Form 10-Q
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33118
ORBCOMM INC.
(Exact name of registrant as specified in its charter)
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Delaware
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41-2118289 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
2115 Linwood Avenue, Fort Lee, New Jersey 07024
(Address of principal executive offices)
(201) 363-4900
(Registrants telephone number)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock as of August 7, 2009 is
42,438,373.
ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
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June 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
62,934 |
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$ |
75,370 |
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Restricted cash |
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3,000 |
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2,000 |
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Accounts receivable, net of allowances for
doubtful accounts of $572 and $101 |
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3,580 |
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3,412 |
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Inventories |
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116 |
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158 |
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Prepaid expenses and other current assets |
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3,339 |
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4,140 |
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Current assets held for sale |
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1,237 |
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1,621 |
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Total current assets |
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74,206 |
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86,701 |
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Satellite network and other equipment, net |
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92,505 |
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92,772 |
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Intangible assets, net |
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3,343 |
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4,086 |
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Restricted cash |
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2,680 |
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3,680 |
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Other assets |
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1,321 |
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1,484 |
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Long term assets held for sale |
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2,496 |
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2,644 |
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Total assets |
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$ |
176,551 |
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$ |
191,367 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,876 |
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$ |
8,428 |
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Accrued liabilities |
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7,157 |
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7,168 |
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Current portion of deferred revenue |
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3,731 |
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3,543 |
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Current liabilities related to assets held for sale |
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396 |
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326 |
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Total current liabilities |
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14,160 |
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19,465 |
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Note payable related party |
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1,299 |
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1,244 |
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Deferred revenue, net of current portion |
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7,223 |
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7,607 |
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Total liabilities |
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22,682 |
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28,316 |
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Commitments and contingencies |
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Equity: |
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ORBCOMM
Inc. stockholders equity: |
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Common stock, par value $0.001; 250,000,000
shares authorized; 42,423,373 and
42,101,834 shares issued and outstanding |
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42 |
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42 |
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Additional paid-in capital |
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229,800 |
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229,001 |
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Accumulated
other comprehensive (loss) income |
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(83 |
) |
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381 |
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Accumulated deficit |
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(77,473 |
) |
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(67,976 |
) |
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Total ORBCOMM Inc. stockholders equity |
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152,286 |
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161,448 |
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Noncontrolling interests in ORBCOMM Japan |
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1,583 |
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1,603 |
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Total equity |
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153,869 |
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163,051 |
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Total liabilities and equity |
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$ |
176,551 |
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$ |
191,367 |
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See notes to condensed consolidated financial statements.
3
ORBCOMM Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues: |
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Service revenues |
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$ |
6,720 |
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$ |
5,757 |
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$ |
13,342 |
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$ |
10,612 |
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Product sales |
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50 |
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1,117 |
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155 |
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1,107 |
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Total revenues |
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6,770 |
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6,874 |
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13,497 |
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11,719 |
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Costs and expenses (1): |
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Costs of services |
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3,292 |
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2,128 |
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6,513 |
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4,162 |
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Costs of product sales |
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36 |
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568 |
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96 |
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589 |
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Selling, general and administrative |
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4,398 |
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5,169 |
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9,201 |
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9,595 |
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Product development |
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152 |
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150 |
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341 |
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271 |
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Gain on customer claims settlements |
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(367 |
) |
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(1,243 |
) |
Impairment charge-satellite network |
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7,045 |
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Total costs and expenses |
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7,878 |
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7,648 |
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23,196 |
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13,374 |
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Loss from operations |
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(1,108 |
) |
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(774 |
) |
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(9,699 |
) |
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(1,655 |
) |
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Other income (expense): |
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Interest income |
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23 |
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356 |
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64 |
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1,122 |
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Other income |
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388 |
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12 |
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339 |
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23 |
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Interest expense |
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(48 |
) |
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(48 |
) |
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(96 |
) |
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(98 |
) |
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Total other income |
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363 |
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320 |
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307 |
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1,047 |
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Loss from continuing operations before pre-control
earnings of consolidated subsidiary |
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(745 |
) |
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(454 |
) |
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(9,392 |
) |
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(608 |
) |
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Less: Pre-control earnings of consolidated subsidiary |
|
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|
128 |
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128 |
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Loss from continuing operations |
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|
(745 |
) |
|
|
(582 |
) |
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(9,392 |
) |
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(736 |
) |
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Income (loss) from discontinued operations |
|
|
412 |
|
|
|
(356 |
) |
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|
(40 |
) |
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(736 |
) |
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Net loss |
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(333 |
) |
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|
(938 |
) |
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(9,432 |
) |
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(1,472 |
) |
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Less: Net income attributable to the noncontrolling interests |
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29 |
|
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|
41 |
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|
65 |
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41 |
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Net loss attributable to ORBCOMM Inc. |
|
$ |
(362 |
) |
|
$ |
(979 |
) |
|
$ |
(9,497 |
) |
|
$ |
(1,513 |
) |
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Net loss attributable to ORBCOMM Inc.: |
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Loss from continuing operations |
|
$ |
(774 |
) |
|
$ |
(623 |
) |
|
$ |
(9,457 |
) |
|
$ |
(777 |
) |
Income (loss) from discontinued operations |
|
|
412 |
|
|
|
(356 |
) |
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|
(40 |
) |
|
|
(736 |
) |
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|
|
|
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|
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|
Net loss attributable to ORBCOMM Inc. |
|
$ |
(362 |
) |
|
$ |
(979 |
) |
|
$ |
(9,497 |
) |
|
$ |
(1,513 |
) |
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Per share information-basic and diluted: |
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Loss from continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.02 |
) |
Income (loss) from discontinued operations |
|
|
0.01 |
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|
|
(0.01 |
) |
|
|
(0.00 |
) |
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|
(0.02 |
) |
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Net loss attributable to ORBCOMM Inc. |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.04 |
) |
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Weighted average common shares outstanding: |
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Basic and diluted |
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42,407 |
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|
41,961 |
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|
|
42,358 |
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|
41,882 |
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(1) Stock-based compensation included in costs and expenses: |
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Costs of services |
|
$ |
14 |
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|
$ |
1 |
|
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$ |
34 |
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|
$ |
49 |
|
Selling, general and administrative |
|
|
330 |
|
|
|
978 |
|
|
|
757 |
|
|
|
1,705 |
|
Product development |
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|
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|
15 |
|
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|
8 |
|
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|
30 |
|
|
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|
|
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|
|
|
|
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|
$ |
344 |
|
|
$ |
994 |
|
|
$ |
799 |
|
|
$ |
1,784 |
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See notes to condensed consolidated financial statements.
4
ORBCOMM Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
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Six months ended |
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June 30, |
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|
2009 |
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|
2008 |
|
Cash flows from operating activities: |
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|
|
|
|
|
|
|
Net loss |
|
$ |
(9,432 |
) |
|
$ |
(1,472 |
) |
Adjustments
to reconcile net loss to net cash
provided by operating activities: |
|
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|
|
|
|
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|
Change in allowance for doubtful accounts |
|
|
452 |
|
|
|
(159 |
) |
Depreciation and amortization |
|
|
2,580 |
|
|
|
1,286 |
|
Accretion on note payable related party |
|
|
66 |
|
|
|
66 |
|
Stock-based compensation |
|
|
799 |
|
|
|
1,784 |
|
Foreign exchange gains |
|
|
(337 |
) |
|
|
(18 |
) |
Non-cash
portion of gain on customer claims settlements |
|
|
|
|
|
|
(882 |
) |
Pre-control earnings of consolidated subsidiary |
|
|
|
|
|
|
128 |
|
Expiration of gateway purchase option |
|
|
|
|
|
|
(325 |
) |
Impairment charge-satellite network |
|
|
7,045 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(513 |
) |
|
|
255 |
|
Inventories |
|
|
35 |
|
|
|
222 |
|
Prepaid expenses and other assets |
|
|
886 |
|
|
|
847 |
|
Accounts payable and accrued liabilities |
|
|
(6 |
) |
|
|
407 |
|
Deferred revenue |
|
|
(188 |
) |
|
|
1,052 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
1,387 |
|
|
|
3,191 |
|
Net cash provided by (used in) operating activities of discontinued operations |
|
|
605 |
|
|
|
(205 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,992 |
|
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(14,051 |
) |
|
|
(14,193 |
) |
Change in restricted cash |
|
|
|
|
|
|
(5,680 |
) |
Cash from the step acquisition of subsidiary |
|
|
|
|
|
|
366 |
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations |
|
|
(14,051 |
) |
|
|
(19,507 |
) |
Net cash used in investing activities of discontinued operations |
|
|
(3 |
) |
|
|
(237 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(14,054 |
) |
|
|
(19,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants and options |
|
|
|
|
|
|
252 |
|
Payment of offering costs in connection with secondary public offering |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities from continuing operations |
|
|
|
|
|
|
212 |
|
Net cash provided by financing activities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(374 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(12,436 |
) |
|
|
(16,625 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
75,370 |
|
|
|
115,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
62,934 |
|
|
$ |
98,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
|
|
Non cash investing activities |
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid |
|
$ |
1,126 |
|
|
$ |
6,906 |
|
|
|
|
|
|
|
|
Stock-based compensation included in capital expenditures |
|
$ |
|
|
|
$ |
21 |
|
|
|
|
|
|
|
|
Net assets from step acquisition of subsidiary |
|
$ |
|
|
|
$ |
1,363 |
|
|
|
|
|
|
|
|
Asset basis adjustment due to expiration of gateway purchase option |
|
$ |
|
|
|
$ |
161 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
ORBCOMM Inc.
Condensed Consolidated Statements of Equity
Six months ended June 30, 2009 and 2008
(in thousands, except
share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
interests |
|
|
|
|
|
|
Common stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
in ORBCOMM |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
(loss) income |
|
|
deficit |
|
|
Japan |
|
|
equity |
|
Balances, January 1, 2009 |
|
|
42,101,834 |
|
|
$ |
42 |
|
|
$ |
229,001 |
|
|
$ |
381 |
|
|
$ |
(67,976 |
) |
|
$ |
1,603 |
|
|
$ |
163,051 |
|
Vesting of restricted stock units |
|
|
321,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,497 |
) |
|
|
65 |
|
|
|
(9,432 |
) |
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(464 |
) |
|
|
|
|
|
|
(85 |
) |
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2009 |
|
|
42,423,373 |
|
|
$ |
42 |
|
|
$ |
229,800 |
|
|
$ |
(83 |
) |
|
$ |
(77,473 |
) |
|
$ |
1,583 |
|
|
$ |
153,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2008 |
|
|
41,658,066 |
|
|
$ |
42 |
|
|
$ |
224,899 |
|
|
$ |
(656 |
) |
|
$ |
(63,436 |
) |
|
$ |
|
|
|
$ |
160,849 |
|
Exercise of warrants and options |
|
|
144,692 |
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
Vesting of restricted stock units |
|
|
253,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,846 |
|
Non-controlling
interest of acquired subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
789 |
|
|
|
789 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,513 |
) |
|
|
169 |
|
|
|
(1,344 |
) |
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2008 |
|
|
42,056,245 |
|
|
$ |
42 |
|
|
$ |
226,997 |
|
|
$ |
(807 |
) |
|
$ |
(64,949 |
) |
|
$ |
958 |
|
|
$ |
162,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
ORBCOMM INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
(unaudited)
1. Overview
ORBCOMM Inc. (ORBCOMM or the Company), a Delaware corporation, is a satellite-based data
communications company that operates a two-way global wireless data messaging system optimized
for narrowband data communication. The Company also provides terrestrial-based cellular
communication services through reseller agreements with major cellular wireless providers. The
Company provides services through a constellation of 28 owned and operated low-Earth orbit
satellites and accompanying ground infrastructure through which small, low power, fixed or
mobile satellite subscriber communicators (Communicators) and cellular wireless subscriber
identity modules, or SIMS, connected to the cellular wireless
providers networks, that can be
connected to other public or private networks, including the Internet (collectively, the
ORBCOMM System). The ORBCOMM System is designed to enable businesses and government agencies
to track, monitor, control and communicate with fixed and mobile assets.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission (the SEC). Certain information
and footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted pursuant to SEC rules. These financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2008.
