orbc-10q_20180331.htm

 

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 March 31, 2018

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 formal fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      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 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):

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

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 April 30, 2018 is 78,422,647.

 

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2018 and March 31, 2017

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2018 and March 31, 2017

5

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and March 31, 2017

6

Condensed Consolidated Statements of Changes in Equity (unaudited) for the three months ended March 31, 2018 and March 31, 2017

7

Notes to the Condensed Consolidated Financial Statements (unaudited)

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures about Market Risks

34

Item 4. Disclosure Controls and Procedures

34

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

34

Item 1A. Risk Factors

34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3. Defaults Upon Senior Securities

35

Item 4. Mine Safety Disclosures

35

Item 5. Other Information

35

Item 6. Exhibits

35

SIGNATURES

36

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ORBCOMM Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share data)

(Unaudited)

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

28,225

 

 

$

34,830

 

Accounts receivable, net of allowance for doubtful accounts of $1,083

   and $400, respectively

 

48,512

 

 

 

46,900

 

Inventories

 

48,250

 

 

 

42,437

 

Prepaid expenses and other current assets

 

19,798

 

 

 

18,692

 

Total current assets

 

144,785

 

 

 

142,859

 

Satellite network and other equipment, net

 

171,633

 

 

 

174,178

 

Goodwill

 

166,436

 

 

 

166,678

 

Intangible assets, net

 

96,058

 

 

 

99,339

 

Other assets

 

12,686

 

 

 

12,036

 

Deferred income taxes

 

161

 

 

 

104

 

Total assets

$

591,759

 

 

$

595,194

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

24,040

 

 

$

29,298

 

Accrued liabilities

 

43,329

 

 

 

33,016

 

Current portion of deferred revenue

 

4,631

 

 

 

6,263

 

Total current liabilities

 

72,000

 

 

 

68,577

 

Note payable - related party

 

1,400

 

 

 

1,366

 

Note payable, net of unamortized deferred issuance costs

 

245,325

 

 

 

245,131

 

Deferred revenue, net of current portion

 

3,304

 

 

 

2,459

 

Deferred tax liabilities

 

18,519

 

 

 

17,646

 

Other liabilities

 

11,889

 

 

 

13,619

 

Total liabilities

 

352,437

 

 

 

348,798

 

Commitments and contingencies

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

ORBCOMM Inc. stockholders' equity

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, par value $0.001; 1,000,000 shares

   authorized; 37,544 shares issued and outstanding at March 31, 2018 and

   December 31, 2017

 

376

 

 

 

376

 

Common stock, par value $0.001; 250,000,000 shares authorized; 75,010,790 and

   74,436,579 shares issued at March 31, 2018 and December 31, 2017

 

75

 

 

 

74

 

Additional paid-in capital

 

413,866

 

 

 

411,298

 

Accumulated other comprehensive income

 

674

 

 

 

256

 

Accumulated deficit

 

(176,331

)

 

 

(166,245

)

Less treasury stock, at cost; 29,990 shares at March 31, 2018 and

   December 31, 2017

 

(96

)

 

 

(96

)

Total ORBCOMM Inc. stockholders' equity

 

238,564

 

 

 

245,663

 

Noncontrolling interest

 

758

 

 

 

733

 

Total equity

 

239,322

 

 

 

246,396

 

Total liabilities and equity

$

591,759

 

 

$

595,194

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

3


ORBCOMM Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

Service revenues

 

$

37,992

 

 

$

29,512

 

Product sales

 

 

29,981

 

 

 

22,409

 

Total revenues

 

 

67,973

 

 

 

51,921

 

Cost of revenues, exclusive of depreciation and amortization

   shown below:

 

 

 

 

 

 

 

 

Cost of services

 

 

15,548

 

 

 

9,569

 

Cost of product sales

 

 

23,511

 

 

 

17,648

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

17,500

 

 

 

12,241

 

Product development

 

 

2,813

 

 

 

1,588

 

Depreciation and amortization

 

 

12,223

 

 

 

11,022

 

Acquisition - related and integration costs

 

 

606

 

 

 

228

 

Loss from operations

 

 

(4,228

)

 

 

(375

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

475

 

 

 

118

 

Other (expense) income

 

 

(167

)

 

 

5

 

Interest expense

 

 

(5,200

)

 

 

(2,426

)

Total other expense

 

 

(4,892

)

 

 

(2,303

)

Loss before income taxes

 

 

(9,120

)

 

 

(2,678

)

Income taxes

 

 

943

 

 

 

623

 

Net loss

 

 

(10,063

)

 

 

(3,301

)

Less: Net income attributable to the noncontrolling

   interests

 

 

23

 

 

 

42

 

Net loss attributable to ORBCOMM Inc.

 

$

(10,086

)

 

$

(3,343

)

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(10,086

)

 

$

(3,343

)

Per share information-basic:

 

 

 

 

 

 

 

 

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(0.13

)

 

$

(0.05

)

Per share information-diluted:

 

 

 

 

 

 

 

 

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(0.13

)

 

$

(0.05

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

74,729

 

 

 

71,424

 

Diluted

 

 

74,729

 

 

 

71,424

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

4


ORBCOMM Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(10,063

)

 

$

(3,301

)

Other comprehensive income - Foreign currency translation

   adjustments

 

 

420

 

 

 

196

 

Other comprehensive income

 

 

420

 

 

 

196

 

Comprehensive loss

 

 

(9,643

)

 

 

(3,105

)

Less: Comprehensive (income) attributable to

   noncontrolling interests

 

 

(25

)

 

 

(36

)

Comprehensive loss attributable to ORBCOMM Inc.

 

$

(9,668

)

 

$

(3,141

)

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

5


ORBCOMM Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,063

)

 

$

(3,301

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Change in allowance for doubtful accounts

 

 

881

 

 

 

(36

)

Change in the fair value of acquisition-related contingent consideration

 

 

(1,508

)

 

 

(495

)

Amortization and write off of deferred financing fees

 

 

194

 

 

 

229

 

Depreciation and amortization

 

 

12,223

 

 

 

11,022

 

Stock-based compensation

 

 

1,707

 

 

 

1,524

 

Foreign exchange loss (gain)

 

 

176

 

 

 

(26

)

Deferred income taxes

 

 

779

 

 

 

155

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,155

)

 

 

(6,399

)

Inventories

 

 

(5,549

)

 

 

(151

)

Prepaid expenses and other assets

 

 

1,070

 

 

 

1,768

 

Accounts payable and accrued liabilities

 

 

2,076

 

 

 

(3,461

)

Deferred revenue

 

 

(578

)

 

 

(229

)

Other liabilities

 

 

(435

)

 

 

(98

)

Net cash (used in) provided by operating activities

 

 

(1,182

)

 

 

502

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(5,623

)

 

 

(5,645

)

Net cash (used in) investing activities

 

 

(5,623

)

 

 

(5,645

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

200

 

 

 

75

 

Net decrease in cash and cash equivalents

 

 

(6,605

)

 

 

(5,068

)

Beginning of period

 

 

34,830

 

 

 

25,023

 

End of period

 

$

28,225

 

 

$

19,955

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for

 

 

 

 

 

 

 

 

Interest

 

$

 

 

$

2,194

 

Income taxes

 

$

 

 

$

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred not yet paid

 

$

1,314

 

 

$

1,391

 

Stock-based compensation related to capital expenditures

 

$

159

 

 

$

131

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

 

6


ORBCOMM Inc.

Condensed Consolidated Statements of Changes in Equity

Three Months Ended 2018 and 2017

(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, 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

 

 

 

 

 

 

 

 

459,039

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,741

 

Common stock issued as

   payment for MPUs

 

 

 

 

 

 

 

 

81,277

 

 

 

 

 

 

827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

827

 

Exercise of SARs

 

 

 

 

 

 

 

 

33,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,086

)

 

 

 

 

 

 

 

 

23

 

 

 

(10,063

)

Foreign currency

   translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

418

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

420

 

Balances, March 31, 2018

 

 

37,544

 

 

$

376

 

 

 

75,010,790

 

 

$

75

 

 

$

413,866

 

 

$

674

 

 

$

(176,331

)

 

 

29,990

 

 

$

(96

)

 

$

758

 

 

$

239,322

 

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

 

 

 

 

 

 

 

 

554,469

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,498

 

Exercise of SARs

 

 

 

 

 

 

 

 

29,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,343

)

 

 

 

 

 

 

 

 

42

 

 

 

(3,301

)

Foreign currency

   translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

202

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

196

 

Balances, March 31, 2017

 

 

36,466

 

 

$

364

 

 

 

71,695,802

 

 

$

72

 

 

$

388,418

 

 

$

(887

)

 

$

(108,292

)

 

 

29,990

 

 

$

(96

)

 

$

683

 

 

$

280,262

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

 

 

7


ORBCOMM Inc.

