orbc-10q_20190331.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, 2019

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 former 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 every Interactive Data File required to be submitted 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 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:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

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  

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

The number of shares outstanding of the registrant’s common stock as of April 29, 2019 is 79,675,069.

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2019 and March 31, 2018

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2019 and March 31, 2018

5

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and March 31, 2018

6

Condensed Consolidated Statements of Changes in Equity (unaudited) for the three months ended March 31, 2019 and March 31, 2018

7

Notes to the Condensed Consolidated Financial Statements (unaudited)

8

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

23

Item 3. Quantitative and Qualitative Disclosures about Market Risks

31

Item 4. Disclosure Controls and Procedures

31

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

32

Item 1A. Risk Factors

32

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

32

Item 3. Defaults Upon Senior Securities

32

Item 4. Mine Safety Disclosures

32

Item 5. Other Information

32

Item 6. Exhibits

33

SIGNATURES

34

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ORBCOMM Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share data)

 

 

 

March 31,

 

 

 

 

 

 

2019

 

 

December 31,

 

 

(Unaudited)

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

58,078

 

 

$

53,766

 

Accounts receivable, net of allowance for doubtful accounts of $4,084

   and $4,072, respectively

 

60,233

 

 

 

57,665

 

Inventories

 

35,059

 

 

 

34,300

 

Prepaid expenses and other current assets

 

17,848

 

 

 

15,553

 

Total current assets

 

171,218

 

 

 

161,284

 

Satellite network and other equipment, net

 

155,649

 

 

 

160,070

 

Goodwill

 

166,129

 

 

 

166,129

 

Intangible assets, net

 

83,029

 

 

 

86,264

 

Other assets

 

22,547

 

 

 

12,603

 

Deferred income taxes

 

495

 

 

 

109

 

Total assets

$

599,067

 

 

$

586,459

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

19,000

 

 

$

15,527

 

Accrued liabilities

 

40,570

 

 

 

35,735

 

Current portion of deferred revenue

 

5,312

 

 

 

5,954

 

Total current liabilities

 

64,882

 

 

 

57,216

 

Note payable - related party

 

1,275

 

 

 

1,298

 

Notes payable, net of unamortized deferred issuance costs

 

246,101

 

 

 

245,907

 

Deferred revenue, net of current portion

 

6,463

 

 

 

5,471

 

Deferred tax liabilities

 

15,436

 

 

 

16,109

 

Other liabilities

 

10,065

 

 

 

2,600

 

Total liabilities

 

344,222

 

 

 

328,601

 

Commitments and contingencies

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

ORBCOMM Inc. stockholders' equity

 

 

 

 

 

 

 

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

   authorized; 39,442 shares issued and outstanding at March 31, 2019 and

   December 31, 2018

 

394

 

 

 

394

 

Common stock, par value $0.001; 250,000,000 shares authorized; 79,568,496 and

   79,008,243 shares issued at March 31, 2019 and December 31, 2018

 

80

 

 

 

79

 

Additional paid-in capital

 

452,240

 

 

 

449,343

 

Accumulated other comprehensive income

 

(887

)

 

 

(381

)

Accumulated deficit

 

(197,997

)

 

 

(192,507

)

Less treasury stock, at cost; 29,990 shares at March 31, 2019 and

   December 31, 2018

 

(96

)

 

 

(96

)

Total ORBCOMM Inc. stockholders' equity

 

253,734

 

 

 

256,832

 

Noncontrolling interests

 

1,111

 

 

 

1,026

 

Total equity

 

254,845

 

 

 

257,858

 

Total liabilities and equity

$

599,067

 

 

$

586,459

 

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,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Service revenues

 

$

39,007

 

 

$

37,992

 

Product sales

 

 

27,028

 

 

 

29,981

 

Total revenues

 

 

66,035

 

 

 

67,973

 

Cost of revenues, exclusive of depreciation and amortization

   shown below:

 

 

 

 

 

 

 

 

Cost of services

 

 

13,047

 

 

 

15,548

 

Cost of product sales

 

 

19,028

 

 

 

23,511

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

17,179

 

 

 

17,500

 

Product development

 

 

3,967

 

 

 

2,813

 

Depreciation and amortization

 

 

12,678

 

 

 

12,223

 

Acquisition-related and integration costs

 

 

215

 

 

 

606

 

Loss from operations

 

 

(79

)

 

 

(4,228

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

392

 

 

 

475

 

Other income (expense)

 

 

242

 

 

 

(167

)

Interest expense

 

 

(5,241

)

 

 

(5,200

)

Total other expense

 

 

(4,607

)

 

 

(4,892

)

Loss before income taxes

 

 

(4,686

)

 

 

(9,120

)

Income taxes

 

 

710

 

 

 

943

 

Net loss

 

 

(5,396

)

 

 

(10,063

)

Less: Net income attributable to noncontrolling

   interests

 

 

94

 

 

 

23

 

Net loss attributable to ORBCOMM Inc.

