FORM 10-Q
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended March 31, 2007
OR
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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
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
2115 Linwood Avenue, Fort Lee, New Jersey 07024
(Address of principal executive offices)
(201) 363-4900
(Registrant’s telephone number)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. Check One
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
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 registrant’s common stock as of
May 9, 2007 is 37,353,166.
Part I. Financial Information
Item 1. Financial Statements
ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
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March 31, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
47,012 |
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$ |
62,139 |
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Marketable securities |
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51,100 |
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38,850 |
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Accounts receivable, net of allowances for doubtful accounts of $295 and $297
as of March 31, 2007 and December 31, 2006 |
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5,045 |
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|
5,185 |
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Inventories |
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2,128 |
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3,528 |
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Advances to contract manufacturer |
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150 |
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177 |
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Prepaid expenses and other current assets |
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1,861 |
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1,354 |
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Total current assets |
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107,296 |
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111,233 |
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Long-term receivable |
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372 |
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372 |
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Satellite network and other equipment, net |
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37,598 |
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29,131 |
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Intangible assets, net |
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6,686 |
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7,058 |
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Other assets |
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306 |
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299 |
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Total assets |
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$ |
152,258 |
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$ |
148,093 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,038 |
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$ |
3,438 |
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Accrued liabilities |
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10,451 |
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4,915 |
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Current portion of deferred revenue |
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2,223 |
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2,083 |
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Total current liabilities |
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15,712 |
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10,436 |
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Note payable — related party |
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930 |
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879 |
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Deferred revenue, net of current portion |
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7,939 |
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8,066 |
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Total liabilities |
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24,581 |
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19,381 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, par value $0.001; 250,000,000 shares authorized;
37,187,134 and 36,923,715 shares issued and outstanding as of
March 31, 2007 and December 31, 2006 |
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37 |
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37 |
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Additional paid-in capital |
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190,845 |
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188,917 |
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Accumulated other comprehensive loss |
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(419 |
) |
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(395 |
) |
Accumulated deficit |
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(62,786 |
) |
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(59,847 |
) |
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Total stockholders’ equity |
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127,677 |
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128,712 |
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Total liabilities and stockholders’ equity |
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$ |
152,258 |
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$ |
148,093 |
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See notes to condensed consolidated financial statements.
2
ORBCOMM Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
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Three months ended |
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March 31, |
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2007 |
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2006 |
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Revenues: |
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Service revenues |
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$ |
3,950 |
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$ |
2,321 |
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Product sales |
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2,011 |
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4,059 |
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Total revenues |
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5,961 |
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6,380 |
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Costs and expenses (1): |
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Costs of services |
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2,353 |
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2,057 |
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Costs of product sales |
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2,106 |
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4,076 |
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Selling, general and administrative |
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5,311 |
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3,328 |
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Product development |
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360 |
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498 |
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Total costs and expenses |
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10,130 |
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9,959 |
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Loss from operations |
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(4,169 |
) |
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(3,579 |
) |
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Other income (expense): |
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Interest income |
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1,279 |
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|
455 |
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Other income |
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3 |
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— |
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Interest expense |
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(52 |
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(17 |
) |
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Total other income |
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1,230 |
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438 |
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Net loss |
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$ |
(2,939 |
) |
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$ |
(3,141 |
) |
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Net loss applicable to common shares (Note 5) |
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$ |
(2,939 |
) |
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$ |
(5,448 |
) |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.08 |
) |
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$ |
(0.96 |
) |
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Weighted average common shares outstanding: |
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Basic and diluted |
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37,036 |
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5,690 |
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(1) Stock-based compensation included in costs and expenses: |
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Costs of services |
|
$ |
220 |
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$ |
8 |
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Costs of product sales |
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|
29 |
|
|
|
— |
|
Selling, general and administrative |
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|
1,637 |
|
|
|
328 |
|
Product development |
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|
42 |
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|
5 |
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|
|
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|
|
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$ |
1,928 |
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|
$ |
341 |
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|
|
|
|
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See notes to condensed consolidated financial statements.
3
ORBCOMM Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Three months ended |
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March 31, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net loss |
|
$ |
(2,939 |
) |
|
$ |
(3,141 |
) |
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
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Change in allowance for doubtful accounts |
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(2 |
) |
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(258 |
) |
Inventory impairments |
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— |
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|
336 |
|
Depreciation and amortization |
|
|
542 |
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|
656 |
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Accretion on note payable — related party |
|
|
33 |
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|
|
33 |
|
Stock-based compensation |
|
|
1,928 |
|
|
|
341 |
|
Changes in operating assets and liabilities: |
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Accounts receivable |
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|
142 |
|
|
|
(2,982 |
) |
Inventories |
|
|
1,400 |
|
|
|
(505 |
) |
Advances to contract manufacturer |
|
|
27 |
|
|
|
276 |
|
Prepaid expenses and other current assets |
|
|
(514 |
) |
|
|
(186 |
) |
Accounts payable and accrued liabilities |
|
|
105 |
|
|
|
(1,918 |
) |
Deferred revenue |
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|
13 |
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|
679 |
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|
|
|
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Net cash provided by (used in) operating activities |
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735 |
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(6,669 |
) |
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Cash flows from investing activities: |
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Capital expenditures |
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(3,007 |
) |
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(754 |
) |
Purchases of marketable securities |
|
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(19,050 |
) |
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|
— |
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Sales of marketable securities |
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6,800 |
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|
— |
|
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Net cash used in investing activities |
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(15,257 |
) |
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(754 |
) |
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Cash flows from financing activities: |
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Payment of offering costs in connection with initial public offering |
|
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(599 |
) |
|
|
— |
|
Proceeds from issuance of Series B preferred stock,
net of issuance costs of $113 |
|
|
— |
|
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|
1,465 |
|
Payment of Series A preferred stock dividends |
|
|
— |
|
|
|
(8,027 |
) |
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|
|
|
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Net cash used in financing activities |
|
|
(599 |
) |
|
|
(6,562 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(6 |
) |
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|
(26 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(15,127 |
) |
|
|
(14,011 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
62,139 |
|
|
|
68,663 |
|
|
|
|
|
|
|
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End of period |
|
$ |
47,012 |
|
|
$ |
54,652 |
|
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|
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Supplemental cash flow disclosures: |
|
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|
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|
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Non cash financing activities -
Preferred stock dividends accrued |
|
$ |
— |
|
|
$ |
2,179 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
ORBCOMM
Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts)
1. Business
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 provides these services through a constellation
of 29 owned and operated low-Earth orbit satellites and accompanying ground infrastructure
through which small, low power, fixed or mobile subscriber communicators (“Communicators”) 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 located nearly anywhere
in the world.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “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 Company’s Annual Report on Form 10-K for the year ended December
31, 2006.
In the opinion of management, the financial statements as of March 31, 2007 and for the three
month periods ended March 31, 2007 and 2006 include all adjustments (consisting of 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 three months ended March 31, 2007 and 2006 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. Investments in entities over which the Company has the
ability to exercise significant influence but does not have a controlling interest are accounted
for under the equity method of accounting. The Company considers several factors in determining
whether it has the ability to exercise significant influence with respect to investments,
including, but not limited to, direct and indirect ownership level in the voting securities, active
participation on the board of directors, approval of operating and budgeting decisions and other
participatory and protective rights. Under the equity method, the Company’s proportionate share of
the net income or loss of such investee is reflected in the Company’s 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 March 31, 2007 and
December 31, 2006. The Company had no equity in the earnings or losses of those investees for the
three months ended March 31, 2007 and 2006. Non-controlling interests in companies are accounted
for by the cost method where the Company does not exercise significant influence over the investee.
The Company’s cost basis investments had no carrying value as of March 31, 2007 and December 31,
2006.
The
Company has incurred losses from inception including a net loss of $2,939 for the three months
ended March 31, 2007 and as of March 31, 2007, the Company has an accumulated deficit of $62,786. As
of March 31, 2007, the Company’s primary source of liquidity consisted of cash and cash equivalents
and marketable securities, which the Company believes will be sufficient to provide working capital
and fund capital expenditures, which primarily include additional satellites
which will be comprised of the quick-launch and next-generation
satellites, for the next twelve
months.