In the opinion of management, the financial statements as of June 30, 2009 and for the three and
six-month periods ended June 30, 2009 and 2008 include all adjustments (including normal
recurring accruals) necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows for the periods presented. The results of operations for
the interim periods are not necessarily indicative of the results to be expected for the full
year.
The financial statements include the accounts of the Company, its wholly-owned and
majority-owned subsidiaries, and investments in variable interest entities in which the Company
is determined to be the primary beneficiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The portions of majority-owned subsidiaries
that the Company does not own are reflected as noncontrolling
interests in the condensed consolidated
balance sheets.
Effective January 1, 2009, the Company adopted SFAS No, 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160). The adoption of SFAS
160 has resulted in the reclassification of amounts previously attributable to minority interest
(now referred to as noncontrolling interest) to a separate component of equity in the
accompanying condensed consolidated balance sheets. Additionally, net income attributable to
noncontrolling interests is shown separately from net loss in the accompanying condensed
consolidated statements of operations. The prior periods presented have also been reclassified
to conform to the current classification as required by SFAS No. 160. These reclassifications
have no effect on the Companys previously reported net loss per common share.
Investments in entities over which the Company has the ability to exercise significant influence
but does not have a controlling interest are accounted for under the equity method of
accounting. The Company considers several factors in determining whether it has the ability to
exercise significant influence with respect to investments, including, but not limited to,
direct and indirect ownership level in the voting securities, active participation on the board
of directors, approval of operating and budgeting decisions and other participatory and
protective rights. Under the equity method, the Companys proportionate share of the net income
or loss of such investee is reflected in the Companys consolidated results of operations.
Although the Company owns interests in companies that it accounts for pursuant to the equity
method, the investments in those entities had no carrying value as of June 30, 2009 and December
31, 2008. The Company has no guarantees or other funding obligations to those entities. The
Company had no equity or losses of those investees for the three and six months ended June 30,
2009 and the Companys equity in the earnings or losses of those investees for the three and six
months ended June 30, 2008 was not significant.
Non-controlling interests in companies are accounted for by the cost method where the
Company does not exercise significant influence over the investee. The Companys other cost basis
investments had no carrying value as of June 30, 2009 and December 31, 2008.
The
Company has incurred losses from inception including a net loss of
$9,432 for the six months
ended June 30, 2009 and as of June 30, 2009, the Company has an accumulated deficit of $77,473.
As of June 30, 2009, the Companys primary source of liquidity consisted of cash and cash
equivalents, which the Company believes will be sufficient to provide working capital and
milestone payments for its next-generation satellites for the next twelve months.
Fair
Value of Financial instruments
The carrying value of the Companys financial instruments, including cash, accounts
receivable, accounts payable and accrued expenses approximated their fair value due to the
short-term nature of these items. The fair value of the Note
Payable-related party is de minimis.
Concentration
of Credit Risk
The following table presents customers with revenues greater than 10% of the Companys
consolidated total revenues for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
General Electric Company |
|
|
16.4 |
% |
|
|
17.1 |
% |
|
|
16.7 |
% |
|
|
20.8 |
% |
Caterpillar Inc. |
|
|
16.7 |
% |
|
|
11.1 |
% |
|
|
16.1 |
% |
|
|
11.6 |
% |
Komatsu Ltd., |
|
|
11.2 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
Hitachi Construction Machinery Co., Ltd., |
|
|
|
|
|
|
19.1 |
% |
|
|
|
|
|
|
12.9 |
% |
The following table presents customers with accounts receivable greater than 10% of the
Companys consolidated accounts receivable for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
General Electric Company |
|
|
11.8 |
% |
|
|
16.2 |
% |
Caterpillar Inc. |
|
|
16.5 |
% |
|
|
|
|
Komatsu Ltd., |
|
|
|
|
|
|
|
|
Hitachi Construction Machinery Co., Ltd., |
|
|
|
|
|
|
16.6 |
% |
7
Inventories
Inventories
are stated at the lower of cost or fair value, determined on a first-in, first-out
basis. Inventory consists primarily of finished goods available for sale to customers. The
Company reviews inventory quantities on hand and evaluates the realizability of inventories and
adjusts the carrying value as necessary based on forecasted product demand. Inventories in
excess of one years supply are classified as long-term.
At
June 30, 2009, assets held for sale include $1,994 of long-term
inventory of which $332 is component parts held at the manufacturing
facility of Stellar Satellite Communications, Ltd.
(Stellar) principal supplier (See Note 3).
Income taxes
As of June 30, 2009, the Company had unrecognized tax benefits of $775. There were no changes to
the Companys unrecognized tax benefits during the three and six months ended June 30, 2009. The
Company is subject to U.S. federal and state examinations by tax authorities from 2005. The
Company does not expect any significant changes to its unrecognized tax positions during the
next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. No interest and penalties related to uncertain tax positions were recognized during the
three and six months ended June 30, 2009.
A valuation allowance has been provided for all of the Companys deferred tax assets because it
is more likely than not that the Company will not recognize the tax benefits of these deferred
tax assets.
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R).
SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and
other events in which one entity obtains control over one or more other businesses. It broadens
the fair value measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. SFAS 141R expands on required
disclosures to improve the statement users abilities to evaluate the nature and financial
effects of business combinations. In April 2009, the FASB issued FSP 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination that arise from Contingencies,
which amends and clarifies the initial and subsequent accounting and disclosures of
contingencies in a business combination. The Company adopted SFAS 141R on January 1, 2009 and
will apply it and FSP 141(R)-1 prospectively to any business combinations completed after January 1,
2009.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), to define
fair value, establish a framework for measuring fair value in accordance with generally accepted
accounting principles and expand disclosures about fair value measurements. SFAS 157 requires
quantitative disclosures using a tabular format in all periods (interim and annual) and
qualitative disclosures about the valuation techniques used to measure fair value in all annual
periods. On January 1, 2008, the Company adopted SFAS 157 except with respect to its
non-financial assets and liabilities. On January 1, 2009, the Company adopted SFAS 157 for its
non-financial assets and liabilities. The adoption of SFAS 157 did not have material impact on
the Companys consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments , to require disclosures about fair value of financial instruments not
measured on the balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this FSP, fair values for these assets and liabilities were only
disclosed annually. The required disclosures are included in
Fair Value of Financial Instruments above.
In May 2009, the FASB issued SFAS No. 165, Subsequent
Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued.
Specifically, SFAS 165 provides
guidance regarding the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial statements; and the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The Company evaluated all events or transactions that
occurred after June 30, 2009 through August 10, 2009, the date we issued these financial statements.
During this period, the Company had material nonrecognizable
subsequent events (See Note 8).
8
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (SFAS
167). SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, (FIN 46(R) to require an enterprise to qualitatively assess the
determination of the primary beneficiary of a variable interest entity (VIE) based on whether the
entity (1) has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and (2) has the obligation to absorb losses of the entity or the
right to receive benefits from the entity that could potentially be significant to the VIE. Also,
SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that
trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to
provide information about an enterprises involvement in a VIE. SFAS 167 will be effective for
the Company on January 1, 2010. The Company is currently evaluating the impact of adopting SFAS 167
on its consolidated financial statements.
3. Discontinued Operations
The
Company is focused on continuing the growth and expansion of its
network services business and is discussing with interested parties
about a sale of its subsidiary, Stellar. The
GE Settlement Agreement discussed below and the Services
Agreement (See Note 17) provides the Company with
the ability to dispose of Stellar without disrupting ORBCOMMs
growth prospects with GE Asset Intelligence, LLC (GE)
allowing the Company to concentrate its resources on its service-based data communications
business. Beginning in the second quarter of 2009, the Company
classified the assets and liabilities of
Stellar as assets held for sale in its condensed consolidated balance
sheets and Stellars results of
operations as discontinued operations in its condensed consolidated statements of operations for the
periods presented. The Company expects to complete the sale of
Stellar during 2009.
On
April 3, 2009, the Company entered into a settlement agreement (the Settlement Agreement)
with GE with respect to the supply agreement dated October 10,
2006 (the 2006 Agreement) to supply GE up to 412,000 units of in-production and future models of
subscriber communicators through December 31, 2009 to support GEs applications utilizing the
Companys data communications system. 270,000 of these units were non-cancelable except for
specified early termination provisions.
Pursuant to the Settlement Agreement, the Company received $800 as settlement for GEs
obligation under the 2006 Agreement. GE did not purchase its minimum committed volumes for 2007
and 2008. For the three and six months ended June 30, 2009, the Company recognized a gain on
settlement of $800, which is recorded in discontinued operations.
The Company and GE terminated the 2006 Agreement and all their respective obligations relating
to it, and released each other from any claims relating to their obligations arising under the
2006 Agreement, except for certain obligations related to warranties, indemnities,
confidentiality and intellectual property.
A
summary of discontinued operations for the three and six months ended
June 30, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues Product sales |
|
$ |
375 |
|
|
$ |
850 |
|
|
$ |
1,009 |
|
|
$ |
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
discontinued
operations |
|
$ |
412 |
|
|
$ |
(356 |
) |
|
$ |
(40 |
) |
|
$ |
(736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 and December 31, 2008, the major classes of assets and liabilities of
Stellar held for sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
197 |
|
|
$ |
338 |
|
Inventories, current |
|
|
1,010 |
|
|
|
1,263 |
|
Total current assets |
|
|
1,237 |
|
|
|
1,621 |
|
Other equipment, net |
|
|
502 |
|
|
|
518 |
|
Inventories,
long term |
|
|
1,994 |
|
|
|
2,126 |
|
Current liabilities |
|
|
396 |
|
|
|
326 |
|
As of
June 30, 2009, the assets held for sale are reported at the
lower of cost or estimated
fair value less costs to sell and are no longer being depreciated.
9
4. ORBCOMM Japan
On March 25, 2008, the Company received a 37% equity interest in ORBCOMM Japan and cash of $602
in satisfaction of claims against ORBCOMM Japan. The distribution was pursuant to a voluntary
reorganization of ORBCOMM Japan in accordance with a rehabilitation plan approved by the Tokyo
district court on December 25, 2007.
The Company and ORBCOMM Japan are parties to a service license agreement, pursuant to which
ORBCOMM Japan acts as a country representative and resells the Companys services in Japan.
ORBCOMM Japan owns a gateway earth station in Japan, holds the regulatory authority and
authorization to operate the gateway earth station and provides the Companys satellite
communication services in Japan.
The fair value of the consideration the Company received for settlement of claims against
ORBCOMM Japan exceeded the $366 carrying value of current and long-term receivables from ORBCOMM
Japan by $876 and the Company recognized a gain for the same amount in the first quarter of
2008. The estimated fair value of the Companys equity interest in ORBCOMM Japan was $640 at
March 31, 2008.
ORBCOMM Japans results of operations were not significant for the period from March 25, 2008
through March 31, 2008.
On May 12, 2008, the Company entered into an amended service license agreement with ORBCOMM
Japan, which expires in June 2018. On May 15, 2008, in consideration for entering into the
amended service license agreement, the Company received 616 newly issued shares of common stock
from ORBCOMM Japan representing an additional 14% equity interest and the Company recognized a
gain of $242 during the three months ended June 30, 2008. As a result, the Companys ownership
interest in ORBCOMM Japan increased to 51%. On June 9, 2008, the Company and the noncontrolling
stockholder entered into an agreement, which terminated the noncontrolling stockholders
substantive participatory rights in the governance of ORBCOMM Japan and resulted in the Company
obtaining a controlling interest in ORBCOMM Japan.
As the 51% interest in ORBCOMM Japan was acquired in two transactions during 2008, the Company
has accounted for this transaction using the step acquisition method prescribed by Accounting
Research Bulletin No. 51, Consolidated Financial Statements (ARB 51). As permitted by ARB 51,
the Company consolidated ORBCOMM Japans results of operations as though the controlling
interest was acquired on April 1, 2008. For the three and six months ended June 30, 2008, the
Company deducted from continuing operations in its consolidated statement of operations $128 of the pre-control earnings of ORBCOMM
Japan from the termination of the noncontrolling stockholders substantive participatory rights
on June 9, 2008 and a noncontrolling interest for the 49% interest in the income of ORBCOMM
Japan attributable to the noncontrolling stockholders for the period after change in control.
5. Comprehensive Loss
The components of comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(333 |
) |
|
$ |
(938 |
) |
|
$ |
(9,432 |
) |
|
$ |
(1,472 |
) |
Foreign currency translation adjustment |
|
|
(411 |
) |
|
|
(96 |
) |
|
|
(549 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(744 |
) |
|
|
(1,034 |
) |
|
|
(9,981 |
) |
|
|
(1,623 |
) |
Comprehensive
income (loss) attributable to noncontrolling interests |
|
|
28 |
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to ORBCOMM Inc. |
|
$ |
(772 |
) |
|
$ |
(1,034 |
) |
|
$ |
(9,896 |
) |
|
$ |
(1,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Stock-based Compensation
The Companys share-based compensation plans consist of its 2006 Long-Term Incentives Plan (the
2006 LTIP) and its 2004 Stock Option Plan. As of June 30, 2009, there were 2,114,261 shares
available for grant under the 2006 LTIP and no shares available for grant under the 2004 Stock
Option Plan.
10
For the three months ended June 30, 2009 and 2008, the Company recorded stock-based compensation
expense in continuing operations of $344 and $994, respectively. For the six months ended June 30, 2009 and 2008, the
Company recorded stock-based compensation expense in continuing
operations of $799 and $1,784, respectively. The Companys
stock-based compensation expense in discontinued operations was not
significant for the three and six months ended June 30, 2009 and
2008. The
components of the Companys stock-based compensation expense are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
|
|
|
$ |
24 |
|
|
$ |
24 |
|
|
$ |
48 |
|
Restricted stock units |
|
|
118 |
|
|
|
698 |
|
|
|
299 |
|
|
|
1,375 |
|
Stock appreciation
rights |
|
|
226 |
|
|
|
272 |
|
|
|
476 |
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
344 |
|
|
$ |
994 |
|
|
$ |
799 |
|
|
$ |
1,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the Company had an aggregate of $1,992 of unrecognized compensation costs
for all share-based payment arrangements.
Time-Based Restricted Stock Units
During the six months ended June 30, 2009, the Company granted 77,420 time-based RSUs. These
RSUs vest in January 2010.
A summary of the Companys time-based RSUs for the six months ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Balance at January 1, 2009 |
|
|
342,184 |
|
|
$ |
8.21 |
|
Granted |
|
|
77,420 |
|
|
|
1.55 |
|
Vested |
|
|
(189,606 |
) |
|
|
10.40 |
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
229,998 |
|
|
$ |
4.16 |
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, the Company recorded stock-based compensation
expense of $113 and $553 related to the time-based RSUs, respectively. For the six months ended
June 30, 2009 and 2008, the Company recorded stock-based compensation expense of $214 and $1,051
related to the time-based RSUs, respectively. As of June 30, 2009, $624 of total unrecognized
compensation cost related to the time-based RSUs granted is expected to be recognized through
September 2011.
The fair value of the time-based RSU awards granted in 2009 is based upon the closing stock
price of the Companys common stock on the date of grant.
Performance-Based Restricted Stock Units
A summary of the Companys performance-based RSUs for the six months ended June 30, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Grant Date Fair Value |
|
Balance at January 1, 2009 |
|
|
131,129 |
|
|
$ |
4.85 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(90,329 |
) |
|
|
4.81 |
|
Forfeited or expired |
|
|
(38,387 |
) |
|
|
4.81 |
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
2,413 |
|
|
$ |
6.98 |
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, the Company recorded stock-based compensation
expense of $5 and $145 related to the performance-based RSUs, respectively. For the six months
ended June 30, 2009 and 2008, the Company recorded stock-based compensation of $85 and $324
related to the performance-based RSUs, respectively. As of June 30, 2009, there was no
unrecognized compensation costs related to the performance-based RSUs.
Time-Based Stock Appreciation Rights
During the six months ended June 30, 2009, the Company granted 25,000 time-based SARs. These
SARS vest over various periods through February 2012. The weighted-average grant date fair value
of these time-based SARs was $0.91 per share.
11
A summary of the Companys time-based SARs for the six months ended June 30, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1, 2009 |
|
|
1,141,667 |
|
|
$ |
5.31 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
25,000 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
1,166,667 |
|
|
$ |
5.23 |
|
|
|
8.68 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
351,667 |
|
|
$ |
6.11 |
|
|
|
8.47 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
June 30, 2009 |
|
|
1,166,667 |
|
|
$ |
5.23 |
|
|
|
8.68 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, the Company recorded stock-based compensation
expense of $226 and $243 relating to the time-based SARs, respectively. For the six months ended
June 30, 2009 and 2008, the Company recorded stock-based compensation of $448 and $276 relating
to the time-based SARs, respectively. As of June 30, 2009, $1,368 of total unrecognized
compensation cost related to the time-based SARs is expected to be recognized through February
2012.
Performance-Based Stock Appreciation Rights
A summary of the Companys performance-based SARs for the six months ended June 30, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1,
2009 |
|
|
291,899 |
|
|
$ |
10.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(41,753 |
) |
|
|
9.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
7.95 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
7.95 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
at June 30, 2009 |
|
|
250,146 |
|
|
$ |
10.52 |
|
|
|
7.95 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, the Company recorded stock-based compensation
expense of nil and $29 relating to the performance-based SARs, respectively. For the six months
ended June 30, 2009 and 2008, the Company recorded stock-based compensation expense of $28 and
$85 relating to the performance-based SARs, respectively. As of June 30, 2009, there was no
unrecognized compensation cost related to the performance-based SARs.
The fair value of each SAR award is estimated on the date of grant using the Black-Scholes
option pricing model with the assumptions described below for the periods indicated. Expected
volatility was based on the stock volatility for comparable publicly traded companies. The
Company uses the simplified method based on the average of the vesting term and the
contractual term to calculate the expected life of each SAR award. Estimated forfeitures were
based on voluntary and involuntary termination behavior as well as analysis of actual SAR
forfeitures. The risk-free interest rate was based on the U.S. Treasury yield curve at the time
of the grant over the expected term of the SAR grants.
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
2.34% |
|
2.50% to 2.67% |
Expected life (years) |
|
6.00 |
|
5.50 to 6.00 |
Estimated volatility factor |
|
55.03% |
|
43.98% |
Expected dividends |
|
None |
|
None |
12
2004 Stock Option Plan
A summary of the status of the Companys stock options as of June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at January 1, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.67 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.67 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
June 30, 2009 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
4.67 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss attributable to ORBCOMM Inc.
by the weighted-average number of common shares outstanding for the period. Diluted net loss per
common share is the same as basic net loss per common share, because potentially dilutive
securities such as RSUs, SARs, stock options and stock warrants would have an antidilutive
effect as the Company incurred a net loss for the three and six months ended June 30, 2009 and
2008.
The potentially dilutive securities excluded from the determination of diluted loss per share,
as their effect is antidilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Common stock warrants |
|
|
56,724 |
|
|
|
322,560 |
|
Stock options |
|
|
782,079 |
|
|
|
785,790 |
|
RSUs |
|
|
232,411 |
|
|
|
433,365 |
|
SARs |
|
|
1,416,813 |
|
|
|
1,403,566 |
|
|
|
|
|
|
|
|
|
|
|
2,488,027 |
|
|
|
2,945,281 |
|
|
|
|
|
|
|
|
8. Satellite Network and Other Equipment
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life |
|
|
June 30, |
|
|
December 31, |
|
|
|
(years) |
|
|
2009 |
|
|
2008 |
|
Land |
|
|
|
|
|
$ |
381 |
|
|
$ |
381 |
|
Satellite network |
|
310 |
|
|
|
22,351 |
|
|
|
21,290 |
|
Capitalized software |
|
35 |
|
|
|
1,217 |
|
|
|
1,112 |
|
Computer hardware |
|
5 |
|
|
|
1,090 |
|
|
|
1,069 |
|
Other |
|
57 |
|
|
|
1,028 |
|
|
|
881 |
|
Assets under construction |
|
|
|
|
|
|
77,236 |
|
|
|
76,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,303 |
|
|
|
101,732 |
|
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(10,798 |
) |
|
|
(8,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,505 |
|
|
$ |
92,772 |
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2009 and 2008, the Company capitalized costs attributable
to the design and development of internal-use software in the amount
of $112 and $233,
respectively. Depreciation and amortization expense for the three months ended June 30, 2009 and
2008 was $925 and $272, respectively. This includes amortization of internal-use software of $74
and $55 for the three months ended June 30, 2009 and 2008, respectively. Depreciation and
amortization expense for the six months ended June 30, 2009 and 2008 was $1,837 and $542,
respectively. This includes amortization of internal-use software of $146 and $124 for the six
months ended June 30, 2009 and 2008, respectively.
Assets under construction primarily consist of costs relating to milestone payments and other
costs pursuant to the Companys satellite payload and launch procurement agreements for its
quick-launch satellites and the procurement agreement for its next-generation satellites (See
Note 16) and upgrades to its infrastructure and ground segment.
The quick-launch satellites have completed testing and depreciation
will start during the quarter ending September 30, 2009.
13
On June 19, 2008, the Coast Guard Demonstration satellite and five quick-launch satellites
were successfully launched. Due to delays associated with the construction of the final quick-launch
satellite, the Company is retaining it for future deployment. Since launch, communications
capability with two of the quick-launch satellites has been lost as described below. In addition, the
Companys engineers and satellite providers have identified various anomalies affecting these
satellites including lower than nominal gateway transmission power on one satellite, lower than
expected nominal subscriber transmission on one satellite, intermittent computer resets on one
satellite and outages to the reaction wheel components of the attitude control system on each of
the satellites. The satellite with the lower than expected subscriber
transmission power was reprogrammed
to operate in a mode to utilize the gateway transmission for subscriber messaging traffic, although
on July 31, 2009 the gateway transmitter on this satellite ceased functioning as described below.
The satellite with the intermittent flight computer resets has been reprogrammed to use a redundant
receiver to perform some of the flight computer functions, but
additional programming development is required
to incorporate the power system anomaly prevention procedure described below. The implications of
these operational procedures continues to be evaluated. The three
satellites launched in June 2008 for which the Company maintains communications capability are providing limited ORBCOMM messaging
and worldwide AIS services.
On February 22, 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite by both the Companys ground control
systems and the ground control systems of the company providing in-orbit monitoring and testing, KB
Polyot-Joint Stock Company (KB Polyot).
After consultation with OHB and its own engineers, the Company believes that after an extended
period of no communication with the satellite, the satellite is not recoverable. A non-cash
impairment charge to write-off the cost of this satellite of $7,045
was recognized during the
first quarter of 2009.
On July 31, 2009, the satellite with lower than expected subscriber transmission
power experienced a
gateway transmitter anomaly that resulted in a loss of contact with the satellite by the Companys
ground control systems. KB Polyot has been able to connect to the satellite through the back-up
command and control system. Telemetry from this back-up system has indicated the satellite bus is functioning as it
was prior to the occurrence of this anomaly. The Company is using this back-up system to send
commands to the payload in an attempt to recover the gateway transmitter but these commands have
not corrected the anomaly. After consultations with its engineers, the Company believes that the
gateway transmitter will not be recovered, resulting in an inability to provide ORBCOMM messaging
and AIS data services by this satellite. The Company is still conducting post-loss data analysis to better understand
the causes of the gateway downlink anomaly and resulting loss of
communication capability of this satellite.
On
August 7, 2009, the Company decided it is unlikely the satellite
will be recovered and that an impairment charge should be recognized in the
quarter ending September 30, 2009 with respect to the satellite
that suffered the gateway transmitter failure. Accordingly, the Company estimates that a non-cash impairment charge for the cost
of the satellite of approximately $7,100 will be reflected in the condensed consolidated financial
statements in the Companys Quarterly Report on Form 10-Q for the quarter ending September 30,
2009. No amount of this impairment charge represents a cash expenditure and the Company does not
expect that any amount of this impairment charge will result in any future cash expenditures.
On August 7, 2009, a second
quick-launch satellite experienced a power system anomaly which resulted in
loss of contact with the satellite by the Company’s ground control
systems and KB Polyot’s back-up command and control systems. Both control
centers continue to send commands to the spacecraft in an attempt to recover
from the power system anomaly. In the event that the Company is unable to
recover the satellite, the Company may have to take a non-cash impairment
charge for the carrying value of this satellite in the quarter ending
September 30, 2009.
The
loss of these quick-launch satellites can result in longer delays, or latencies, in
transmitting messages but is not expected to have a material adverse effect on the current
communications service as the satellites were not in full operational service. Each of the
remaining two quick-launch satellites and the Coast Guard Demonstration satellite is equipped
with an AIS payload and the Company believes the current loss of three satellites will not adversely impact
in any material respect its current AIS service, as the remaining satellites provide redundant
capabilities to the AIS data service.
The Company conducted a post-loss data analysis to determine the root cause of the first quick
launch satellite failure on February 22, 2009 and establish operational procedures, if any, to
mitigate the risk of a similar anomaly from occurring on the remaining three quick-launch
satellites which are of the same design and the Coast Guard Demonstration Satellite which is of a
similar design. This analysis revealed the most likely cause of the February 22, 2009 failure to be
a failure of the electrical power system (EPS) components that control battery charging which
resulted in completely discharging the battery and precluded additional charging. As a precaution
to mitigate the risk of this type of failure leading to the loss of the other satellites, the
Company has developed new software that resides in the payload flight computer that performs the
majority of the functions performed by the EPS component that the Company believes failed. This
software has been uploaded to three of the satellites that have experienced failures to redundant
EPS components. Further programming development is necessary to upload the software to the satellite
experiencing flight computer resets. The Company is unable to determine whether or when another EPS
anomaly will occur on the other satellites, and is currently unable to quantify the impact that a
further EPS anomaly would have on the expected useful life and communications capabilities of these
satellites. The Company is still analyzing the likely cause of the
July 31, 2009 failure of the second satellite and the
August 7, 2009 loss of communications to the third satellite.
The
remaining satellites are experiencing attitude control system anomalies which result in the
satellites not pointing towards the sun and the earth as expected. This pointing error results in
reduced power generation, improper satellite spacing within the orbital plane and reduced
communications capabilities. While OHB, the satellite bus
manufacturer, and the Companys engineering staff continue their efforts to correct and develop alternate operational procedures
to mitigate the effect of these anomalies, there can be no assurance in this regard.
The
Company has in-orbit insurance that under certain circumstances
during the coverage period that ended June 19, 2009 covers the total loss or
constructive total loss of the Coast Guard Demonstration and five quick-launch satellites. Under
the terms of the policy, a satellite that does not meet the working satellite criteria constitutes
a constructive total loss of that satellite for insurance purposes. The in-orbit insurance is
subject to certain exclusions including a deductible under which no claim is payable under the
policy for the first satellite to suffer a constructive total loss or total loss.
The Company has filed a claim under the policy for all six satellites as either a total loss or
constructive total loss. The total loss claim is for the one satellite that suffered a power system
failure resulting in loss of contact, and the constructive total loss claim for each of the other
five satellites is on the basis that these satellites do not meet the working satellite criteria
stated in the policy due to, among other anomalies, the pointing errors described above. The
maximum amount recoverable by the Company under the policy from third party insurers for all six
satellites covered by the policy is $50 million, which includes the one-satellite deductible
described above, and less any salvage value that can be established.
9. Restricted Cash
Restricted cash consists of cash collateral of $5,000 for a performance bond required by the FCC
in connection with the Company obtaining expanded FCC authorization to construct, launch and
operate an additional 24 next-generation satellites. Under the terms of the performance bond,
the cash collateral will be reduced in increments of $1,000 upon completion of specified
milestones. The Company certified completion of three milestones to
the FCC on March 20, 2009, and in response to a request from the
FCC staff, filed a supplement to the certification on May 18,
2009. The FCC has not yet issued a ruling on the certification. The Company has classified $3,000 of
restricted cash as a current asset.
14
Restricted cash also includes $680 deposited into an escrow account under the terms of the
Orbital Sciences procurement agreement for the quick-launch satellites. The amounts in escrow
are payable to Orbital Sciences, subject to adjustments under the
agreement, one year following the successful completion of in-orbit
testing of the five quick-launch satellites (See Note 16).
The interest income earned on the restricted cash balances is unrestricted and included in
interest income.
10. Intangible Assets
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Useful life |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
(years) |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
Acquired licenses |
|
|
6 |
|
|
$ |
8,115 |
|
|
$ |
(4,772 |
) |
|
$ |
3,343 |
|
|
$ |
8,115 |
|
|
$ |
(4,029 |
) |
|
$ |
4,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense was $371 for the three months ended June 30, 2009 and
2008 and was $743 for the six months ended June 30, 2009 and 2008.
Estimated amortization expense for intangible assets subsequent to June 30, 2009 is as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
Remainder of 2009 |
|
$ |
743 |
|
2010 |
|
|
1,486 |
|
2011 |
|
|
1,114 |
|
|
|
|
|
|
|
$ |
3,343 |
|
|
|
|
|
11. Accrued Liabilities
The Companys accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Litigation settlement (See Note 16) |
|
$ |
2,450 |
|
|
$ |
2,450 |
|
Accrued compensation and benefits |
|
|
1,316 |
|
|
|
2,200 |
|
Accrued interest |
|
|
766 |
|
|
|
736 |
|
Accrued professional services |
|
|
355 |
|
|
|
229 |
|
Deferred
rent payable |
|
|
837 |
|
|
|
166 |
|
Other accrued expenses |
|
|
1,433 |
|
|
|
1,387 |
|
|
|
|
|
|
|
|
|
|
$ |
7,157 |
|
|
$ |
7,168 |
|
|
|
|
|
|
|
|
12. Deferred Revenues
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Professional services |
|
$ |
6,833 |
|
|
$ |
7,043 |
|
Service activation fees |
|
|
3,017 |
|
|
|
3,032 |
|
Manufacturing license fees |
|
|
52 |
|
|
|
59 |
|
Prepaid services |
|
|
1,052 |
|
|
|
1,016 |
|
|
|
|
|
|
|
|
|
|
|
10,954 |
|
|
|
11,150 |
|
Less current portion |
|
|
(3,731 |
) |
|
|
(3,543 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
7,223 |
|
|
$ |
7,607 |
|
|
|
|
|
|
|
|
Deferred professional services revenues at June 30, 2009, represent amounts related to the USCG
Concept Validation Project (See Note 16).
15
13. Note Payable
In connection with the acquisition of a majority interest in Satcom in 2005, the Company
recorded an indebtedness to OHB, a
stockholder of the Company. At June 30, 2009, the principal balance of the note payable was
1,138 ($1,594) and it had a carrying value of $1,299. At December 31, 2008, the principal
balance of the note payable was 1,138 ($1,605) and it had a carrying value of $1,244. The
carrying value was based on the notes estimated fair value at the time of acquisition. The
difference between the carrying value and principal balance is being amortized to interest
expense over the estimated life of the note of six years. Interest expense related to the note
for the three and six months ended June 30, 2009 and 2008 was $33 and $66, respectively. This
note does not bear interest and has no fixed repayment term. Repayment will be made from the
distribution profits (as defined in the note agreement) of ORBCOMM Europe LLC. The note has been
classified as long-term and the Company does not expect any repayments to be required prior to
June 30, 2010.
14. Stockholders Equity
As of June 30, 2009, the Company had outstanding warrants to purchase 56,724 shares of common
stock at an exercise price of $4.26 per share. During the six months ended June 30, 2009,
warrants to purchase 201,262 common shares with per share exercise prices of $4.26 expired.
At June 30, 2009, the Company reserved the following shares of common stock for future issuance:
|
|
|
|
|
|
|
Shares |
|
Employee stock compensation plans |
|
|
4,545,564 |
|
Warrants to purchase common stock |
|
|
56,724 |
|
|
|
|
|
|
|
|
4,602,288 |
|
|
|
|
|
15. Geographic Information
The Company operates in one reportable segment, satellite data communications. Other than
satellites in orbit, long-lived assets outside of the United States are not significant. The following table summarizes revenues on a
percentage basis by geographic regions, based on the country in which the customer is located.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States |
|
|
87 |
% |
|
|
73 |
% |
|
|
86 |
% |
|
|
80 |
% |
Japan |
|
|
10 |
% |
|
|
23 |
% |
|
|
10 |
% |
|
|
15 |
% |
Other |
|
|
3 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Commitments and Contingencies
Procurement agreements in connection with quick-launch satellites
On April 21, 2006, the Company entered into an agreement with Orbital Sciences to design,
manufacture, test and deliver one payload engineering development unit and six AIS-equipped
satellite payloads to the Company. The cost of the payloads is $17,000, subject to adjustment
under certain circumstances. Payments under the agreement were due upon the achievement of
specified milestones by Orbital Sciences. As of June 30, 2009, the Company has made milestone
payments of $16,300 under this agreement. The Company anticipates making the remaining payments,
subject to adjustments under the agreement, of $700 in 2009.
On June 5, 2006, the Company entered into an agreement with OHB System, AG, an affiliate of OHB,
to design, develop and manufacture six satellite buses, integrate such buses with the payloads
provided by Orbital Sciences, and launch the six integrated satellites. The original price for
the six satellite buses and launch services was $20,000 and payments under the agreement were
due upon specific milestones achieved by OHB System, AG.
On July 2, 2008, the Company and OHB System, AG entered into an agreement to amend the June 5,
2006 agreement in connection with the successful launch of the Coast Guard demonstration
satellite and the five quick-launch satellites on June 19, 2008. Pursuant to the agreement, the
Company and OHB System, AG agreed to a revised schedule of milestone and related payments for
the launch of the five quick-launch satellites and delivery schedule of the sixth quick-launch
satellite, with no modification to the price in the agreement entered into on June 5, 2006,
including certain launch support and in-orbit testing services for the sixth quick-launch
satellite. In addition, the Company agreed to pay an additional $450 to OHB System, AG relating
to the construction of the five quick-launch satellites. The Company and OHB System, AG have
also agreed to waive any applicable on-time delivery incentive payments and to waive any
applicable liquidated delay damages, except for any liquidated delay damages with respect to
delivery delay of the sixth quick-launch satellite.
16
As of June 30, 2009, the Company has made milestone payments of $17,767 under this agreement. In
addition, OHB System, AG will provide services relating to the development, demonstration and
launch of the Companys next-generation satellites at a total cost of $1,350. The remaining
balance of $2,233 is payable, subject to adjustments under the
agreement.
Procurement agreements in connection with U.S. Coast Guard contract
In May 2004, the Company entered into an agreement to construct and deploy a satellite for use
by the USCG. In connection with this agreement, the Company entered into procurement agreements
with Orbital Sciences and OHB System, AG. As of June 30, 2009, the Companys remaining
obligation under this agreement was $271.
Procurement agreement in connection with next-generation satellites
On May 5, 2008, the Company entered into a procurement agreement with Sierra Nevada Corporation
(SNC) pursuant to which SNC will construct eighteen low-earth-orbit satellites in three sets
of six satellites (shipsets) for the Companys next-generation satellites (the Initial
Satellites). Under the agreement, SNC will also provide launch support services, a test
satellite (excluding the mechanical structure), a satellite software simulator and the
associated ground support equipment. Under the agreement, the Company may elect to use the
launch option to be offered by SNC or it may contract separately with other providers for launch
services and launch insurance for the satellites.
Under the agreement, the Company has the option, exercisable at any time until the third
anniversary of the execution of the agreement, to order up to thirty additional satellites
substantially identical to the Initial Satellites (the Optional Satellites).
The total contract price for the Initial Satellites is $117,000, subject to reduction upon
failure to achieve certain in-orbit operational milestones or if the pre-ship reviews of each
shipset are delayed more than 60 days after the specified time periods described below. The
Company has agreed to pay SNC up to $1,500 in incentive payments for the successful operation of
the Initial Satellites five years following the successful completion of in-orbit testing for
the third shipset of six satellites. The price for the Optional Satellites ranges from $5,000 to
$7,700 per satellite depending on the number of satellites ordered and the timing of the
exercise of the option.
The agreement also requires SNC to complete the pre-ship review of the Initial Satellites (i) no
later than 24 months after the execution of the agreement for the first shipset of six
satellites, (ii) no later than 31 months after the execution of the agreement for the second
shipset of six satellites and (iii) no later than 36 months after the execution of the agreement
for the third shipset of six satellites. Payments under the agreement will begin upon the
execution of the agreement and will extend into the second quarter of 2012, subject to SNCs
successful completion of each payment milestone. As of June 30, 2009, the Company has made
milestone payments of $36,270 under the agreement. The Company anticipates making payments under
the agreement of $15,210 during the remainder of 2009. Under the agreement, SNC has agreed to provide the Company
with an optional secured credit facility for up to $20,000 commencing 24 months after the
execution of the agreement and maturing 44 months after the effective date. If the Company
elects to establish and use the credit facility it and SNC will enter into a formal credit
facility on terms established in the agreement.
Airtime credits
In 2001, in connection with the organization of ORBCOMM Europe LLC and the reorganization of the
ORBCOMM business in Europe, the Company agreed to grant certain country representatives in
Europe approximately $3,736 in airtime credits. The Company has not recorded the airtime credits
as a liability for the following reasons: (i) the Company has no obligation to pay the unused
airtime credits if they are not utilized; and (ii) the airtime credits are earned by the country
representatives only when the Company generates revenue from the country representatives. The
airtime credits have no expiration date. Accordingly, the Company is recording airtime credits
as services are rendered and these airtime credits are recorded net of revenues from the country
representatives. For the three months ended June 30, 2009 and 2008, airtime credits used totaled
approximately $15 and $72, respectively. For the six months ended June 30, 2009 and 2008,
airtime credits used totaled approximately $48 and $113, respectively. As of June 30, 2009 and
December 31, 2008, unused credits granted by the Company were approximately $2,259 and $2,307,
respectively.
Purchase commitment
On August 29, 2008, Stellar entered into an agreement with Delphi Automotive Systems LLC to
purchase approximately $4,800 of a future model of a subscriber communicator over a two-year
period beginning once the subscriber communicator model is commercially available within the
next twelve months (See Note 3).
17
Litigation
From time to time, the Company is involved in various litigation matters involving ordinary and
routine claims incidental to its business. Management currently believes that the outcome of
these proceedings, either individually or in the aggregate, will not have a material adverse
effect on the Companys business, results of operations or financial condition. The Company is
also involved in certain litigation matters as discussed below.
Class Action Litigation
On September 20 and 25, 2007, two separate plaintiffs filed purported class action lawsuits in
the United States District Court for the District of New Jersey against the Company and certain
of its officers. On June 2, 2008, the Court consolidated the actions, appointed Erwin Weichel,
David Peterson and William Hunt as lead plaintiffs and approved the lead plaintiffs selection
of co-lead and liaison counsel. On July 17, 2008, the lead plaintiffs filed their consolidated
complaint against the Company and certain of its officers, and added as defendants the two
co-lead underwriters of the Companys initial public offering, UBS Securities LLC and Morgan
Stanley & Co. Incorporated. The consolidated complaint alleges, among other things, that the
Companys registration statement related to its initial public offering in November 2006
contained material misstatements and omissions in violation of the Securities Act of 1933. The
action cited, among other things, a drop in the trading price of the Companys common stock that
followed disclosure on August 14, 2007 of a change in the Companys definition of billable
subscriber communicators and reduced guidance for the remainder of 2007 released with the
Companys 2007 second quarter financial results. The action seeks to recover compensatory and
rescissory damages, on behalf of a class of shareholders who purchased common stock in and/or
traceable to the Companys initial public offering on or about November 3, 2006 through
August 14, 2007. On February 25, 2009, the Company and the other named defendants agreed in
principle to settle the action, while continuing to deny any liability for these claims, for a
payment of $2,450 to be paid entirely by the Companys insurer providing directors and officers
liability coverage for the claims asserted in the litigation. On May 21, 2009, the Company and
the other named defendants entered into a definitive settlement agreement to settle the action
on the terms described above and on July 21, 2009, the United States District Court for the
District of New Jersey preliminarily approved the settlement. The settlement remains subject to
final approval by the United States District Court for the District of New Jersey. As of June
30, 2009 and December 31, 2008, the Company has accrued the $2,450 as a component of accrued
liabilities. The Company has established a receivable from its insurance carrier in the same
amount that is included as a component of prepaid expenses and other
current assets, as collection
is probable. Litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include money damages. If an unfavorable ruling were to
occur, it could have a material adverse effect on the Companys business and results of
operations for the period in which the ruling occurred or future periods. In addition, the
Company has received a request for indemnification pursuant to the Underwriting Agreement
entered into in connection with the initial public offering from UBS Securities, LLC and Morgan
Stanley & Co. Incorporated for any losses or costs they may incur as a result of this lawsuit.
The Company has declined to pay any such indemnity claims by these firms.
17. Services Agreement with GE
Concurrent with the Settlement Agreement (See Note 3), the Company and GE entered into a
services agreement (the Services Agreement) with a term of January 1, 2009 through December 31
2013, pursuant to which the Company and GE agreed to expand the scope of services provided or
that may in the future be provided to GE to include other satellite, cellular or dual mode (cellular
plus satellite) data communications services, in addition to the low-earth-orbit-satellite-based
data communication services (the Low-Earth Services).
Under the Services Agreement, GE will activate and provide telematics and machine-to-machine
data communications services on all communicators sold or managed by or on behalf of GE in the
United States, Canada and Mexico for purposes of communications between (i) subscriber
communicators sold or managed by or on behalf of GEs asset tracking and monitoring business and
(ii) communications centers or customers of GEs asset tracking and monitoring business, whether
satellite, cellular or dual mode (cellular plus satellite), exclusively (subject to certain
restrictions and qualifications) on ORBCOMMs communications system that provides the Low-Earth
Services and terrestrial-based cellular communication services through reseller agreements with
major cellular wireless providers and that may in the future provide communication services
through other third party communication networks in each case as long as the Company provides
competitive services at competitive rates with appropriate regulatory approval, subject to the
terms of the Services Agreement.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Safe Harbor Statement Under the Private Securities Litigation Reform of Act 1995.
Certain statements discussed in Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form
10-Q constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans,
objectives and expectations for future events and include statements about our expectations,
beliefs, plans, objectives, intentions, assumptions and other statements that are not historical
facts. Such forward-looking statements, including those concerning the Companys expectations,
are subject to known and unknown risks and uncertainties, which could cause actual results to
differ materially from the results, projected, expected or implied by the forward-looking
statements, some of which are beyond the Companys control, that may cause the Companys actual
results, performance or achievements, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking
statements. These risks and uncertainties include but are not limited to: the impact of global
recession and continued worldwide credit and capital constraints; substantial losses we have
incurred and expect to continue to incur; demand for and market acceptance of our products and
services and the applications developed by our resellers; loss or decline or slowdown in the
growth in business from the Asset Intelligence division of General Electric Company (GE or
General Electric or AI), other value-added resellers or VARs and international value-added
resellers or IVARs; loss or decline or slowdown in growth in business of any of the specific
industry sectors the Company serves, such as transportation, heavy equipment, fixed assets and
maritime; litigation proceedings; technological changes, pricing pressures and other competitive
factors; the inability of our international resellers to develop markets outside the United
States; market acceptance and success of our Automatic Identification System (AIS) business;
the in-orbit satellite failure of the Coast Guard demonstration or the quick-launch satellites;
satellite launch and construction delays and cost overruns and in-orbit satellite failures or
reduced performance; the failure of our system or reductions in levels of service due to
technological malfunctions or deficiencies or other events; our inability to renew or expand our
satellite constellation; political, legal regulatory, government administrative and economic
conditions and developments in the United States and other countries and territories in which we
operate; and changes in our business strategy. These and other risks are described in more
detail in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2008. The Company undertakes no obligation to publicly revise any forward-looking
statements or cautionary factors, except as required by law.
Overview
We operate a global commercial wireless messaging system optimized for narrowband
communications. Our system consists of a global network of 28 low-Earth orbit, or LEO,
satellites and accompanying ground infrastructure.
Our two-way communications system enables our
customers and end-users, which include large and established multinational businesses and
government agencies, to track, monitor, control and communicate cost-effectively with fixed and
mobile assets located anywhere in the world. We also provide terrestrial-based cellular
communication services through reseller agreements with major cellular wireless providers. These
terrestrial-based communication services enable our customers who have higher bandwidth
requirements to receive and send messages from communication devices based on terrestrial-based
technologies using the cellular providers wireless networks as well as from dual-mode devices
combining our satellite subscriber communicators with devices for terrestrial-based
technologies. As a result, our customers are now able to integrate into their applications a
terrestrial communications device that will allow them to add messages, including data intensive
messaging from the cellular providers wireless networks.
Our products and services enable our customers and end-users to enhance productivity, reduce
costs and improve security through a variety of commercial, government, and emerging homeland
security applications. We enable our customers and end-users to achieve these benefits using a
single global satellite technology standard for machine-to-machine and telematic, or M2M, data
communications. Our customers have made significant investments in developing ORBCOMM-based
applications. Examples of assets that are connected through our M2M data communications system
include trucks, trailers, railcars, containers, heavy equipment, fluid tanks, utility meters,
pipeline monitoring equipment, marine vessels, and oil wells. Our customers include original
equipment manufacturers, or OEMs, such as Caterpillar Inc., (Caterpillar), Doosan Infracore
America, Hitachi Construction Machinery Co., Ltd.,
(Hitachi), Hyundai Heavy Industries, Komatsu Ltd.,
(Komatsu) The Manitowoc Company and Volvo Construction Equipment, IVARs, such as GE, VARs,
such as XATA Corporation and American Innovations, Ltd., and government agencies, such as the
U.S. Coast Guard.
Our products and services are satellite-based data communications services, product sales from
subscriber communicators, terrestrial-based cellular communications services, product sales from
cellular wireless subscriber identity modules, or SIMS for use with devices or equipment that
enable the use of the cellular providers wireless networks for data communications and
satellite AIS data services.
19
We currently have a contract to provide AIS data to the U.S. Coast Guard and offer the
AIS data service to other government and commercial customers. Further, we will be working with
system integrators and maritime information service providers for value-added service and to
facilitate the sales and distribution of our AIS data. In January 2009, we entered into our
first AIS data license distribution agreement for commercial purposes with Lloyds
Register-Fairplay Ltd (Lloyds). As a result, Lloyds has entered into agreements with
several government agencies and corporate customers. We will continue to work with additional
candidates to address the various market sectors for AIS data. We believe we are the only
commercially available satellite-based AIS data provider reaching beyond coastal access into the
open seas.
The recent global economic conditions, including concerns about a global economic recession,
along with unprecedented credit and capital constraints in the capital markets and
deteriorations of financial institutions have created a challenging economic environment leading
to a lack of customer confidence. Our worldwide operations and performance depend significantly
on global economic conditions and their impact on our customers decisions to purchase our
services and products. Economic conditions have worsened significantly in many parts of the
world, and may remain weak or even deteriorate further in the foreseeable future. The worldwide
economic turmoil may have a material adverse effect on our operations and financial results, and
we may be unable to predict the scope and magnitude of its effects on our business. VARs and end
users in any of our target markets, including in commercial transportation and heavy equipment,
have and may experience unexpected fluctuations in demand for their products, as our end users
alter purchasing activities in response to this economic volatility. Our customers may change or
scale back product development efforts, the roll-out of service applications, product purchases
or other sales activities that affect purchases of our products and services, and this could
adversely affect the amount and timing of revenue for the long-term future, leaving us with
limited visibility in the revenue we can anticipate in any given period. These economic
conditions also affect our third party manufacturers, and if they are unable to obtain the
necessary capital to operate their business, this may also impact their ability to provide the
subscriber communicators that our end-users need, or may adversely affect their ability to
provide timely services or to make timely deliveries of products or services to our end-users.
It is currently unclear as to what overall effect these economic conditions and uncertainties
will have on our existing customers and core markets, and future business with existing and new
customers in our current and future markets.
On June 19, 2008, the Coast Guard Demonstration satellite and five quick-launch satellites
were successfully launched. Due to delays associated with the construction of the final quick-launch
satellite, we are retaining it for future deployment. Since launch, communications capability with
two quick-launch satellites has been lost as described below. In addition, our engineers and satellite
providers have identified various anomalies affecting these satellites including lower than nominal
gateway transmission power on one satellite, lower than expected
nominal subscriber transmission power on
one satellite, intermittent computer resets on one satellite and outages to the reaction wheel
components of the attitude control system on each of the satellites. The satellite with the lower
than expected subscriber transmission was reprogrammed to operate in a mode to utilize the gateway
transmission for subscriber messaging traffic, although on July 31, 2009 the gateway transmitter on
this satellite ceased functioning as described below. The satellite with the intermittent flight
computer resets has been reprogrammed to use a redundant receiver to perform some of the flight
computer functions, but additional programming development is required to incorporate the power system anomaly
prevention procedure described below. The implications of these operational procedures continues to
be evaluated. The three satellites launched in June 2008 for which we maintain
communications capability, are providing limited ORBCOMM messaging and worldwide AIS services.
On February 22, 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite by both our ground control systems
and the ground control systems of the company providing in-orbit monitoring and testing, KB
Polyot-Joint Stock Company (KB Polyot).
After consultation with OHB and our own engineers, we believe that after an extended period of no
communication with the satellite, the satellite is not recoverable. A non-cash impairment charge to
write-off the cost of this satellite of $7.0 million was
recognized during the first quarter of 2009.
On July 31, 2009, the satellite with lower than expected subscriber transmission
experienced a gateway transmitter anomaly that resulted in a loss of contact with the satellite by our ground
control systems. KB Polyot has been able to connect to the satellite through the back-up command and control system.
Telemetry from this back-up system has indicated the satellite bus is functioning as it was prior
to the occurrence of this anomaly. We are using this back-up system to send commands to the
payload in an attempt to recover the gateway transmitter but these commands have not corrected the
anomaly. After consultations with our engineers, we believe that the gateway transmitter will not
be recovered, resulting in an inability to provide ORBCOMM messaging
and AIS data services by this satellite. We are
still conducting post-loss data analysis to better understand the causes of the gateway downlink
anomaly and resulting loss of communication capability of this satellite.
On
August 7, 2009, we decided it is unlikely the satellite will be
recovered and that an impairment charge should be recognized in the quarter ending September 30, 2009
with respect to the satellite that suffered the gateway transmitter failure. Accordingly, we
estimate that a non-cash impairment charge for the cost of the satellite of approximately $7.1 million will be reflected in our condensed consolidated financial statements in the quarter ending
September 30, 2009. No amount of this impairment charge represents a cash expenditure and we do
not expect that any amount of this impairment charge will result in any future cash expenditures.
On August 7, 2009, a second
quick-launch satellite experienced a power system anomaly which resulted in
loss of contact with the satellite by our ground control systems and KB
Polyot’s back-up command and control systems. Both control centers
continue to send commands to the spacecraft in an attempt to recover from the
power system anomaly. In the event that we are unable to recover the satellite,
we may have to take a non-cash impairment charge for the carrying value of this
satellite in the quarter ending September 30, 2009.
The
loss of these quick-launch satellites can result in longer delays, or latencies, in
transmitting messages but is not expected to have a material adverse effect on the current
communications service as the satellites were not in full operational service. Each of the
remaining two quick-launch satellites and the Coast Guard Demonstration satellite is equipped
with an AIS payload and we believe that the current loss of three satellites will not adversely impact in
any material respect our current AIS service, as the remaining satellites provide redundant
capabilities to the AIS data service.
We conducted a post-loss data analysis to determine the root cause of the first quick launch
satellite failure on February 22, 2009 and establish operational procedures, if any, to mitigate
the risk of a similar anomaly from occurring on the remaining three quick-launch satellites which
are of the same design and the Coast Guard Demonstration Satellite which is of a similar design.
This analysis revealed the most likely cause of the February 22, 2009 failure to be a failure of
the electrical power system (EPS) components that control battery charging which resulted in
completely discharging the battery and precluded additional charging. As a precaution to mitigate
the risk of this type of failure leading to the loss of the other satellites, we have developed new
software that resides in the payload flight computer that performs the majority of the functions
performed by the EPS component that we believed failed. This software has been uploaded to three of
the satellites that have experienced failures to redundant EPS components. Further development is
necessary to upload the software to the satellite experiencing flight computer resets. We are
unable to determine whether or when another EPS anomaly will occur on the other satellites, and is
currently unable to quantify the impact that a further EPS anomaly would have on the expected
useful life and communications capabilities of these satellites. We are still analyzing the likely
cause of the July 31, 2009 failure of the second satellite and
the August 7, 2009 loss of communication to the third satellite.
The
remaining satellites are experiencing attitude control system anomalies which result in the
satellites not pointing towards the sun and the earth as expected. This pointing error results in
reduced power generation, improper satellite spacing within the orbital plane and reduced
communications capabilities. While OHB, the satellite bus
manufacturer, and our engineering staff continue their efforts to correct and develop alternate operational procedures to mitigate
the effect of these anomalies, there can be no assurance in this regard.
We
have in-orbit insurance that under certain circumstances during the
coverage period that ended June 19, 2009 covers the total loss or constructive
total loss of the Coast Guard Demonstration and five quick-launch satellites. Under the terms of
the policy, a satellite that does not meet the working satellite criteria constitutes a
constructive total loss of that satellite for insurance purposes. The in-orbit insurance is subject
to certain exclusions including a deductible under which no claim is payable under the policy for
the first satellite to suffer a constructive total loss or total loss.
We have filed a claim under the policy for all six satellites as either a total loss or
constructive total loss. The total loss claim is for the one satellite that suffered a power system
failure resulting in loss of contact, and the constructive total loss claim for each of the other
five satellites is on the basis that these satellites do not meet the working satellite criteria
stated in the policy due to, among other anomalies, the pointing errors described above. The
maximum amount recoverable by us under the policy from third party insurers for all six satellites
covered by the policy is $50 million, which includes the one-satellite deductible described above,
and less any salvage value that can be established.
20
ORBCOMM Japan
On March 25, 2008, we received a 37% equity interest in ORBCOMM Japan, which was accounted for
an investment in affiliates at March 31, 2008. ORBCOMM Japans results of operations were not
significant for the period from March 25, 2008 through March 31, 2008. On May 15, 2008, we
received an additional 14% equity interest in Japan and, as a result, our ownership interest
increased to 51%. On June 9, 2008, we entered into an agreement with the noncontrolling
stockholder, which terminated its substantive participatory rights in the governance of ORBCOMM
Japan and as a result, we obtained the controlling interest in ORBCOMM Japan.
We consolidated the results of ORBCOMM Japan as though the controlling interest was acquired on
April 1, 2008 and therefore deducted $0.1 million of ORBCOMM Japans earnings for the period
prior to June 9, 2008 (the date we acquired our controlling
interest) from our results of continuing
operations in our consolidated statement of operations. See Note 4 to the condensed
consolidated financial statements for further discussion.
21
Discontinued Operations
We are
focused on our network business and in the process of discussing with interested
parties about a sale of our subsidiary, Stellar Satellite Communications, Ltd (Stellar).
The GE settlement agreement and the services agreement discussed below provides us with the ability to
dispose of Stellar without disrupting ORBCOMMs growth prospects with GE and allows us to
concentrate on our service-based data communications business. As a result, we classified
Stellars assets and liabilities as held for sale on our
condensed consolidated balance sheets and presented
Stellars results of operations as discontinued operations in our condensed
consolidated statements of
operations for the periods presented. We expect to complete the sale
of Stellar during 2009. See Note 3 to the condensed consolidated
financial statements for further discussion.
On
April 3, 2009, we entered into a settlement agreement ( the Settlement Agreement) with GE
with respect to the supply agreement dated October 10, 2006 (the 2006 Agreement) to supply up
to 412,000 units of in-production and future models of subscriber communicators through
December 31, 2009 to support GEs applications utilizing our data communications system. 270,000
of these units were non-cancelable except for specified early termination provisions.
Pursuant to the Settlement Agreement, we received $0.8 million as settlement for GEs obligation
under the 2006 Agreement. GE did not purchase its minimum committed volumes for 2007 and 2008.
For the three and six months ended June 30, 2009 we recognized a gain of $0.8 million for
customer claims settlements in income (loss) from discontinued operations.
The Company and GE terminated the 2006 Agreement and all their respective obligations relating
to it, and released each other from any claims relating to their obligations arising under the
2006 Agreement, except for certain obligations related to warranties, indemnities,
confidentiality and intellectual property.
GE
Concurrent
with the Settlement Agreement, we and GE entered into a services agreement (the
Services Agreement) with a term of January 1, 2009 through December 31 2013, pursuant to which
we and GE agreed to expand the scope of services provided or that may in the future be provided
to include other satellite, cellular or dual mode (cellular plus satellite) data communications
services, in addition to the low-earth-orbit-satellite-based data communication services (the
Low-Earth Services).
Under the Services Agreement, GE will activate and provide telematics and machine-to-machine
data communications services on all communicators sold or managed by or on behalf of GE in the
United States, Canada and Mexico for purposes of communications between (i) subscriber
communicators sold or managed by or on behalf of GEs asset tracking and monitoring business and
(ii) communications centers or customers of GEs asset tracking and monitoring business, whether
satellite, cellular or dual mode (cellular plus satellite), exclusively (subject to certain
restrictions and qualifications) on ORBCOMMs communications system that provides the Low-Earth
Services and terrestrial-based cellular communication services through reseller agreements with
major cellular wireless providers and that may in the future provide communication services
through other third party communication networks in each case as long as we provide competitive
services at competitive rates with appropriate regulatory approval, subject to the terms of the
Services Agreement.
22
Critical Accounting Policies
Our discussion and analysis of our results of operations, liquidity and capital resources are
based on our condensed consolidated financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP). The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates and
judgments, including those related to revenue recognition, costs of revenues, accounts
receivable, inventory valuation, satellite network and other equipment, capitalized development
costs, intangible assets, the valuation of deferred tax assets, uncertain tax positions and the
fair value of securities underlying share-based payment arrangements. We base our estimates on
historical and anticipated results and trends and on various other assumptions that we believe
are reasonable under the circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. By their nature, estimates are
subject to an inherent degree of uncertainty. Actual results may differ from our estimates and
could have a significant adverse effect on our results of operations and financial position. For
a discussion of our critical accounting policies see Part II, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2008. There have been no material changes to our critical
accounting policies during 2009.
EBITDA
EBITDA is defined as earnings attributable to ORBCOMM Inc., before interest income (expense),
provision for income taxes and depreciation and amortization. We believe EBITDA is useful to our
management and investors in evaluating our operating performance because it is one of the
primary measures we use to evaluate the economic productivity of our operations, including our
ability to obtain and maintain our customers, our ability to operate our business effectively,
the efficiency of our employees and the profitability associated with their performance. It also
helps our management and investors to meaningfully evaluate and compare the results of our
operations from period to period on a consistent basis by removing the impact of our financing
transactions and the depreciation and amortization impact of capital investments from our
operating results. In addition, our management uses EBITDA in presentations to our board of
directors to enable it to have the same measurement of operating performance used by management
and for planning purposes, including the preparation of our annual operating budget.
EBITDA is not a performance measure calculated in accordance with accounting principles
generally accepted in the United States, or GAAP. While we consider EBITDA to be an important
measure of operating performance, it should be considered in addition to, and not as a
substitute for, or superior to, net loss or other measures of financial performance prepared in
accordance with GAAP and may be different than EBITDA measures presented by other companies.
The following table (in thousands) reconciles our net loss to EBITDA for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss
attributable to ORBCOMM Inc. |
|
$ |
(362 |
) |
|
$ |
(979 |
) |
|
$ |
(9,497 |
) |
|
$ |
(1,513 |
) |
Interest income |
|
|
(23 |
) |
|
|
(356 |
) |
|
|
(64 |
) |
|
|
(1,122 |
) |
Interest expense |
|
|
48 |
|
|
|
48 |
|
|
|
96 |
|
|
|
98 |
|
Depreciation and
amortization |
|
|
1,297 |
|
|
|
663 |
|
|
|
2,598 |
|
|
|
1,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
960 |
|
|
$ |
(624 |
) |
|
$ |
(6,867 |
) |
|
$ |
(1,226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months: EBITDA during the three months ended June 30, 2009
improved by $1.6 million as compared to 2008. This improvement
was primarily due to increases in net service revenues
of $1.0 million.
Six Months: EBITDA during the six months ended June 30, 2009 decreased by $5.6 million over
2008. This decrease was primarily due to a non-cash impairment charge of $7.0 million for one of our
quick-launch satellites and an increase in other operating expenses of $2.0 million, offset by higher
net service revenue of $2.7 million.
Operating expenses increased during the six months ended June 30, 2009 due to $0.4 million in
operating expenses of ORBCOMM Japan, $0.3 million of a satellite insurance policy that expired
in June 2009 for the Coast Guard demonstration and quick-launch satellites, $0.6 million for
bad debt reserves, unanticipated expenses of $0.6 million for a contested proxy vote,
$0.1 million in severance payments and $0.1 million in legal fees related to the preparation of
our satellite insurance claim.
23
Results of Operations
Revenues
We derive service revenues from our resellers and direct customers from utilization of satellite
subscriber communicators on our communications system and the reselling of airtime from the
utilization of terrestrial-based subscriber communicators using SIMS on the cellular providers
wireless networks. These service revenues generally consist of a one-time activation fee for
each subscriber communicator and SIMS activated for use on our communications system and monthly
usage fees. Usage fees that we charge our customers are based upon the number, size and
frequency of data transmitted by the customer and the overall number of subscriber communicators
and SIMS activated by each customer. Revenues for usage fees from currently billing subscriber
communicators and SIMS are recognized on an accrual basis, as services are rendered, or on a
cash basis, if collection from the customer is not reasonably assured at the time the service is
provided. Usage fees charged to our resellers and direct customers are charged primarily at
wholesale rates based on the overall number of subscriber communicators activated by them and
the total amount of data transmitted. Service revenues also includes AIS data transmissions,
services to the United States Coast Guard for the Concept Validation Project, royalty fees from
third parties for the use of our proprietary communications protocol charged on a one-time basis
for each satellite subscriber communicator connected to our M2M data communications system, and
fees from providing engineering, technical and management support services to customers.
The table below presents our revenues from continuing operations for the three and six months
ended June 30, 2009 and 2008, together with the percentage of total revenue represented by each
revenue category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Service revenues |
|
$ |
6,720 |
|
|
|
99.3 |
% |
|
$ |
5,757 |
|
|
|
83.8 |
% |
|
$ |
13,342 |
|
|
|
98.9 |
% |
|
$ |
10,612 |
|
|
|
90.6 |
% |
Product sales |
|
|
50 |
|
|
|
0.7 |
% |
|
|
1,117 |
|
|
|
16.2 |
% |
|
|
155 |
|
|
|
1.1 |
% |
|
|
1,107 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,770 |
|
|
|
100.0 |
% |
|
$ |
6,874 |
|
|
|
100.0 |
% |
|
$ |
13,497 |
|
|
|
100.0 |
% |
|
$ |
11,719 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months: Total revenues for the three months ended June 30, 2009 decreased by $0.1 million
or 1.5%, to $6.8 million from $6.9 million for the three months ended June 30, 2008.
Six Months: Total revenues for the six months ended June 30, 2009 increased by $1.8 million or,
15.2% to $13.5 million from $11.7 million for the six months ended June 30, 2008.
Service revenues
Three Months: Service revenues increased $1.0 million for the three months ended June 30, 2009,
or 16.7%, to $6.7 million, or approximately 99.3% of total revenues, from $5.8 million, or
approximately 83.8% of total revenues for the three months ended June 30, 2008.
Six Months; Service revenues increased $2.7 million for the six months ended June 30, 2009, or
25.7%, to $13.3 million, or approximately 98.9% of total revenues, from $10.6 million, or
approximately 90.6% of total revenues for the six months ended June 30, 2008.
The increases in service revenues for the three and six months ended June 30, 2009 over the
corresponding 2008 periods were primarily due to an increase in the number of billable
subscriber communicators activated on our communications system, AIS revenue of $0.5 million
and $1.0 million, respectively and incremental service revenue
margin provided by ORBCOMM Japan of $0.4 million. As of June 30, 2009, we had approximately 483,000 billable
subscriber communicators on the ORBCOMM System compared to approximately 420,000 billable
subscriber communicators as of June 30, 2008, an increase of approximately 14.9%.
Service revenue growth can be impacted by the customary lag between subscriber communicator
activations and recognition of service revenue from these units.
24
Product sales
Product sales are primarily from our Japanese subsidiary.
Three Months: Revenue from product sales decreased $1.0 million for the three months ended June
30, 2009, or 95.5%, to less than $0.1 million, or approximately 0.7% of total revenues, from
$1.1 million, or approximately 16.2% of total revenues for the three months ended June 30, 2008.
Six Months: Revenue from product sales decreased $0.9 million for the six months ended June 30,
2009, or 86.0%, to $0.2 million, or approximately 1.1% of total revenues, from $1.1 million, or
approximately 9.4% of total revenues for the six months ended June 30, 2008.
The decrease in product revenues for the three and six months ended June 30, 2009 over the
corresponding 2008 periods were due to the lower product
sales by our Japanese subsidiary
as a result of the current economic conditions impacting the heavy
equipment sector.
Costs of services
Costs of services is comprised of usage fees to our cellular wireless providers for the data
transmitted by our resellers on our network, payroll and related costs, including stock-based
compensation associated with our network engineers, materials and supplies, depreciation
associated with our communications system and amortization of licenses acquired used to deliver
the services.
Three Months: Costs of services increased by $1.2 million, or 54.7%, to $3.3 million for the
three months ended June 30, 2009 from $2.1 million during the three months ended June 30, 2008.
The increase is primarily due to a charge of $0.3 million from a satellite insurance policy that expired in
June 2009 for the Coast Guard demonstration and quick-launch satellites and depreciation expense
of $0.6 million primarily related to the Coast Guard demonstration satellite placed in service
during the third quarter of 2008. As a percentage of service revenues, cost of services were
49.0% of service revenues for the three months ended June 30, 2009 compared to 37.0% for the
three months ended June 30, 2008.
Six Months: Costs of services increased by $2.3 million, or 56.5%, to $6.5 million for the six
months ended June 30, 2009 from $4.2 million during the six months ended June 30, 2008. The
increase is primarily due to a charge of $0.3 million from a satellite insurance policy that expired in June
2009 for the Coast Guard demonstration and quick-launch satellites depreciation expense of
$1.3 million primarily related to the Coast Guard demonstration satellite placed in service
during the third quarter of 2008,
network telecommunications costs to support higher service revenues
of $0.3 million and the consolidation of ORBCOMM Japan of
$0.4 million.
As a percentage of service revenues, cost of services were
48.8% of service revenues for the six months ended June 30, 2009 compared to 39.2% for the six
months ended June 30, 2008.
Costs of product sales
Costs of product sales include the purchase price of subscriber communicators, SIMS and shipping charges.
Three Months: Costs of product sales decreased by $0.5 million, or 93.5%, to less than $0.1
million for the three months ended June 30, 2009 from $0.6 million for the three months ended
June 30, 2008.
Six Months: Costs of product sales decreased by $0.5 million, or 83.7%, to $0.1 million for the
six months ended June 30, 2009 from $0.6 million for the six months ended June 30, 2008.
Costs
of product sales decreased due to lower product sales by our Japanese
subsidiary.
Selling, general and administrative expenses
Selling, general and administrative expenses relate primarily to compensation and associated
expenses for employees in general management, sales and marketing and finance, legal expenses
and regulatory matters.
Three Months: Selling, general and administrative expenses decreased by $0.8 million, or 14.9%,
to $4.4 million for the three months ended June 30, 2009 from $5.2 million for the three months
ended June 30, 2008. This decrease is primarily due to lower
employee costs of $0.8 million and other operating expenses of
$0.3 million, offset by an increase in bad debts of
$0.1 million and $0.2 million of costs incurred in
connection with our contested proxy.
Six Months: Selling, general and administrative expenses decreased by $0.4 million, or 4.1%, to
$9.2 million for the six months ended June 30, 2009 from $9.6 million for the six months ended
June 30, 2008. This decrease is primarily related to a decrease of $0.9 million in stock-based
compensation. This decrease was offset primarily due to increases in expenses related to the
consolidation of ORBCOMM Japan, $0.6 million of costs incurred in
connection with our contested proxy and $0.1 million in legal
fees related to the preparation of filing our satellite insurance claim.
25
Product development expenses
Product development expenses consist primarily of the expenses associated with the staff of our
engineering development team,
along with the cost of third parties that are contracted for specific development projects.
Three Months: Product development expenses for the three months ended June 30, 2009 and 2008
were $0.2 million.
Six Months: Product development expenses for the six months ended June 30, 2009 and 2008 were
$0.3 million.
Gain on customer claims settlements
In June 2008, we recognized a $0.1 million gain on a settlement of a claim against a VAR upon
receipt of the settlement.
On March 25, 2008, we received a 37% equity interest in ORBCOMM Japan and cash of $0.6 million
in satisfaction of claims against ORBCOMM Japan, pursuant to a voluntary reorganization of
ORBCOMM Japan in accordance with the rehabilitation plan approved by the Tokyo district court on
December 25, 2007. The fair value of the consideration we received for settlement of claims
against ORBCOMM Japan exceeded the $0.4 million carrying value of current and long-term
receivables from ORBCOMM Japan by $0.9 million and we recognized a gain for the same amount for
the three months ended March 31, 2008. On May 15, 2008, we received 616 newly issued shares of
common stock from ORBCOMM Japan representing an additional 14% equity interest and recognized a
gain of $0.2 million during the three months ended June 30, 2008.
Impairment Charge Satellite Network
In February 2009, one quick-launch satellite experienced a power system anomaly that
subsequently resulted in a loss of contact with the satellite. The satellite was not recovered
and we recorded a non-cash impairment charge to write off the cost of the satellite of
$7.0 million during the six months ended June 30, 2009.
Other income (expense)
Other income (expense) is comprised primarily of interest income from our cash and cash
equivalents that consists of U.S. Treasuries and interest bearing instruments, foreign exchange
gains and losses and interest expense.
Three Months: Other income was $0.4 million for the three months ended June 30, 2009 compared to
$0.3 million for the three months ended June 30, 2008.
Six Months: Other income was $0.3 million for the six months ended June 30, 2009 compared to
$1.0 million for the six months ended June 30, 2008. This decrease is primarily due to lower
invested cash balances and reduced interest rates. We expect that interest income will continue
to decrease in future periods as cash is used for our capital expenditures, working capital
purposes and to fund operating losses.
Pre-control earnings in subsidiary
Pre-control
earnings in subsidiary are comprised of earnings prior to the change in control related
to the acquisition of ORBCOMM Japan in June 2008.
For
the three and six months ended June 30, 2008 the pre-control
earnings of ORBCOMM Japan were $0.1 million.
Loss from continuing operations
Three Months: As a result of the items described above, we have a loss from continuing
operations of $0.7 million for the three months ended June 30, 2009, compared to a loss from
continuing operations of $0.6 million for the three months ended June 30, 2008, an increase of
$0.1 million.
Six Months: As a result of the items described above, we have a loss from continuing operations
of $9.4 million for the six months ended June 30, 2009, compared to a loss from continuing
operations of $0.7 million for the six months ended June 30, 2008, an increase of $8.7 million.
Income (loss) from discontinued operations
Three Months: Income from discontinued operations for the three months ended June 30, 2009 was
$0.4 million, compared to a loss of $0.4 million from discontinued operations for the three
months ended June 30, 2008.
Six Months: Loss from discontinued operations for the six months ended June 30, 2009 was less
than $0.1 million, compared to a loss of $0.7 million from discontinued operations for the six
months ended June 30, 2008.
The improvement in income (loss) from discontinued operations for the three and six months ended
June 30, 2009 over the comparable periods in 2008 was primarily related to the $0.8 million we
received as settlement for GEs obligation under the 2006 Agreement.
26
Noncontrolling interests
Noncontrolling
interests relate to earnings of ORBCOMM Japan that are attributable
to its minority shareholders.
Net loss attributable to ORBCOMM Inc.
Three
Months: As a result of the items described above, the net loss
attributable to our company narrowed to $0.4 million
for the three months ended June 30, 2009, compared to a net loss of $1.0 million for the three
months ended June 30, 2008, decreasing by $0.6 million, an improvement of 60%.
Six
Months: As a result of the items described above, the net loss
attributable to our company of $9.5 million for the
six months ended June 30, 2009, compared to a net loss of $1.5 million for the six months ended
June 30, 2008, an increase of $8.0 million.
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs and to fund capital expenditures
to support our current operations, and facilitate growth and expansion. Since our inception, we
have financed our operations from sales of our common stock through public offerings and private
placements of debt, convertible redeemable preferred stock, membership interests and common
stock. We have incurred losses from operations since inception,
including a net loss of $9.4
million for the six months ended June 30, 2009 and as of June 30, 2009 we have an accumulated
deficit of approximately $77.5 million. As of June 30, 2009, our primary source of liquidity
consisted of cash and cash equivalents totaling $62.9 million.
Operating activities
Cash provided by our operating activities of continuing operations for the six months ended June
30, 2009 was $1.4 million resulting from a loss from continuing operations of $9.4 million,
offset by non-cash items including a $7.0 million
impairment charge for one of our quick-launch satellites, $2.6 million for depreciation and
amortization and $0.8 million for stock-based compensation. Working capital activities
primarily consisted of a net source of cash of $0.9 million for a decrease in prepaid expenses
and other assets primarily related to timing of expenses, offset by a
net use of cash for an
increase of $0.5 million in accounts receivable, primarily related to an increase in our
revenues and the timing of collections.
Cash provided by our operating activities of continuing operations for the six months ended June
30, 2008 was $3.9 million resulting from a loss from continuing operations of $0.7 million,
offset by non-cash items of $1.3 million for
depreciation and amortization and $1.8 million for stock-based
compensation, including a $0.9 million non-cash gain primarily related to obtaining our 51% interest in ORBCOMM Japan and
a $0.3 million reduction of expenses due to expiration of an asset purchase option. Working
capital activities primarily consisted of net sources of cash of $0.8 million for a decrease in
prepaid expenses and other assets primarily related to timing of expenses and a $1.0 million
increase in deferred revenue primarily related to an increase in the number of billable
subscriber communicators activated on the ORBCOMM system.
Cash provided by our operating activities of discontinued operations for the six months ended
June 30, 2009 was $0.6 million resulting from a loss from discontinued operations of less than
$0.l million, offset by $0.6 million of cash generated from working capital.
Cash used in our operating activities of discontinued operations for the six months ended June
30, 2008 was $0.9 million resulting from a loss from discontinued operations of $0.7 million,
offset by $0.6 million of cash generated from working capital.
Investing activities
Cash used in our investing activities of continuing operations for the six months ended June 30,
2009 was $14.1 million, resulting from capital expenditures of $0.9 million for the Coast Guard
demonstration satellite and quick-launch satellites and $12.2 million for next-generation
satellites and $1.0 million of improvements to our internal infrastructure and ground segment.
Cash used in our investing activities of continuing operations for the six months ended June 30,
2008 was $19.5 million, resulting from capital expenditures of $14.2 million and an increase of
$5.7 million to restricted cash as collateral for a performance bond in connection with
obtaining FCC authorization to construct, launch and operate an additional twenty-four
next-generation satellites and the Orbital Sciences procurement agreement for the quick-launch
satellites. Capital expenditures included $13.9 million for the Coast Guard demonstration
satellite, quick-launch and next-generation satellites and $0.3 million of improvements to our
internal infrastructure and ground segment.
Cash used in our investing activities of our discontinued operations for the six months ended
June 30, 2009 and June 30, 2008 was less than $0.1 million and $0.2 million, respectively.
27
Financing activities
For the six months ended June 30, 2009, we did not have any cash flows from financing activities
of continuing operations.
Cash provided by our financing activities of continuing operations for the six months ended
June 30, 2008 was $0.3 million resulting primarily from proceeds received from the issuance of
an aggregate of 92,656 shares of common stock upon the exercise of warrants and stock options to
purchase common stock at per share exercise prices ranging from $2.33 to $4.26.
Future Liquidity and Capital Resource Requirements
We expect cash flows from continuing operating activities, along with our existing cash and cash
equivalents will be sufficient to provide working capital and fund capital expenditures, which
primarily includes milestone payments under the procurement agreement for the next-generation
satellites. For the remainder of 2009, we expect to incur approximately $15.2 million of capital
expenditures primarily for our next-generation satellites.
Contractual Obligations
There have been no material changes in our contractual obligations as of June 30, 2009, as
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Recent accounting pronouncements
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (SFAS .
167). SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, (FIN 46(R) to require an enterprise to qualitatively assess the
determination of the primary beneficiary of a variable interest entity (VIE) based on whether the
entity (1) has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and (2) has the obligation to absorb losses of the entity or the
right to receive benefits from the entity that could potentially be significant to the VIE. Also,
SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that
trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to
provide information about an enterprises involvement in a VIE. SFAS 167 will be effective for
us on January 1, 2010. We are currently evaluating the impact of adopting SFAS 167 on our
consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
There has been no material changes in our assessment of our sensitivity to market risk as of
June 30, 2009, as previously disclosed in Part II, Item 7A Quantitative and Qualitative
Disclosures about Market Risks in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Concentration of credit risk
The following table presents customers with revenues greater than 10% of our consolidated total revenues for the periods shown:
|
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|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
General Electric Company |
|
|
16.4 |
% |
|
|
17.1 |
% |
|
|
16.7 |
% |
|
|
20.8 |
% |
Caterpillar Inc. |
|
|
16.7 |
% |
|
|
11.1 |
% |
|
|
16.1 |
% |
|
|
11.6 |
% |
Komatsu Ltd., |
|
|
11.2 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
Hitachi Construction
Machinery Co., Ltd., |
|
|
|
|
|
|
19.1 |
% |
|
|
|
|
|
|
12.9 |
% |
Item 4. Disclosure Controls and Procedures
Evaluation of the Companys disclosure controls and procedures. The Companys management
evaluated, with the participation of the Companys President and Chief Executive Officer and
Executive Vice President and Chief Financial Officer, the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of
June 30, 2009. Based on their evaluation, the Companys President and Chief Executive Officer
and Executive Vice President and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective as of June 30,
2009.
Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We discuss certain pending legal proceedings in Note 16 to the condensed consolidated financial
statements and refer you to that discussion for important information concerning those legal
proceedings, including the basis for such actions and relief sought.
Item 1A. Risk Factors
There have been no material changes in the risk factors as of June 30, 2009, as previously
disclosed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds from Initial Public Offering
On November 2, 2006, the SEC declared effective our Registration Statement on Form S-1
(Registration No. 333-134088), relating to our initial public offering. After deducting
underwriters discounts and commissions and other offering costs, our net proceeds were
approximately $68.3 million. As of June 30, 2009 we have used all of the net proceeds from our
initial public offering for working capital and capital expenditures, primarily related to the
deployment of additional satellites, which was comprised of our quick-launch and next-generation
satellites.
Exercise of Warrants
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At our
annual meeting of shareholders on May 6, 2009, the following
three proposals were
voted on and approved:
Proposal 1 (To elect three Class II directors to three-year terms expiring at the
2012 annual meeting of shareholders.)
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Votes For |
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Votes Witheld |
|
Jerome B. Eisenberg |
|
|
30,028,929 |
|
|
|
584,932 |
|
Marco Fuchs |
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30,039,996 |
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573,865 |
|
Proposal 2 (To ratify the appointment of Deloitte & Touche LLP as the
Companys independent registered public accounting firm for the fiscal year ending December 31, 2009.)
|
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For |
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Against |
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Abstain |
31,277,854 |
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70,465 |
|
22,256 |
Proposal 3 (To declassify the Board of Directors.)
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For |
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Against |
|
Abstain |
13,361,970 |
|
17,236,782 |
|
82,675 |
Item 5.
Other Information Material Impairments
One
quick-launch satellite that was launched on June 19, 2008 with five
other satellites in our quick-launch and Coast Guard Demonstration
satellite programs experienced a communications failure. On July 31, 2009,
the satellite with lower than expected subscriber transmission power experienced a gateway transmitter
anomaly that resulted in a loss of contact with the satellite by our ground control
systems. KB Polyot-Joint Stock Company, a provider of sub-contracting services to OHB, has been
able to connect to the satellite through the back-up command and control system. Telemetry from
this back-up system has indicated the satellite bus is functioning as it was prior to the
occurrence of this anomaly. We are using this back-up system to send commands to the payload in
an attempt to recover the gateway transmitter but these commands have not corrected the anomaly.
After consultations with our engineers, we believe that the gateway transmitter will not be
recovered, resulting in an inability to provide ORBCOMM messaging and
AIS data services by this satellite. We are
still conducting post-loss data analysis to better understand the causes of the gateway downlink
anomaly and resulting loss of communication capability of this satellite.
On
August 7, 2009, we decided it is unlikely the satellite
will be recovered and that an impairment charge should be recognized in the quarter ending September 30, 2009
with respect to the satellite that suffered the gateway transmitter failure. We believe that it is unlikely that
the satellite will be recovered, leading to the conclusion of the impairment. Accordingly, we
estimate that a non-cash impairment charge for the cost of the satellite of approximately $7.1
million will be reflected in our condensed consolidated financial statements in the quarter ending
September 30, 2009. No amount of this impairment charge represents a cash expenditure and we do
not expect that any amount of this impairment charge will result in any future cash expenditures.
On August 7, 2009, a second
quick-launch satellite experienced a power system anomaly which resulted in
loss of contact with the satellite by our ground control systems and KB
Polyot’s back-up command and control systems. Both control centers
continue to send commands to the spacecraft in an attempt to recover from the
power system anomaly. In the event that we are unable to recover the satellite,
we may have to take a non-cash impairment charge for the carrying value of this
satellite in the quarter ending September 30, 2009.
We
have in-orbit insurance that under certain circumstances during the
coverage period that ended June 19, 2009 covers the total loss or constructive
total loss of the Coast Guard Demonstration and five quick-launch satellites. Under the terms of
the policy, a satellite that does not meet the working satellite criteria constitutes a
constructive total loss of that satellite for insurance purposes. The in-orbit insurance is subject
to certain exclusions including a deductible under which no claim is payable under the policy for
the first satellite to suffer a constructive total loss or total loss.
We have filed a claim under the policy for all six satellites as either a total loss or
constructive total loss. The total loss claim is for the one satellite that suffered a power system
failure resulting in loss of contact, and the constructive total loss claim for each of the other
five satellites is on the basis that these satellites do not meet the working satellite criteria
stated in the policy due to, among other anomalies, the pointing
errors described under Overview in Item 2,
Managements Discussion and Analysis of Financial Condition and
Results of Operations. The
maximum amount recoverable by us under the policy from third party insurers for all six satellites
covered by the policy is $50 million, which includes the one-satellite deductible described above,
and less any salvage value that can be established.
Item 6. Exhibits
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*10.1 |
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Termination
agreement dated April 3, 2009 between Stellar Satellite
Communications Ltd. and GE Asset Intelligence, LLC. |
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*10.2 |
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Services
agreement dated April 3, 2009 between ORBCOMM LLC and GE Asset Intelligence, LLC. |
|
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10.3 |
|
|
Settlement
agreement dated April 3, 2009 among ORBCOMM Inc., ORBCOMM LLC
and Stellar Satellite Communication Ltd. and GE Asset Intelligence
LLC. |
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31.1 |
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Certification of President and Chief Executive Officer required by Rule 13a-14(a). |
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31.2 |
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Certification of Executive Vice President and Chief Financial Officer required by
Rule 13a-14(a). |
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32.1 |
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Certification of President and Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350. |
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32.2 |
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Certification of Executive Vice President and Chief Financial Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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* |
|
Portions of this exhibit have been omitted and filed
separately with the Office of the Secretary of the Securities and
Exchange Commission pursuant to a confidential treatment request. |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ORBCOMM Inc. |
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(Registrant) |
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Date: August 10, 2009
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/s/ Marc J. Eisenberg
Marc J. Eisenberg,
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 10, 2009
|
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/s/ Robert G. Costantini
Robert G. Costantini,
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Executive Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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30
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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*10.1 |
|
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Termination
agreement dated April 3, 2009 between Stellar Satellite
Communications Ltd. and GE Asset Intelligence, LLC. |
|
|
|
|
|
|
*10.2 |
|
|
Services
agreement dated April 3, 2009 between ORBCOMM LLC and GE Asset Intelligence, LLC. |
|
|
|
|
|
|
10.3 |
|
|
Settlement
agreement dated April 3, 2009 among ORBCOMM Inc., ORBCOMM LLC
and Stellar Satellite Communication Ltd. and GE Asset Intelligence
LLC. |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer and President required by Rule 13a-14(a). |
|
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|
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31.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by
Rule 13a-14(a). |
|
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|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer and President required by Rule 13a-14(b)
and 18 U.S.C. Section 1350. |
|
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|
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|
32.2 |
|
|
Certification of Executive Vice President and Chief Financial Officer required by
Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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* |
|
Portions of this exhibit have been omitted and filed
separately with the Office of the Secretary of the Securities and
Exchange Commission pursuant to a confidential treatment request. |
31