 

$

(5,490

)

 

$

(10,086

)

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(5,490

)

 

$

(10,086

)

Per share information-basic:

 

 

 

 

 

 

 

 

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(0.07

)

 

$

(0.13

)

Per share information-diluted:

 

 

 

 

 

 

 

 

Net loss attributable to ORBCOMM Inc.

   common stockholders

 

$

(0.07

)

 

$

(0.13

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

79,387

 

 

 

74,729

 

Diluted

 

 

79,387

 

 

 

74,729

 

 

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,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(5,396

)

 

$

(10,063

)

Other comprehensive income - Foreign currency translation

   adjustments

 

 

(515

)

 

 

420

 

Other comprehensive income

 

 

(515

)

 

 

420

 

Comprehensive loss

 

 

(5,911

)

 

 

(9,643

)

Less: Comprehensive (income) attributable to

   noncontrolling interests

 

 

(85

)

 

 

(25

)

Comprehensive loss attributable to ORBCOMM Inc.

 

$

(5,996

)

 

$

(9,668

)

 

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,396

)

 

$

(10,063

)

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

 

 

 

 

 

 

 

 

Change in allowance for doubtful accounts

 

 

144

 

 

 

881

 

Change in the fair value of acquisition-related contingent consideration

 

 

(2,063

)

 

 

(1,508

)

Amortization and write-off of deferred financing fees

 

 

194

 

 

 

194

 

Depreciation and amortization

 

 

12,678

 

 

 

12,223

 

Stock-based compensation

 

 

2,082

 

 

 

1,707

 

Foreign exchange (gain) loss

 

 

(256

)

 

 

176

 

Deferred income taxes

 

 

(1,042

)

 

 

779

 

Other

 

 

752

 

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,852

)

 

 

(2,155

)

Inventories

 

 

(785

)

 

 

(5,549

)

Prepaid expenses and other assets

 

 

(1,549

)

 

 

1,070

 

Accounts payable and accrued liabilities

 

 

7,439

 

 

 

2,076

 

Deferred revenue

 

 

351

 

 

 

(578

)

Other liabilities

 

 

(679

)

 

 

(435

)

Net cash provided by (used in) operating activities

 

 

9,018

 

 

 

(1,182

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,515

)

 

 

(5,623

)

Net cash (used in) investing activities

 

 

(4,515

)

 

 

(5,623

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(191

)

 

 

200

 

Net increase (decrease) in cash and cash equivalents

 

 

4,312

 

 

 

(6,605

)

Beginning of period

 

 

53,766

 

 

 

34,830

 

End of period

 

$

58,078

 

 

$

28,225

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

 

 

$

 

Income taxes

 

$

 

 

$

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred not yet paid

 

$

467

 

 

$

1,314

 

Stock-based compensation related to capital expenditures

 

$

(336

)

 

$

159

 

 

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 March 31, 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, 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

 

 

 

 

 

 

 

 

496,336

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,395

 

Common stock issued as

   payment for MPUs

 

 

 

 

 

 

 

 

60,885

 

 

 

 

 

 

502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

502

 

Exercise of SARs

 

 

 

 

 

 

 

 

3,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,490

)

 

 

 

 

 

 

 

 

94

 

 

 

(5,396

)

Foreign currency

   translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(506

)

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

(515

)

Balances, March 31, 2019

 

 

39,442

 

 

$

394

 

 

 

79,568,496

 

 

$

80

 

 

$

452,240

 

 

$

(887

)

 

$

(197,997

)

 

 

29,990

 

 

$

(96

)

 

$

1,111

 

 

$

254,845

 

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

 

 

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 (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 the transportation and supply chain, heavy equipment, fixed asset monitoring and maritime 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 two acquisitions in 2017, the Company added vehicle fleet management, as well as in-cab and fleet vehicle solutions to its transportation product portfolio. 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 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 provides what it believes are 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 Policies

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, 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 on 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 investees 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, 2019 and December 31, 2018. The Company has no guarantees or other funding obligations to those entities and the Company had no equity in the earnings or losses of those investees for the three months ended March 31, 2019 and 2018.

8


 

Acquisition-Related and Integration Costs

Acquisition-related and integration costs 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 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, 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 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 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 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 engineering, technical and management support services. Revenues generated from installation services are recognized at a point in time using the output method 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 using the output method 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 March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Service activation fees

 

$

2,826

 

 

$

2,813

 

Prepaid services

 

 

8,102

 

 

 

7,816

 

Extended warranty revenues

 

 

847

 

 

 

796

 

 

 

 

11,775

 

 

 

11,425

 

Less current portion

 

 

(5,312

)

 

 

(5,954

)

Long-term portion

 

$

6,463

 

 

$

5,471

 

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During the quarter ended March 31, 2019, the Company recognized revenue of $2,263 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 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:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

 

Recurring service revenues

 

$

37,529

 

 

$

36,725

 

Other service revenues

 

 

1,478

 

 

 

1,267

 

Total service revenues

 

 

39,007

 

 

 

37,992

 

Product revenue

 

 

25,822

 

 

 

27,712

 

Total revenue from contracts with customers

 

 

64,829

 

 

 

65,704

 

Revenue recognized under ASC 842

 

 

1,206

 

 

 

2,269

 

Total revenues

 

$

66,035

 

 

$

67,973

 

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 separate performance obligations when sold on its own 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 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 the non-financial assets for impairment and any resulting asset impairment would require that a non-financial asset be recorded at fair value. FASB Accounting Standards Codification (“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.