Marketable securities
Marketable
securities consist of investment grade floating rate redeemable municipal debt securities which have
stated maturities ranging from twenty to forty years. The Company classifies these securities as
available-for-sale. Management determines the appropriate classification of its investments at
the time of purchase and at each balance sheet date. Available-for-sale securities are carried
at fair value with unrealized gains and losses, if any, reported in accumulated other
comprehensive income. Interest received on these securities is included in interest income.
Realized gains or losses upon disposition of available-for-sale securities are included in other
income. As of March 31, 2007, the fair value of these securities approximates cost.
Concentration of credit risk
Long-term receivables represent amounts due from the sale of products and services to related
parties that are collateralized by assets whose estimated fair market value exceeds the carrying
value of the receivables.
During the
three months ended March 31, 2007 and 2006, one customer
comprised 39.7% and 62.7% of revenues, respectively. As of March 31, 2007 and December 31, 2006,
this customer accounted for 61.2% and 60.3% of accounts receivable, respectively.
Inventories
Inventories are stated at the lower of cost or market, determined on a first-in, first-out
basis. Inventory represents finished goods available for sale to customers. The Company
regularly evaluates the realizability of inventories and adjusts the carrying value as
necessary. During the three months ended March 31, 2006, the Company recorded an
inventory impairment of $336, due to reduced demand for older model
Communicators.
5
Income taxes
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109, Accounting for Income
Taxes . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
As of January 1, 2007, the
Company had no significant unrecognized tax benefits. During the
three months ended March 31, 2007, the Company recognized no
adjustments for uncertain tax benefits. The Company
is subject to U.S. federal and state examinations by tax authorities for all years since
its inception. 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 accrued at March 31, 2007.
The Company maintains a full valuation allowance on its deferred tax assets. Accordingly, the
Company has not recorded a benefit for income taxes.
Proposed
Underwritten sale of shares of the Company’s common stock.
During the
quarter ended March 31, 2007, the Company began preparation of a
registration statement for a proposed
underwritten sale of shares of the Company’s common stock to be sold
in a secondary offering registered under the Securities
Act of 1933, as amended. On April 25, 2007, the Board of
Directors formally authorized management to pursue the offering. In
connection with the proposed offering and sale, the Company has incurred costs totaling
$156, which have been deferred at March 31, 2007. In the event
the proposed offering and sale is not consummated the deferred offering costs will be expensed.
Recent accounting pronouncements
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 (“GAAP”) 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. SFAS 157 will be effective for the Company beginning January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 157 on its
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS 159”). SFAS 159 expands opportunities to use fair value
measurements in financial reporting and permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 will be
effective for the Company beginning January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 159 on its
financial statements.
3. Comprehensive Loss
The components of comprehensive loss are as follows:
| |
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|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
Net loss |
|
$ |
(2,939 |
) |
|
$ |
(3,141 |
) |
Foreign currency translation adjustment |
|
|
(24 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(2,963 |
) |
|
$ |
(3,201 |
) |
|
|
|
|
|
|
|
4. Stock-based Compensation
The
Company’s share-based compensation plans consist of its 2006 Long-Term Incentives Plan ( the
“2006 LTIP”) and its 2004 Stock Option Plan. As of March 31, 2007, there were 3,600,539 shares available
for grant under the 2006 LTIP and no shares available for grant under
the 2004 stock option plan.
The components of the Company’s stock-based compensation expense are presented below:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
Stock options |
|
$ |
57 |
|
|
$ |
341 |
|
Restricted stock units |
|
|
1,520 |
|
|
|
— |
|
Stock appreciation rights |
|
|
351 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,928 |
|
|
$ |
341 |
|
|
|
|
|
|
|
|
As of March 31, 2007, the Company had an aggregate of $6,396 of unrecognized compensation
costs for share-based payment arrangements.
6
RSUs
Performance-based RSUs
During the
three months ended March 31, 2007, 128,949 performance-based
RSUs were granted when the Compensation Committee established
performance targets for fiscal 2007. These RSUs will vest through
May 2008 and the Company estimates that 100% of the performance targets
will be achieved. The Company expects that 142,015 performance-based RSUs will vest in the second quarter of 2007.
A summary of the Company’s performance-based RSUs for the three months ended March
31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
RSUs |
|
|
Grant Date Fair Value |
|
Balance at January 1, 2007 |
|
|
257,484 |
|
|
$ |
11.00 |
|
Granted |
|
|
128,949 |
|
|
|
13.00 |
|
Vested |
|
|
(8,403 |
) |
|
|
11.00 |
|
Forfeited or expired |
|
|
(37,099 |
) |
|
|
11.00 |
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
340,931 |
|
|
$ |
11.76 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company recorded stock-based compensation expense
of $1,025 related to the performance-based RSUs. As of March 31, 2007, $1,704 of total
unrecognized compensation cost related to the performance-based RSUs granted is
expected to be recognized through May 2008.
Time-based RSUs
In February 2007, the Company granted 11,000 time-based RSUs to certain executive officers of
the Company. These RSUs vest on January 1, 2008.
A summary of the Company’s time-based RSUs for the three months ended March 31, 2007
is as follows
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
RSUs |
|
|
Grant Date Fair Value |
|
Balance at January 1, 2007 |
|
|
528,087 |
|
|
$ |
11.00 |
|
Granted |
|
|
11,000 |
|
|
|
13.00 |
|
Vested |
|
|
(120,129 |
) |
|
|
11.00 |
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
418,958 |
|
|
$ |
11.05 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company recorded stock-based compensation expense
of $495 related to the time-based RSUs. As of March 31, 2007, $3,530 of total unrecognized
compensation cost related to the time-based RSUs granted is expected to be
recognized through January 2009.
The fair
value of the performance-and time-based RSU awards granted in 2007 is based upon the
closing stock price of the Company’s common share on the date of grant.
SARs
Performance-based SARs
During the
three months ended March 31, 2007, 115,556 performance-based SARs were
granted when the Compensation Committee established performance
targets for fiscal 2007. These SARs will vest through March 2008 and the
Company estimates that 100% of the performance targets will be achieved. The Company expects that 101,731 performance based SARs will vest
in the second quarter of 2007.
A summary of the Company’s performance-based SARs for the three months ended March 31, 2007 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Oustanding at January 1, 2007 |
|
|
115,556 |
|
|
$ |
11.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
115,556 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
231,112 |
|
|
$ |
11.00 |
|
|
|
9.71 |
|
|
$ |
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2007 |
|
|
217,287 |
|
|
|
|
|
|
|
|
|
|
$ |
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of the performance-based SARs granted during the
three months ended March 31, 2007 was $6.19 per share.
For the three months ended March 31, 2007, the Company recorded stock-based compensation
expense of $321 relating to the performance-based SARs. As of March 31, 2007, $647 of total
unrecognized compensation cost related to the performance-based SARs is expected to be recognized through the first quarter of 2008.
7
Time-based SARs
A summary of the Company’s time-based SARs for the three months ended March 31, 2007 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Weighted-Average |
|
|
Contractural |
|
|
intrinsic value |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(in thousands) |
|
Outstanding at January 1, 2007 |
|
|
66,667 |
|
|
$ |
11.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
66,667 |
|
|
$ |
11.00 |
|
|
|
9.50 |
|
|
$ |
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
22,222 |
|
|
|
|
|
|
|
|
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2007 |
|
|
66,667 |
|
|
|
|
|
|
|
|
|
|
$ |
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company recorded stock-based compensation
expense of $30 relating to the time-based SARs. As of March 31, 2007, $211 of total unrecognized
compensation cost related to the time-based SARs is expected to be
recognized ratably through January 1, 2009.
The fair value of each SAR award is estimated on the date of grant using the Black-Scholes option
pricing model with the assumptions described below for the periods indicated. Expected volatility
was based on the stock volatility for comparable publicly traded companies. The Company uses the
“simplified” method based on the average of the vesting term and the contractual term to calculate
the expected life of each SAR award. Estimated forfeitures were based on voluntary and involuntary
termination behavior as well as analysis of actual SAR forfeitures. The risk-free interest rate was
based on the U.S. Treasury yield curve at the time of the grant over the expected term of the SAR
grants.
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2007 |
|
|
2006(1) |
|
Risk-free interest rate |
|
|
4.93 |
% |
|
|
— |
|
Expected life (years) |
|
|
5.50 |
|
|
|
— |
|
Estimated volatility factor |
|
|
43.93 |
% |
|
|
— |
|
Expected dividends |
|
None |
|
|
|
— |
|
(1) There were no SARs granted during the three months ended March 31, 2006.
2004 Stock Option Plan
The fair value of each stock option 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 historical activity to estimate the expected life of stock options,
giving consideration to the contractual terms and vesting schedules. Estimated forfeitures were
based on voluntary and involuntary termination behavior as well as analysis of actual option
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 stock option grants.
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2007(1) |
|
|
2006 |
|
Risk-free interest rate |
|
|
— |
|
|
|
4.64 |
% |
Expected life (years) |
|
|
— |
|
|
|
4.00 |
|
Estimated volatility factor |
|
|
— |
|
|
|
44.50 |
% |
Expected dividends |
|
|
— |
|
|
None |
|
(1) There were no options granted during the three months ended March 31,
2007.
8
A summary
of the status of the Company’s stock options as of March 31, 2007 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, 2007 |
|
|
1,464,420 |
|
|
$ |
3.09 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
1,464,420 |
|
|
$ |
3.09 |
|
|
|
6.52 |
|
|
$ |
14,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
1,389,084 |
|
|
$ |
3.02 |
|
|
|
6.58 |
|
|
$ |
13,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2007 |
|
|
1,461,951 |
|
|
$ |
3.09 |
|
|
|
6.62 |
|
|
$ |
14,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Company’s non-vested stock options as of March 31, 2007 and changes during the
three months ended March 31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
|
| |
|
Shares |
|
|
Grant Date Fair Value |
|
Balance at January 1, 2007 |
|
|
92,805 |
|
|
$ |
4.03 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
(17,469 |
) |
|
|
3.24 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
75,336 |
|
|
$ |
4.22 |
|
|
|
|
|
|
|
|
The Company applied a forfeiture rate of 3% calculating the amount of options expected to
vest as of March 31, 2007. As
of March 31, 2007, $304 of total unrecognized compensation cost related to stock options
issued to employees is expected to be recognized over a weighted-average term of 1.6 years.
5. Net Loss per Common Share
Basic net loss per common share is
calculated by dividing net loss applicable to common
stockholders (net loss adjusted for dividends required on preferred stock and accretion in
preferred stock carrying value) by the weighted-average number of common shares outstanding for
the year. 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, stock warrants and
convertible preferred stock would have an antidilutive effect as the
Company incurred a net loss for the three months ended March 31, 2007 and 2006.
The potentially dilutive securities excluded from the determination of basic and diluted loss
per share, as their effect is antidilutive, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Common stock warrants |
|
|
1,443,985 |
|
|
|
1,917,998 |
|
Stock options |
|
|
1,464,420 |
|
|
|
1,481,207 |
|
RSUs |
|
|
759,889 |
|
|
|
— |
|
SARs |
|
|
297,779 |
|
|
|
— |
|
Series A convertible preferred stock |
|
|
— |
|
|
|
9,369,074 |
|
Series B convertible preferred stock |
|
|
— |
|
|
|
12,014,227 |
|
Preferred stock warrants |
|
|
— |
|
|
|
318,928 |
|
|
|
|
|
|
|
|
|
|
|
3,966,073 |
|
|
|
25,101,434 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007 and 2006, the reconciliation between net loss and
net loss applicable to common shares is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(2,939 |
) |
|
$ |
(3,141 |
) |
Add: Preferred stock dividends and accretion of preferred stock carrying value |
|
|
— |
|
|
|
(2,307 |
) |
|
|
|
|
|
|
|
Net loss applicable to common shares |
|
$ |
(2,939 |
) |
|
$ |
(5,448 |
) |
|
|
|
|
|
|
|
9
6. Satellite Network and Other Equipment
Satellite network and other equipment consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Useful life |
|
|
March 31, |
|
|
December 31, |
|
| |
|
(years) |
|
|
2007 |
|
|
2006 |
|
Land |
|
|
|
|
|
$ |
381 |
|
|
$ |
379 |
|
Satellite network |
|
|
5-7 |
|
|
|
9,319 |
|
|
|
7,373 |
|
Capitalized software |
|
|
3-5 |
|
|
|
636 |
|
|
|
516 |
|
Computer hardware |
|
|
5 |
|
|
|
914 |
|
|
|
867 |
|
Other |
|
|
5-7 |
|
|
|
411 |
|
|
|
411 |
|
Assets under construction |
|
|
|
|
|
|
33,427 |
|
|
|
26,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,088 |
|
|
|
36,451 |
|
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(7,490 |
) |
|
|
(7,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,598 |
|
|
$ |
29,131 |
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007 and 2006, the Company capitalized costs
attributable to the design and development of internal-use software in the amount of $139 and
$12, respectively. Depreciation and amortization expense for the three months ended March 31,
2007 and 2006 was $170 and $410, respectively. This includes amortization of internal-use
software of $44 and $19 for the three months ended March 31, 2007 and 2006, respectively.
Assets under construction primarily consist of costs relating to the design, development and
launch of a single demonstration satellite pursuant to a contract with the United States Coast
Guard (“USCG”) (see Notes 9 and 13) and milestone payments and other costs pursuant to the
Company’s satellite payload and launch procurement agreements with Orbital Sciences Corporation
and OHB-System AG for its quick-launch satellites (see Note 13) and upgrades to its
infrastructure and ground segment.
7. Intangible Assets
The
Company’s intangible assets consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Useful life |
|
|
|
|
|
|
|
| |
|
(years) |
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
Acquired licenses |
|
|
6 |
|
|
$ |
8,115 |
|
|
$ |
(1,429 |
) |
|
$ |
6,686 |
|
|
$ |
8,115 |
|
|
$ |
(1,057 |
) |
|
$ |
7,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense was $372 and $246 for the three months ended March 31,
2007 and 2006, respectively.
Estimated amortization expense for intangible assets subsequent to March 31, 2007 is as
follows:
| |
|
|
|
|
Years ending
December 31, |
|
|
|
|
Remainder of 2007 |
|
$ |
1,114 |
|
2008 |
|
|
1,486 |
|
2009 |
|
|
1,486 |
|
2010 |
|
|
1,486 |
|
2011 |
|
|
1,114 |
|
|
|
|
|
|
|
$ |
6,686 |
|
|
|
|
|
10
8. Accrued Liabilities
The Company’s accrued liabilities consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Gateway
settlement obligation (see Note 13) |
|
$ |
644 |
|
|
$ |
945 |
|
Accrued compensation and benefits |
|
|
1,966 |
|
|
|
2,094 |
|
Accrued
milestone obligations in connection with quick-launch satellites (see Note 13) |
|
|
5,000 |
|
|
|
— |
|
Accrued warranty obligations |
|
|
15 |
|
|
|
45 |
|
Accrued interest |
|
|
666 |
|
|
|
622 |
|
Accrued professional services |
|
|
591 |
|
|
|
361 |
|
Other accrued expenses |
|
|
1,569 |
|
|
|
848 |
|
|
|
|
|
|
|
|
|
|
$ |
10,451 |
|
|
$ |
4,915 |
|
|
|
|
|
|
|
|
The Company accrues an
estimate of its exposure to warranty claims based on current product
sales data and actual customer claims. The majority of the Company’s products carry a one-year
warranty. The Company assesses the adequacy of its recorded accrued warranty costs periodically
and adjusts the amount as necessary. The Company’s current contract manufacturer is responsible
for warranty obligations related to the Company’s newer Communicator models which were
introduced in the third quarter of 2005. During the three months ended March 31, 2007,
substantially all of the Communicators sold by the Company were these newer models. As of March
31, 2007, the Company’s accrued warranty obligation is not significant.
9. Deferred Revenues
Deferred revenues consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Professional services |
|
$ |
7,228 |
|
|
$ |
7,236 |
|
Service activation fees |
|
|
1,366 |
|
|
|
1,326 |
|
Manufacturing license fees |
|
|
86 |
|
|
|
89 |
|
Prepaid services |
|
|
1,482 |
|
|
|
1,498 |
|
|
|
|
|
|
|
|
|
|
|
10,162 |
|
|
|
10,149 |
|
Less current portion |
|
|
(2,223 |
) |
|
|
(2,083 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
7,939 |
|
|
$ |
8,066 |
|
|
|
|
|
|
|
|
During 2004, the Company entered into a contract with the USCG to design, develop, launch
and operate a single satellite equipped with the capability to receive, process and forward
Automatic Identification System (“AIS”) data (the “Concept Validation Project”). Under the terms
of the agreement, title to the Concept Validation Project demonstration satellite remains with
the Company, however the USCG will be granted a non-exclusive, royalty free license to use the
designs, processes and procedures developed under the contract in connection with any future
Company satellites that are AIS enabled. The Company is permitted to use the Concept Validation
Project satellite to provide services to other customers, subject to receipt of a modification
of the Company’s current license or special temporary authority
from the Federal Communication Commission. The agreement also provides for post-launch maintenance and AIS data transmission
services to be provided by the Company to the USCG for an initial term of 14 months. At its
option, the USCG may elect under the agreement to receive maintenance and AIS data transmission
services for up to an additional 18 months subsequent to the initial term. The deliverables
under the arrangement do not qualify as separate units of accounting and, as a result, revenues
from the contract will be recognized ratably commencing upon the launch of the Concept
Validation Project demonstration satellite (expected during 2007) over the expected life of
the customer relationship (see Note 13).
Deferred professional services revenues at March 31, 2007 and December 31, 2006 represent
amounts received from the USCG under the contract.
10. Note Payable
In connection with the acquisition of a majority interest in Satcom in 2005, the Company has
recorded an indebtedness to OHB Technology A.G. (formerly known as OHB Teledata A.G.) (“OHB”), a
stockholder of the Company. At March 31, 2007, the principal balance of the note
payable was €1,138 ($1,521) and it had a carrying value of $930. At December 31, 2006, the
principal balance of the note payable was €1,138 ($1,502) and it had a carrying value of
$879. The carrying value was based
on the note’s estimated fair value at the time of
acquisition. The difference between the carrying value and principal balance is being amortized
to interest expense over the estimated life of the note of six years.
Interest expense related to the note for
each of the three months ended March 31, 2007 and 2006 was $33. This note does not bear interest and has
no fixed repayment term. Repayment will be made from the distribution profits (as defined in the
note agreement) of ORBCOMM Europe LLC. The note has been classified as long-term and the Company
does not expect any repayments to be required prior to March 31, 2008.
11
11. Stockholders’ Equity
Warrants to purchase common stock outstanding at March 31, 2007 were as follows:
| |
|
|
|
|
| Exercise
price |
|
Shares subject
to
Warrants |
|
$2.33 |
|
|
937,137 |
|
$3.38 |
|
|
120,275 |
|
$4.26 |
|
|
386,573 |
|
|
|
|
|
|
|
|
1,443,985 |
|
|
|
|
|
During the
three months ended March 31, 2007, the Company issued
134,887 shares of common stock upon the cashless exercise of
warrants to purchase 173,311 common shares with per share exercise
prices of $2.33 to $4.26.
At March 31, 2007, the Company has reserved the following shares of common stock for future
issuance:
| |
|
|
|
|
| |
|
Shares |
|
Employee stock compensation plans |
|
|
6,122,627 |
|
Warrants to purchase common stock |
|
|
1,443,985 |
|
|
|
|
|
|
|
|
7,566,612 |
|
|
|
|
|
12. 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 region, based on the country in which the customer is located:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
| |
|
March 31, |
|
| |
|
2007 |
|
|
2006 |
|
United States |
|
|
89 |
% |
|
|
92 |
% |
Other(1) |
|
|
11 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
(1) No other single geographic areas are more than 10% of revenues for the three months ended
March 31, 2007.
13. Commitments and Contingencies
Procurement agreements in connection with quick-launch satellites
On April 21, 2006, the Company entered into an agreement with Orbital Sciences whereby
Orbital Sciences will design, manufacture, test and deliver to the Company, one payload
engineering development unit and six AIS-equipped satellite payloads for the Company. The cost
of the payloads is $17,000, subject to adjustment under certain circumstances. The Company had
options to require Orbital Sciences to manufacture, test and deliver up to two additional
satellite payloads at a cost of $2,200 per payload which have expired unexercised. Payments
under the agreement are due upon the achievement of specified milestones by Orbital Sciences. As
of March 31, 2007, the Company has made milestone payments of $10,500 under this agreement. The
Company anticipates making payments under the contract of $5,800
during the remainder of 2007 and $700 in 2008.
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
to be provided by Orbital Sciences, and launch the six integrated satellites. The price for the
six satellite buses and launch services is $20,000 and payments under the agreement are due upon
specific milestones achieved by OHB-System AG. In addition, if OHB-System AG meets specific
on-time delivery milestones, the Company would be obligated to pay up to an additional $1,000.
The Company anticipates making payments under the agreement of
$11,600 during the remainder of 2007 and $400 in 2008, for the initial order of six satellite buses and the related integration and
launch services, inclusive of the on-time delivery payments. As of March 31, 2007, the Company
has made milestone payments of $8,000 under this agreement. In addition, OHB-System AG will
provide services relating to the development, demonstration and launch of the Company’s
next-generation satellites at a total cost of $1,350. The Company has the option on or before
June 5, 2007, to require OHB-System AG to design, develop and manufacture up to two additional
satellite buses and integrate two satellite payloads at a cost of $2,100 per satellite.
12
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 (see Note 9). In connection with this agreement, the Company entered into
procurement agreements with Orbital Sciences and OHB-System AG. All expenditures relating to this project are being capitalized as assets
under construction. The satellite is expected to be launched during
2007. At March 31, 2007 and
December 31, 2006, the Company has incurred $ 6,749 and $6,622 of costs related to this project,
respectively. At March 31, 2007, the Company’s remaining obligation under these procurement
agreements were $512.
Due to the
fact that the launch of the original shared vehicle has not yet taken
place principally as a result of the cancellation of the primary
launch vehicle payload, the launch services provider, with the
Company’s
participation, has been seeking an alternative launch vehicle for the
Coast Guard demonstration satellite. As a result of these delays, in
February 2007, the USCG issued a unilateral modification to the
contract setting a definitive launch date of July 2, 2007. Although the
Company has not agreed to this modification, the Company and the
launch services contractor have advised the USCG that the Company
intends to work with the USCG to establish within the next several
months a new definitive launch date. By letter dated
April 20, 2007, the USCG has advised the Company that they
intend to seek consideration, or other contractual or statutory
remedies, for any launch delay beyond July 2, 2007. The Company
has certain indemnity rights against the launch services provider in
the event of a default under the launch services contract. The
Company continues to be in discussions with the USCG and the launch
services providers to secure an acceptable launch date and a
successful resolution of this matter.
Gateway settlement obligation
In 1996, a
predecessor to the Company entered into a contract to purchase gateway earth stations
(“GESs”) from ViaSAT Inc. (the “GESs Contract”). As of September 15, 2000, the date the
predecessor company filed for bankruptcy, approximately $11,000 had been paid to ViaSAT, leaving
approximately $3,700 owing under the GESs Contract for 8.5 GESs manufactured and stored by
ViaSAT. In December 2004, the Company and ViaSAT entered into a settlement agreement whereby the
Company was granted title to 4 completed GESs in return for a commitment to pay an aggregate of
$1,000 by December 2007. ViaSAT maintains a security interest and lien in the 4 GESs and has the
right to possession of each GESs until the lien associated with the GESs has been satisfied. The
Company has options, expiring in December 2007, to purchase any or all of the remaining 4.5 GESs
for aggregate consideration of $2,700. However, the Company must purchase one of the remaining
4.5 GESs for $1,000 prior to the sale or disposition of the last of the 4 GESs for which title
has been transferred. The Company recorded the 4 GESs in inventory at an aggregate value of
$1,644 upon execution of the settlement agreement. As of March 31, 2007 and December 31, 2006, the
accrued liability for the settlement agreement was $644 and $945, respectively.
Airtime credits
In 2001,
in connection with the organization of ORBCOMM Europe LLC and the
reorganization of the ORBCOMM business in Europe, the Company agreed
to grant certain country representatives in Europe approximately $3,736 in
airtime credits. The Company has not
recorded the airtime credits as a liability for the following
reasons: (i) the Company has no obligation to pay the unused
airtime credits if they are not utilized; and (ii) the airtime
credits are earned by the country representatives only when the
Company generates revenue from the country representatives. The
airtime credits have no expiration date. Accordingly, the Company is
recording airtime credits as services are rendered and these airtime
credits are recorded net of revenues from the country
representatives. For the three months ended March 31, 2007 and
2006, airtime credits used totaled approximately $43 and $46, respectively. As of March 31, 2007
and December 31, 2006, unused credits granted by
the Company were approximately $2,626 and $2,669,
respectively.
Litigation
Quake.
On
May 11, 2007, the Company and Quake Global, Inc.
(“Quake”) entered into a global settlement agreement
dismissing or discontinuing the legal proceedings with Quake
discussed below.
On February 24, 2005, Quake filed a four count action for damages and
injunctive relief against the Company, the Company’s wholly
owned subsidiary, Stellar Satellite Communications, Ltd. (“New
Stellar”), and Delphi Corporation, in the U.S. District Court for the
Central District of California, Western Division (the “Complaint”). The Complaint alleges
antitrust violations, breach of contract, tortious interference and improper exclusive dealing
arrangements. Quake claims damages in excess of $15,000 and seeks treble damages, costs and
reasonable attorneys’ fees, unspecified compensatory damages, punitive damages, injunctive
relief and that the Company be required to divest itself
of the assets it acquired from Stellar Satellite Communications, Ltd. (“Old Stellar”) and
reconstitute a new and effective competitor. On April 21, 2005, the Company filed a motion to
dismiss or to compel arbitration and dismiss or stay the proceedings, which the District Court
denied. On July 19, 2005, the Company and New Stellar took an interlocutory appeal as of right
to the Court of Appeals for the Ninth Circuit from the denial of the Company’s motion to
dismiss. The appeal has been fully briefed and the parties are awaiting and oral argument to be
scheduled by the Ninth Circuit.
13
On December 6, 2005, the Company filed its answer and counterclaims to Quake’s
complaint.
On December 21, 2006, The Company served a Notice of Default on Quake for its failure
to pay past-due royalty fees. Under the Subscriber Communicator Manufacturing Agreement, Quake
had 30 days to cure that default, but failed to do so. In addition, the Company has demanded in
this Notice of Default that Quake post security as required by the Subscriber Communicator
Manufacturing Agreement, which Quake also failed to do. Accordingly, on January 30, 2007, the
Company terminated its Subscriber Communicator Manufacturing Agreement with Quake. On February
12, 2007, Quake sought leave to file and serve a proposed supplemental complaint in the U.S.
District Court for the Central District of California, alleging that the recent termination was
a monopolizing and tortious act by the Company. On March 9, 2007, the Company filed an
opposition to Quake’s motion to file a supplemental complaint, asserting that any dispute over
the legality of the January 30 termination is subject to arbitration. By
order dated April 23, 2007, the court granted Quake’s motion to
amend the complaint, but deferred ruling on whether Quake’s new
claims must be arbitrated. The court held that the issue of
arbitrability may be raised by ORBCOMM LLC in a subsequent motion. In
March 2007, the Company entered into an interim agreement with
Quake for a term of two months for Quake to continue to supply
Communicators to the Company’s customers.
Separately, ORBCOMM served notices of default upon Quake in July and September 2005
and in June, August and December 2006 under the parties’ Subscriber Communicators Manufacturing
Agreement. On September 23, 2005, the Company commenced an arbitration with the American
Arbitration Association seeking: (1) a declaration that the Company has the right to terminate
the Subscriber Communicator Manufacturing Agreement; (2) an injunction against Quake’s
improperly using the fruits of contractually-prohibited non-segregated modem design and
development efforts in products intended for use with the systems of the Company’s competitors;
and (3) damages. Quake has filed an answer with counterclaims to the Company’s claims in the
arbitration. As part of Quake’s counter claims, it claims damages of at least $50,000 and seeks
attorney fees and expenses incurred in connection with the arbitration. On August 28, 2006, the
Company amended its statement of claims in the arbitration to add the claims identified in the
June and August 2006 notices of default. On December 15, 2006 the Company amended its statement
of claims in the arbitration to add the claims identified in the December 14, 2006 notice of
default. On February 7, 2007, the Company sought leave to amend its statement of claims in the
arbitration seeking a declaration that its exercise of its contractual termination right under
the Subscriber Communicator Manufacturing Agreement was lawful and proper in all respects,
including but not limited to under the terms of the Subscriber Communicator Manufacturing
Agreement and the laws of the United States. On February 23, 2007, Quake filed its reply papers
opposing such amended statement of claims. On March 10, 2007, the arbitration panel determined
to allow the Company to amend its statement of claims in the arbitration seeking a declaration
that its exercise of its contractual termination right under the Subscriber Communicator
Manufacturing Agreement was proper as a contractual matter but declined jurisdiction as to
antitrust issues related to such termination.
No
provision for losses, if any, that might have resulted from this
matter was recorded in
the Company’s financial statements as this action was in its preliminary stages and
the Company was unable to predict the outcome and therefore it was not probable that a liability
had been incurred and the amount of loss if any, was not reasonably estimable.
Separately, in connection with a pending legal action between Quake and Mobile Applitech,
Inc, or MobiApps, relating to an RF application specific integrated circuit, or ASIC, developed
pursuant to a Joint Development Agreement between Quake and MobiApps, Quake sent the Company a
letter dated July 19, 2006 notifying the Company that it should not permit or facilitate
MobiApps to market or sell Communicators for use on the ORBCOMM system or allow MobiApps’
Communicators to be activated on ORBCOMM’s system and that failure to cease and desist from the
foregoing actions may subject the Company to legal liability and allow Quake to seek equitable
and monetary relief.
On August 4, 2006, ORBCOMM LLC filed a motion to intervene in the pending action between
Quake and MobiApps in the U.S. District Court for the District of Maryland (Greenbelt Division)
seeking a declaration as to (1) whether MobiApps has the right to use the ASIC product in
Communicators it manufactures for use on the ORBCOMM system, and (2) whether the Company can
permit or facilitate MobiApps to market or sell Communicators using the ASIC product for ORBCOMM’s system and/or allow such Communicators to be activated on ORBCOMM’s system. On August
7, 2006, the Maryland District Court transferred that action to the U.S. District Court for the
Southern District of California. On October 20, 2006, ORBCOMM moved to intervene in the Southern
District of California action and filed a Complaint-In-Intervention therein, seeking the relief
it had requested in the Maryland District Court. ORBCOMM’s Motion to Intervene was granted on
January 4, 2007. Under the terms of the agreement with MobiApps, the Company will be indemnified
for its expenses incurred in connection with this action related to the alleged violations of
Quake’s proprietary rights. On February 15, 2007, Quake filed its answer to the
Complaint-In-Intervention and counterclaims against intervenor ORBCOMM, alleging that ORBCOMM
interfered with Quake’s contractual relations and conspired
with MobiApps to misappropriate Quake’s proprietary information. ORBCOMM LLC has sent
notice to Quake’s counsel that ORBCOMM LLC believes the assertion of these counterclaims
violates Rule 11 of the Federal Rules of Civil Procedure. No
provision for losses, were recorded in the Company’s financial
statements as this action was in its preliminary stages and the
Company was unable to predict the
outcome and therefore it was not probable that a liability had been incurred and the amount of
loss if any, was not reasonably estimable.
On
May 11, 2007, the Company entered into a global
settlement agreement with Quake. Pursuant to the terms of the
settlement agreement, the parties have agreed to (1) dismiss with
prejudice and without cost the Complaint and any counterclaims; (2)
discontinue in its entirety the arbitration relating to the
Subscriber Communicator Manufacturing Agreement with prejudice and
without cost; and (3) dismiss with prejudice and without cost
Quake’s counterclaims against ORBCOMM LLC in the pending action
between Quake and MobiApps. Each party will bear its own legal
expenses with respect to each of these legal proceedings.
Under the terms of the settlement, the Company
agreed to separate and segregate its officers and employees from
those of New Stellar within
60 days and to maintain separate office, testing and laboratory
facilities for New Stellar by February 2008.
In addition,
as part of the settlement, the Company and Quake have entered into a
new subscriber communicator manufacturing agreement for a ten-year
term with respect to the manufacture of subscriber communicators for
use on the Company’s communications system.
The Company is subject to various other claims and assessments in the normal course of its
business. While it is not possible at this time to predict the outcome of the litigation discussed above with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company, based on its evaluation of matters which are pending or asserted the Company’s management believes the disposition
of such matter will not have a material adverse effect on the Company’s business or financial statements.
14. Subsequent Events
In
April 2007, the Company’s Plane F polar satellite, one of the Company’s original prototype first generation
satellites launched in 1995, was retired due to
intermittent service. This retirement did not have a material impact
on the Company’s service.
14
Item 2. Management’s 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. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form
10-Q constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans,
objectives and expectations for future events and includes 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 Company’s
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 Company’s control, that may cause the
Company’s 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:
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;
technological changes, pricing pressures and other competitive factors; the inability of our
international resellers to develop markets outside the United States; satellite launch
failures, 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, 2006. The Company undertakes no obligation to publicly revise any forward-looking
statements or cautionary factors, except as required by law.
Overview
Presently, we operate the only global commercial wireless messaging system optimized for
narrowband communications. Our system consists of a global network of 29 low-Earth orbit, or
LEO, satellites and accompanying ground infrastructure. In April 2007, our Plane F polar
satellite, one of the original prototype first generation satellites launched in 1995, was
voluntarily retired due to intermittent service, without material
impact on our service, reducing our constellation from 30 to 29 satellites. 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. 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 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., Komatsu Ltd., Hitachi Construction Machinery
Co., Ltd. and the Volvo Group, international value added resellers, or IVARs, such as the
Equipment Services business of General Electric Company (“GE”), value-added resellers, or VARs,
such as Fleet Management Services, XATA Corporation and American Innovations, Ltd., and
government agencies, such as the U.S. Coast Guard.
Through our M2M data communications system, our customers and end-users can send and receive
information to and from any place in the world using low-cost subscriber communicators and
paying airtime costs that we believe are the lowest in the industry for global connectivity.
We
believe that there is no other satellite or terrestrial network currently in operation that can
offer global two-way wireless narrowband data service coverage at comparable cost using a
single technology standard worldwide. We are currently authorized, either directly or
indirectly, to provide our communications services in over 80 countries and territories in
North America, Europe, South America, Asia, Africa and Australia.
Presently our unique M2M data communications system is comprised of three elements: (i) a
constellation of 29 LEO satellites in multiple orbital planes between 435 and 550 miles above
the Earth operating in the Very High Frequency, or VHF, radio frequency spectrum, (ii) related
ground infrastructure, including 14 gateway earth stations, four regional gateway control
centers and a network control center in Dulles, Virginia, through which data sent to and from
subscriber communicators are routed and (iii) subscriber communicators attached to a variety of
fixed and mobile assets worldwide.
Our principal products and services are revenues from satellite communications services and
sales of subscriber communicators. We provide global M2M data communications services through
our satellite-based system. We focus our communications services on narrowband data
applications. These data messages are typically sent by a remote subscriber communicator
through our satellite system to our ground facilities for forwarding through an appropriate
terrestrial communications network to the ultimate destination. Our wholly owned subsidiary,
Stellar Satellite Communications Ltd. (“Stellar”), markets and sells subscriber communicators
manufactured exclusively for Stellar, by Delphi Automotive Systems
LLC (“Delphi”), a subsidiary of Delphi
Corporation directly to customers. We also earn a one time royalty from third
parties for the use of our proprietary communications protocol, which enables subscriber
communicators to connect to our M2M data communications system.
15
Increasingly, businesses and governments face the need to track, control, monitor and
communicate with fixed and mobile assets that are located throughout the world. At the same
time, these assets increasingly incorporate microprocessors, sensors and other devices that can
provide a variety of information about the asset’s location, condition, operation or
measurements and respond to external commands. As these intelligent devices proliferate, we
believe that the need to establish two-way communications with these devices is greater than
ever. Increasingly, owners and users of these intelligent devices are seeking low cost and
efficient communications systems that will enable them to communicate with these devices.
Our products and services are typically combined with industry-or customer-specific
applications developed by our resellers which are sold to their end-user customers. We do not
generally market to end-users directly; instead, we utilize a cost-effective sales and
marketing strategy of partnering with over 150 resellers ( i.e., VARs and country
representatives). These resellers, which are our direct customers, market to end-users.
Critical Accounting Policies
Our discussion and analysis of our results of operations,
liquidity and capital resources are
based on our unaudited 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, the useful lives and impairment of satellite network and other
equipment, capitalized development costs, intangible assets, inventory valuation, fair value of securities underlying share-based
payment arrangements and the valuation of deferred tax assets. 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. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2006. There
has been no material changes to our critical accounting policies during the three months ended
March 31, 2007 except for the income taxes policy discussed below.
Effective
January 1, 2007, we began to measure and record uncertain tax
positions in accordance with
FIN 48 Accounting for Uncertainty in
Income Taxes (“FIN 48”) an Interpretation of FASB
Statement No. 109.
FIN 48
prescribes a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. Only tax positions meeting the more-likely-than-not
recognition threshold at the effective date may be recognized or
continue to be recognized upon adoption of this Interpretation.
FIN 48 also provides guidance on accounting for derecognition,
interest and penalties, and classification and disclosure of matters
related to uncertainty in income taxes. Accounting for uncertainties
in income tax positions under FIN 48 involves significant judgments
by management.
EBITDA
EBITDA is defined as earnings before interest income (expense), provision for income taxes
and depreciation and amortization. We believe EBITDA is useful to our management and investors
in evaluating our operating performance because it is one of the primary measures used by us 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 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.
16
The following table (in thousands) reconciles our net loss to EBITDA for the periods shown:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(2,939 |
) |
|
$ |
(3,141 |
) |
Interest income |
|
|
(1,279 |
) |
|
|
(455 |
) |
Interest expense |
|
|
52 |
|
|
|
17 |
|
Depreciation and amortization |
|
|
542 |
|
|
|
656 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(3,624 |
) |
|
$ |
(2,923 |
) |
|
|
|
|
|
|
|
EBITDA during the three
months ended March 31, 2007 decreased by $0.7 million over
2006. This decrease was due to an increase in operating expenses of $2.1 million to
support the growth of the business, which was partially offset by higher net service
revenues of $1.7 million. Operating expenses increased in the first quarter of 2007 mostly
due to increases in stock-based compensation of $1.3 million, staffing costs, litigation
and the costs of being a public company. For the remainder of 2007, staffing costs excluding
stock-based compensation are expected to moderate as our staffing
increased subsequent to the first quarter of 2006. We expect negative
EBITDA to continue in 2007.
Results of Operations
Revenues
Revenues consist of service revenues and product sales. Service revenues are based upon
utilization of subscriber communicators on our communications system. These service revenues
generally consist of a one-time activation for each subscriber communicator activated for use
on our communications system and subscriber-based recurring monthly usage fees. Service
revenues are also earned from providing engineering, technical and management support services
to customers, and from license fees and a one time royalty by third parties for the use of our
proprietary communications protocol, which enables subscriber communicators to connect to our
M2M data communications system. Product sales consist of sales of subscriber communicators,
other products such as subscriber communicator peripherals, and other equipment such as gateway
earth stations and gateway control centers to customers.
The table below presents our revenues (in thousands) for the three months ended March 31, 2007
and 2006, together with the percentage of total revenue represented by each revenue category:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
months ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
| |
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Service revenues |
|
$ |
3,950 |
|
|
|
66.3 |
% |
|
$ |
2,321 |
|
|
|
36.4 |
% |
Product sales |
|
|
2,011 |
|
|
|
33.7 |
% |
|
|
4,059 |
|
|
|
63.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,961 |
|
|
|
100.0 |
% |
|
$ |
6,380 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the three months ended March 31,
2007 decreased by $0.4 million, or 6.6%, to
$6.0 million from $6.4 million for the three months ended March 31, 2006. This decrease
related to a decrease in product sales of $2.1 million offset by an increase in service
revenues of $1.7 million.
Service revenues
Service revenues increased $1.7 million for the three months ended March 31, 2007, or 70.2%, to
$4.0 million, or approximately 66.3% of total revenues, from $2.3 million, or approximately
36.4% of total revenues for the three months ended March 31, 2006. This increase was primarily
due to an increase in the number of billable subscriber communicators activated on our
communications system. At March 31, 2007, there were approximately 250,000 billable subscriber
communicators as compared to approximately 138,000 billable subscriber communicators at March
31, 2006, an increase of 81.6%.
The number of billable subscriber communicators grew at a faster pace than our total service
revenues due in part to customary lags between subscriber communicator activations and
recognition of service revenues from these units. Consistent with our strategy to focus on
customers with the potential for a high number of connections with lower usage applications, we
experienced an increase in the mix of lower revenue per subscriber communicator applications.
The increase in the number of billable
subscriber communicators was primarily by customers with trailer tracking, heavy equipment
monitoring and “in-cab” truck monitoring applications. For
the remainder of 2007, we expect service revenues to increase over the corresponding periods
in 2006, as service revenues increase from our growing base of
subscriber communicators.
17
Product sales
Revenue from product sales decreased $2.1 million for the three months ended March 31, 2007, or
50.5%, to $2.0 million, or approximately 33.7% of total revenues, from $4.1 million, or
approximately 63.6% of total revenues for the three months ended March 31, 2006. This decrease
was primarily due to lower sales to GE in the first quarter of 2007 resulting from a large order from GE in the prior
year quarter, and also a sales return and a decrease in our average selling price
of subscriber communicators based on expected volume price reductions we
will receive from our contract manufacturer Delphi on 2007 inventory
purchases. For the remainder of 2007, based on orders received, as well as ongoing
discussions with existing and potential new customers we expect product revenues from sales of
subscriber communicators to increase over the corresponding periods in 2006.
Costs of services
Costs of services include the expenses associated with our engineering groups, the repair and
maintenance of our ground infrastructure, the depreciation associated with our communications
system and the amortization of licenses acquired.
Costs of services increased by $0.3 million, or 14.4%, to $2.4 million for the three months
ended March 31, 2007 from $2.1 million during the three months ended March 31, 2006. The
increase was due to an increase of $0.2 million in stock-based compensation, which was not
significant in 2006, and higher equipment maintenance costs of $0.2 million as we made
improvements to the existing system infrastructure, offset by a decrease of $0.1 million in the
depreciation associated with our communications system primarily related to our satellites
becoming fully depreciated during the fourth quarter of 2006. As a percentage of service
revenues, cost of services were 59.6% of service revenues for the three months ended March 31,
2007 compared to 88.6% for the three months ended March 31, 2006. For the remainder of
2007, we expect costs of services as a percentage of service revenues to decrease over the
corresponding periods in 2006.
Costs of product sales
Costs of product sales include the cost of subscriber communicators and related peripheral
equipment, as well as the operational costs to fulfill customer orders, including costs for
employees related to our Stellar subsidiary.
Costs of product sales decreased for the three months ended March 31, 2007 by $2.0 million, or
48.3%, to $2.1 million from $4.1 million for the three months ended March 31, 2006. Product
cost represented 83.3% of the cost of product sales for the three months ended March 31, 2007,
which decreased by $2.0 million, or 53.4%, to $1.8 million for the three months ended March 31,
2007 from $3.8 million for the three months ended March 31, 2006. We had a gross loss from
product sales (revenues from product sales minus costs of product sales including costs for
Stellar) of $0.1 million, for the three months ended March 31, 2007, including stock-based
compensation of less than $0.1 million as compared to a gross loss from product sales of
less than $0.1 million for the three months ended March 31, 2006. Stock-based compensation was
nil for the three months ended March 31, 2006. The gross loss from product sales for the three
months ended March 31, 2007 was related to lower revenues from
subscriber communicator sales and lower average selling prices per
unit as described above in Product Sales during
the three months ended March 31, 2007, which was not enough to cover costs associated with
distribution, fulfillment and customer service costs associated with
completing customer orders.
The gross loss from product sales for the three months
ended March 31, 2006 was attributable primarily to an inventory impairment of $0.3 million due
to lower than anticipated demand for our older ST2500 model subscriber communicators because of
the rapid acceptance of our newer DS 300 and DS 100 models manufactured by Delphi. For the
remainder of 2007, we expect gross profit to increase over 2006.
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, litigation
expenses and regulatory matters.
Selling, general and administrative expenses increased $2.0 million, or 60.0%, to $5.3 million
for the three months ended March 31, 2007 from $3.3 million for the three months ended March
31, 2006. This increase is primarily due to an increase in stock-based compensation of $1.3
million for the three months ended March 31 2007, resulting from the granting of restricted
stock units and stock appreciation rights in February 2007 and
October 2006, a $0.4 million
increase in payroll costs related to increased staffing after the
first quarter of 2006 and a $0.3 million increase in
professional service fees relating to litigation and regulatory filings.
For the remainder of 2007, we expect the growth rate of selling, general and administrative
expenses, excluding stock-based compensation, to moderate over the corresponding 2006 periods.
Except for the fourth quarter of 2007, we expect stock-based compensation to increase over the
corresponding 2006 periods due to the timing of granting
time-based and performance-based restricted stock units and stock appreciation rights.
Product development expenses
Product development expenses consist primarily of the expenses associated with the staff of our
engineering development team, along with the cost of third parties that are contracted for
specific development projects.
Product development expenses for the three months ended March 31, 2007 and 2006 was $0.4
million and $0.5 million, respectively, decreasing 27.2% in the current year period over the
same period in the prior year.
18
Other income (expense)
Other income is comprised primarily of interest income from our cash and cash equivalents,
which consists of interest bearing instruments, including commercial paper, and our investments
in investment grade floating rate redeemable municipal debt securities classified as available-for-sale
marketable securities.
Other income was $1.3 million for the three months ended March 31, 2007 compared to $0.5
million for the three months ended March 31, 2006. This increase was due to increased
investment balances resulting from net proceeds received from our initial public offering
completed in November 2006. We expect that interest income will increase then gradually
decrease as cash is used for our capital expenditures, working capital purposes and to fund
operating losses.
Net loss and net loss applicable to common shares
As a result of the items described above, our net loss narrowed to $2.9 million for the three
months ended March 31, 2007, compared to a net loss of $3.1 million for the three months ended
March 31, 2006, decreasing by $0.2 million, an improvement of 6.4%. For the three months ended
March 31, 2006, our net loss applicable to common shares (net loss adjusted for dividends
required to be paid on shares of preferred stock and accretion in preferred stock carrying value) was $5.4 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 primarily through 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 $2.9 for the three months ended
March 31, 2007 and as of March 31, 2007 we have an accumulated deficit of $62.8 million. As of
March 31, 2007, our primary source of liquidity consisted of cash, cash equivalents and
marketable securities, consisting of investment grade floating rate redeemable municipal debt securities,
totaling $98.1 million.
Operating activities
Cash generated in our operating activities for the three months ended March 31, 2007 was $0.7
million resulting from a net loss of $2.9 million offset by adjustments for
non-cash items of $2.5 million, and $1.1 million of cash
generated from working capital.
Adjustments for non-cash items primarily consisted of $0.5 million for depreciation and
amortization and $1.9 million for stock-based compensation. Working capital activities
primarily consisted of a net source of cash of $1.4 million for a decrease to inventories
primarily related to better inventory management, offset by a use of cash of $0.5 million for
an increase in prepaid expense and other current assets primarily
related to deferred costs incurred in connection with a proposed
secondary public offering of our common stock.