Notes to the Condensed Consolidated Financial Statements

(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 for transportation & supply chain, heavy equipment, fixed asset monitoring, maritime and government. 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 two acquisitions in 2017, the Company added to its transportation product portfolio vehicle fleet management, as well as in-cab and fleet vehicle solutions. The Company provides its services using multiple network platforms, including a 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, mobile satellite subscriber communicators for remote asset connectivity, and the Company’s terrestrial-based solutions utilize cellular data modems with subscriber identity modules (“SIMs”). The Company also resells service using the two-way Inmarsat 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 provides what it believes is the most versatile, leading-edge industrial IoT solutions in its markets to enable its customers to run their business more efficiently.

 

 

2. Summary of Significant Accounting Principles

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, 2017. 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 in 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 investee 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 no carrying value as of March 31, 2018 and December 31, 2017. The Company has no guarantees or other funding obligations to those entities. The Company had no equity in or losses of those investees for the three months ended March 31, 2018 and 2017.

8


 

Acquisition-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 recognition prior to the adoption of ASU 2014-09.

The Company derives recurring service revenues mostly 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 and the 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 provides recurring AIS data services for 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 the manufacture of subscriber communicators under a manufacturing agreement.

Service revenue 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. 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, which is the estimated life of the subscriber communicator. Revenues from separately priced extended warranty service agreements extending beyond the initial warranty period of 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 at a point in time 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 fees from providing engineering, technical and management support services to customers. Revenues generated from installation services are recognized at a point in time using the output method when the services are completed. Revenues generated from providing 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 is recognized at a point in time using the output method when the license is provided to the customer.

Product revenues are derived from sales of complete industrial IoT 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 revenue is 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 revenues as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Service activation fees

 

$

5,375

 

 

$

5,509

 

Prepaid services

 

 

2,021

 

 

 

2,754

 

Extended warranty revenues

 

 

539

 

 

 

459

 

 

 

 

7,935

 

 

 

8,722

 

Less current portion

 

 

(4,631

)

 

 

(6,263

)

Long-term portion

 

$

3,304

 

 

$

2,459

 

9


 

 

During the quarter ended March 31, 2018, the Company recognized revenue of $2,580 which was included as deferred revenue as of December 31, 2017.

Shipping costs billed to customers are included in product sales revenues and the related costs are included as costs of product sales.

The Company generates revenue from leasing arrangements of subscriber communicators, under FASB Accounting Standards Codification 840 (“ASC 840”) “Leases”, 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 840:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

 

Recurring service revenues

 

$

36,725

 

 

$

27,945

 

Other service revenues

 

 

1,267

 

 

 

1,567

 

Total service revenue

 

 

37,992

 

 

 

29,512

 

Product revenue

 

 

27,712

 

 

 

22,409

 

Total revenue from contracts with customers

 

 

65,704

 

 

 

51,921

 

Revenue recognized under ASC 840

 

 

2,269

 

 

 

 

Total revenues

 

$

67,973

 

 

$

51,921

 

 

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, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.

If an arrangement provided to a customer has a significant and incremental discount on future revenue, such right is considered a performance obligation and a proportionate amount of the discount should be allocated to each element based on the relative standalone selling price of each element, regardless of the discount. The Company has determined that arrangements provided to our customers do not include significant and incremental discounts.

The Company has elected not to disclose the value of unsatisfied performance obligations since any of these obligations would have an original expected length of one year or less.

10


 

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 the non-financial assets for impairment and any resulting asset impairment would require that a non-financial asset be recorded at the fair value. FASB ASC Topic 820 “Fair Value Measurement 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 value of the Company’s financial instruments, including cash, restricted cash, accounts receivable and accounts payable approximated their fair value due to the short-term nature of these items. As of March 31, 2018, the carrying amount and the fair value of the Company’s Senior Secured Notes (described in “Note 10 – Note Payable”) were $250,000 and $259,375, 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 are 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 10 – Note Payable” for more information. The fair value of the $1,400 book value Note payable - related party is de minimus.

Concentration of Risk

The Company’s customers are primarily commercial organizations. Accounts receivable are generally unsecured.

Accounts receivable are due in accordance with payment terms included 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-off accounts receivable when they are deemed uncollectible.

 

There were no customers with revenues greater than 10% of the Company’s consolidated total revenues for the three months ended March 31, 2018 and 2017.  

 

There were no customers with accounts receivable greater than 10% of the Company’s consolidated accounts receivable as of March 31, 2018 and December 31, 2017.  

As of March 31, 2018, 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 net realizable value, determined on a first-in, first-out basis. At March 31, 2018 and December 31, 2017, inventory consisted primarily of finished goods and purchased parts to be utilized by its contract manufacturer totaling $41,783 and $34,465, respectively, and $6,467 and $7,972, respectively, of raw materials, net of inventory obsolescence. 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 on the Company’s consolidated statement of operations, is made for potential losses on slow moving and obsolete inventories when identified.

Valuation of Long-lived Assets

Property and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company measures recoverability by comparing the carrying amount to the projected cash flows the assets are expected to generate. An impairment loss is recognized to the extent that carrying value exceeds 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.

11


 

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. Refer to “Note 6 – Satellite Network and Other Equipment” for more information.

Warranty Costs

The Company accrues for 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. The warranty accrual is included in accrued liabilities on the consolidated balance sheet.

Separately priced extended warranty coverage is recorded as warranty revenue over the term of the extended warranty coverage and the related warranty costs during the coverage period are recorded as incurred.

Warranty coverage that includes additional services such as repairs and maintenance of the product are treated as a separate deliverable 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 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 financing and operating leases, along with additional qualitative and quantitative disclosures. Early adoption is permitted. The Company is in the process of evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

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 nature of the restrictions. The guidance requires application using a retrospective transition method. The Company adopted this standard on January 1, 2018 and expects the retrospective application to impact its classification of certain restricted cash activity in its statement of cash flows in future interim filings.

 

 

3. Acquisitions

Blue Tree Systems Limited

On October 2, 2017, pursuant to a share purchase agreement (the “Share Purchase Agreement”) entered into by ORBCOMM Technology Ireland Limited, a wholly owned subsidiary of the Company, and Blue Tree Systems Investment Limited, Investec Ventures Ireland Limited and certain individual sellers (collectively, the “Sellers”), the Company completed the acquisition of 100% of the outstanding shares of Blue Tree Systems Limited, for an aggregate consideration of (i) $34,331 in cash, subject 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; and (iii) additional consideration up to $5,750 based on Blue Tree Systems Limited achieving certain operational objections, payable in stock or a combination of cash and stock at the Company’s election (the “Blue Tree Acquisition”).

12


 

Preliminary Estimated Purchase Price Allocation

The Blue Tree 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 “Acquisition Method”). 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 quarter ended March 31, 2018, the Company recorded a measurement period adjustment related to certain working capital accounts, which resulted in a decrease in goodwill of $393. The total consideration for the Blue Tree Acquisition was $37,107, of which $776 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

 

Cash

 

$

656

 

Accounts receivable

 

 

2,335

 

Inventories

 

 

1,395

 

Prepaid expenses and other current assets

 

 

992

 

Property, plant and equipment

 

 

72

 

Intangible assets

 

 

12,020

 

Total identifiable assets acquired

 

 

17,470

 

Accounts payable

 

 

4,124

 

Accrued expenses

 

 

778

 

Deferred tax liability

 

 

1,503

 

Total liabilities assumed

 

 

6,405

 

Net identifiable assets acquired

 

 

11,065

 

Goodwill

 

 

26,042

 

Total preliminary purchase price

 

$

37,107

 

 

Intangible Assets

The estimated fair value of the technology and trademark 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 available through ownership of the asset by the avoidance of paying royalties to license the use of the assets from another owner (the “Technology and Trademark Valuation Technique”). 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 (the “Customer List Valuation Technique”). 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 26.5%. The remaining useful lives of the technology and trademarks were based on historical product development cycles, the projected rate of technology migration, a market participant’s use of these intangible assets and the pattern of projected economic benefit of these intangible assets. 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

 

 

10

 

 

$

9,200

 

Technology

 

 

10

 

 

 

2,700

 

Tradename

 

 

1

 

 

 

120

 

 

 

 

 

 

 

$

12,020

 

 

13


 

Goodwill

The Blue Tree Acquisition solidified the Company’s transportation offering of fleet management and driver safety solutions to 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 Blue Tree Acquisition is not deductible for tax purposes.

Indemnification Asset

In connection with the Share Purchase Agreement, the Company entered into an escrow agreement with the Sellers and an escrow agent. Under the terms of this escrow agreement, $3,675 was placed in an escrow account through April 2019 to fund any indemnification obligations to the Company under the Share 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.

Contingent Consideration

Additional consideration is conditionally due to the Sellers upon achievement of certain financial milestones through December 2018. 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 March 31, 2018 and December 31, 2017, the Company recorded $823 and $776, respectively, in non-current liabilities on the condensed consolidated balance sheet in connection with the contingent consideration. For the three months ended March 31, 2018, an expense of $47 was recorded in SG&A in the condensed consolidated statement of operations for accretion associated with the contingent consideration.

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”), the Company completed the acquisition of inthinc for an aggregate consideration of (i) $34,236 in cash, subject to net working capital adjustments, on a debt 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 20 trading day 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”).

14


 

Preliminary Estimated Purchase Price Allocation

The inthinc Acquisition has been accounted for using the Acquisition Method. 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 quarter ended March 31, 2018, the Company recorded a measurement period adjustment related to accrued expenses, which resulted in an increase in goodwill of $151. 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

 

$

2,345

 

Inventories

 

 

906

 

Prepaid expenses and other current assets

 

 

112

 

Property, plant and equipment

 

 

258

 

Lease receivable

 

 

5,067

 

Intangible assets

 

 

16,000

 

Total identifiable assets acquired

 

 

24,688

 

Accounts payable

 

 

4,613

 

Accrued expenses

 

 

275

 

Other current and non-current liabilities

 

 

1,326

 

Total liabilities assumed

 

 

6,214

 

Net identifiable assets acquired

 

 

18,474

 

Goodwill

 

 

26,361

 

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 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 Customer List Valuation Technique. 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

 

 

15

 

 

$

12,400

 

Technology

 

 

10

 

 

 

3,600

 

 

 

 

 

 

 

$

16,000

 

 

Goodwill

The inthinc Acquisition allows the Company to offer fleet management and driver safety solutions to 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.

15


 

Indemnification Asset

In connection with the Asset Purchase Agreement, the Company entered into an escrow agreement with inthinc and an escrow agent. Under the terms of this escrow agreement, $500 was placed in an escrow account through September 9, 2019 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 $1,032 relating to customer product obligations it was investigating associated with the inthinc Acquisition. As of March 31, 2018, the Company had a remaining liability of $832 in accrued expenses on the condensed consolidated balance sheet in connection with this acquired product liabilities obligation.

Contingent Consideration

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 March 31, 2018 and December 31, 2017, the Company recorded $7,758 and $9,313 in other non-current liabilities on the condensed consolidated balance sheet in connection with the contingent consideration.  One financial milestone for this additional consideration is estimated to be met at a lower than previously estimated level, and therefore, the Company recorded a reduction of the contingent liability of $1,555 in selling, general and administrative (“SG&A”) expenses in the condensed consolidated statement of operations for the quarter ended March 31, 2018.

 

 

4. Stock-based Compensation

The Company’s stock-based compensation plan consist of its 2016 Long Term Incentives Plan (the 2016 LTIP”). As of March 31, 2018, there were 4,342,847 shares available for grant under the 2016 LTIP.

Total stock-based compensation recorded by the Company for the three months ended March 31, 2018 and 2017 was $1,707 and $1,524, respectively. Total capitalized stock-based compensation for the three months ended March 31, 2018 and 2017 was $159 and $131, respectively.

The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cost of services

 

$

164

 

 

$

159

 

Cost of product sales

 

 

39

 

 

 

23

 

Selling, general and administrative

 

 

1,292

 

 

 

1,272

 

Product development

 

 

212

 

 

 

70

 

Total

 

$

1,707

 

 

$

1,524

 

 

As of March 31, 2018, the Company had unrecognized compensation costs for all share-based payment arrangements totaling $6,573.

 

16


 

Time-Based Stock Appreciation Rights

A summary of the Company’s time-based stock appreciation rights (“SARs”) for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Aggregate

 

 

 

 

 

 

 

Weighted-