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The carrying amounts of the Company’s financial instruments, including cash, restricted cash, accounts receivable and accounts payable approximated their fair values due to the short-term nature of these items. As of March 31, 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 Senior Secured Notes for the period presented is 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 – Notes Payable” for more information.

The carrying amounts and fair values of the Company’s Senior Secured Notes are shown in the following table:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Senior Secured Notes

 

$

250,000

 

 

$

257,500

 

 

$

250,000

 

 

$

255,000

 

The fair value of the note payable - related party, $1,275 book value, has a de minimis value.

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 set 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 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, 2019 and 2018.  

There were no customers with accounts receivable greater than 10% of the Company’s consolidated accounts receivable as of March 31, 2019 and December 31, 2018.  

The Company is dependent on one vendor, Sanmina Corporation (“Sanmina”), a contract manufacturer with significant operations in Mexico, for the manufacture of subscriber communicators that the Company designs and sells. For the three months ended March 31, 2019, approximately $17,924, or 66.3%, of the Company’s product revenue was generated from the sale of the Company’s core products produced by Sanmina.

As of March 31, 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 net realizable value, determined on weighted average cost basis. At March 31, 2019 and December 31, 2018, inventory, net of inventory obsolescence, consisted primarily of finished goods and purchased parts to be utilized by its contract manufacturer totaling $28,784 and $27,701, respectively, and raw materials totaling $6,275 and $6,599, respectively. The Company reviews inventory quantities on hand, 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 statements 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 their carrying amount may not be recoverable. The Company measures recoverability by comparing the carrying amount to the projected undiscounted cash flows the assets are expected to generate. An impairment loss is recognized to the extent the 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.

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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 sales. The warranty accrual is included in accrued liabilities on the Company’s condensed consolidated balance 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 February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which is effective for fiscal years beginning after December 15, 2018. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both finance and operating leases, along with additional qualitative and quantitative disclosures. The Company adopted the guidance prospectively as of January 1, 2019, the date of initial application. As part of the 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 completed its comprehensive review of its lease portfolio for all lease types and embedded leases throughout each region. Refer to “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”), which will be effective for fiscal years beginning after December 15, 2019. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under ASU 2017-04, goodwill impairment will 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.

 

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”), the Company completed the acquisition of Inthinc for an aggregate consideration of (i) $34,236 in cash 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.

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 estimates using the probability-weighted discounted cash flow approach. As of March 31, 2019 and December 31, 2018, the Company recorded $0 and $2,063 in accrued liabilities on the condensed consolidated balance sheets in connection with the contingent consideration. Three of the four financial milestones for this additional consideration have not been met and the fourth financial milestone for this additional consideration is not expected to be met. Therefore, the Company recorded a reduction of the contingent liability of $2,063 in selling, general and administrative (“SG&A”) expenses on the condensed consolidated statement of operations for the quarter ended March 31, 2019.

 

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4. Stock-Based Compensation

The Company’s stock-based compensation plan consists of its 2016 Long-Term Incentives Plan (the “2016 LTIP”). As of March 31, 2019, there were 2,950,708 shares available for grant under the 2016 LTIP.

Total stock-based compensation recorded by the Company for the three months ended March 31, 2019 and 2018 was $2,082 and $1,707, respectively. Total capitalized stock-based compensation for the three months ended March 31, 2019 and 2018 was $336 and $159, 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, 2019 and 2018:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cost of services

 

$

159

 

 

$

164

 

Cost of product sales

 

 

43

 

 

 

39

 

Selling, general and administrative

 

 

1,626

 

 

 

1,292

 

Product development

 

 

254

 

 

 

212

 

Total

 

$

2,082

 

 

$

1,707

 

As of March 31, 2019, the Company had unrecognized compensation costs for all share-based payment arrangements totaling $9,275.

Time-Based Stock Appreciation Rights

A summary of the Company’s time-based stock appreciation rights (“SARs”) for the three months ended March 31, 2019 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, 2019

 

 

2,199,094

 

 

$

5.36

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(6,000

)

 

 

6.09

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

2,193,094

 

 

$

5.30

 

 

 

3.43

 

 

$

2,483

 

Exercisable at March 31, 2019

 

 

2,163,094

 

 

$

5.35

 

 

 

3.37

 

 

$

2,709

 

Vested and expected to vest at March 31, 2019

 

 

2,193,094

 

 

$

5.30

 

 

 

3.43

 

 

$

2,483

 

For the three months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense related to these time-based SARs of $36 and $60, respectively. As of March 31, 2019, $146 of total unrecognized compensation cost related to the SARs is expected to be recognized through December 2019.

The intrinsic value of the time-based SARs exercised during the three months ended March 31, 2019 was $18.

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Performance-Based Stock Appreciation Rights

A summary of the Company’s performance-based SARs for the three months ended March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted-