between Constantine Milcos and the Company. | |
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31.1 |
| Certification of President and Chief Executive Officer required by Rule 13a-14(a). |
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31.2 |
| Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(a). |
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32.1 |
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32.2 |
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101.INS |
| XBRL Instance Document - The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File – The Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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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.
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| ORBCOMM Inc. (Registrant) |
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Date: |
| /s/ Marc J. Eisenberg |
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| Marc J. Eisenberg |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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Date: |
| /s/ |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |
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