Cash used in our operating activities for the three months ended March 31, 2006 was $6.7
million resulting from a net loss of $3.1 million, offset by adjustments for non-cash items of
$1.1 million, and $4.7 million used for working capital. Adjustments for non-cash items
primarily consisted of $0.7 million for depreciation and amortization, $0.3 million for
inventory impairments and $0.3 million for stock-based compensation, offset by a decrease of
$0.3 million in the allowance for doubtful accounts. Working capital activities primarily
consisted of a net use of cash of $3.0 million for an increase to accounts receivable primarily
related to the increase in our revenues, and the timing of collections, a use of cash of $0.5
million to inventories primarily related to the increase in our revenues and a use of cash of
$1.9 million for a decrease in accounts payable and accrued liabilities primarily related to
payments for issuance costs related to our Series B preferred stock. The uses described above
were offset by a source of cash of $0.7 million from an increase in deferred revenue primarily
related to billings we rendered in connection with our Coast Guard demonstration satellite
scheduled for launch during 2007.
19
Investing activities
Cash used in our investing activities for the three months ended March 31, 2007 was $15.3
million resulting from capital expenditures of $3.0 million and purchases of marketable
securities consisting of investment grade floating rate redeemable municipal debt securities totaling $19.0
million offset by sales of marketable securities of $6.8 million. Capital expenditures included
$2.2 million for the quick-launch and next-generation satellites and $0.8 million of
improvements to our internal infrastructure and ground segment.
Cash used in our investing activities for the three months ended March 31, 2007 was $0.8
million, resulting from capital expenditures of $0.5 million for the Concept Validation Project
and $0.3 million of improvements to our internal infrastructure and ground segment.
Financing activities
Cash used in our financing activities the three months ended March 31, 2007 was $0.6 million,
resulting from payments of invoices in 2007 related to offering costs
incurred in connection with our
initial public offering in November 2006.
Cash used in our financing activities for the three months ended March 31, 2006 was $6.6
million, resulting from dividend payments to our Series A preferred stock holders totaling $8.0
million, offset by net proceeds received of $1.4 million for the issuance of an additional
391,342 shares of Series B preferred stock after deducting issuance costs.
Future Liquidity and Capital Resource Requirements
We expect cash flows from operating activities, along with our existing cash and
marketable securities will be sufficient to provide working capital and fund capital
expenditures, which primarily includes the deployment of 7 additional satellites through the
next 12 months. For the remainder of 2007, we expect to incur approximately $65 million of
capital expenditures primarily for our quick-launch and next-generation satellites.
Contractual Obligations
There have been no material changes in our contractual obligations as of March 31, 2007, as
previously disclosed in Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under the heading “Contractual Obligations” in our Annual
Report on Form 10-K for the year ended December 31, 2006.
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 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 conformity with
accounting principles generally accepted in the United Sates of America, which expands
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. SFAS 157 will be
effective for us beginning January 1, 2008. We are currently evaluating the impact this
standard will have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 expands opportunities to use fair value
measurements in financial reporting and permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 will be effective for us on January
1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our financial statements.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risks
There has been no material changes in our assessment of our sensitivity to market risk as of
March 31, 2007, 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, 2006.
Concentration
of credit risk
During the
three months ended March 31, 2007 and 2006, sales to GE, a
holder of approximately 5.5% of our common stock, comprised 39.7%
and 62.7% of our revenues, respectively.
Item 4. Disclosure Controls and Procedures
Evaluation of the Company’s disclosure controls and procedures. The Company’s management
evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), as of March 31, 2007. Based on their evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of March 31, 2007.
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 Company’s internal
control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Quake Global,
Inc.
On
May 11, 2007, ORBCOMM LLC and Stellar Satellite Communications, Ltd.,
(“Stellar”) entered into a global settlement agreement with
Quake Global, Inc. (“Quake”) dismissing or discontinuing
our legal proceedings with Quake discussed below.
On February 24, 2005, Quake filed a four-count
action for damages and injunctive relief against ORBCOMM LLC,
our wholly owned subsidiary, Stellar, and Delphi Corporation, in
the U.S. District Court for the Central District of
California, Western Division (the “Complaint”). The
Complaint alleges antitrust violations, breach of contract,
tortious interference and improper exclusive dealing
arrangements. Quake claims damages in excess of $15 million
and seeks treble damages, costs and reasonable attorneys’
fees, unspecified compensatory damages, punitive damages,
injunctive relief and that we be required to divest ourselves of
the assets we had acquired from Stellar and reconstitute a new
and effective competitor. On April 21, 2005, we filed a
motion to dismiss or to compel arbitration and dismiss or stay
the proceedings, which the District Court denied. On
July 19, 2005, we and Stellar took an interlocutory appeal
as of right to the Court of Appeals for the Ninth Circuit from
the denial of our motion to dismiss. On December 6, 2005, we filed our answer and counterclaims
to Quake’s Complaint.
On December 21, 2006, we served a Notice of Default on
Quake for its failure to pay past-due royalty fees. Under our
Subscriber Communicator Manufacturing Agreement, Quake had
30 days to cure that default, but failed to do so. In
addition, we demanded in this Notice of Default that Quake post
security as required by the Subscriber Communicator
Manufacturing Agreement, which Quake also failed to do.
Accordingly, on January 30, 2007, we terminated our
Subscriber Communicator Manufacturing Agreement with Quake. On
February 12, 2007, Quake sought leave to file and serve a
proposed supplemental complaint in the U.S. District Court
for the Central District of California, alleging that the recent
termination was a monopolizing and tortious act by us. On
March 9, 2007, we filed an opposition to Quake’s
motion to file a supplemental complaint, asserting that any
dispute over
the legality of the January 30 termination is subject to
arbitration. By order dated April 23, 2007, the court
granted Quake’s motion to amend the complaint, but deferred
ruling on whether Quake’s new claims must be arbitrated.
The court held that the issue of arbitrability may be raised by
ORBCOMM LLC in a subsequent motion. In March 2007, we entered
into an interim agreement with Quake for a term of two months
for Quake to continue to supply subscriber communicators to our
customers.
Separately, we served notices of default upon Quake in July and
September 2005 and in June, August and December, 2006 under our
Subscriber Communicator Manufacturing Agreement. On
September 23, 2005, we commenced an arbitration with the
American Arbitration Association seeking (1) a declaration
that we have the right to terminate our Subscriber Communicator
Manufacturing Agreement with Quake; (2) an injunction
against Quake’s improperly using the fruits of
contractually-prohibited non-segregated modem design and
development efforts in products intended for use with the
systems of our competitors; and (3) damages. Quake has
filed an answer with counterclaims to our claims in the
arbitration. As part of Quake’s counterclaims, it claims
damages of at least $50 million and seeks attorney fees and
expenses incurred in connection with the arbitration. On
August 28, 2006, we amended our statement of claims in the
arbitration to add the claims identified in the June and August
2006 notices of default. On December 15, 2006, we amended
our statement of claims in the arbitration to add the claims
identified in the December 14, 2006 notice of default. On
February 7, 2007, we sought leave to amend our statement of
claims in the arbitration seeking a declaration that our
exercise of our contractual termination right under the
Subscriber Communicator Manufacturing Agreement was lawful and
proper in all respects, including but not limited to under the
terms of the Subscriber Communicator Manufacturing Agreement and
the laws of the United States. On February 23, 2007, Quake
filed its reply papers opposing such amended statement of
claims. On March 10, 2007, the arbitration panel determined
to allow us to amend our statement of claims in the arbitration
seeking a declaration that our exercise of our contractual
termination right under the Subscriber Communicator
Manufacturing Agreement was proper as a contractual matter but
declined jurisdiction as to antitrust issues related to such
termination.
Separately, in connection with a pending legal action between
Quake and Mobile Applitech, Inc., or MobiApps, relating to a
radio frequency application specific integrated circuit, or
ASIC, developed pursuant to a Joint Development Agreement
between Quake and MobiApps, Quake sent us a letter dated
July 19, 2006 notifying us that we should not permit or
facilitate MobiApps to market or sell subscriber communicators
for use on our communications system or allow MobiApps’
subscriber communicators to be activated on our communications
system and that failure to cease and desist from the foregoing
actions may subject us to legal liability and allow Quake to
seek equitable and monetary relief. On August 4, 2006, our
ORBCOMM LLC subsidiary filed a motion to intervene in the
pending action between Quake and MobiApps in the
U.S. District Court for the District of Maryland (Greenbelt
Division) seeking a declaration as to (1) whether MobiApps
has the right to use the ASIC product in subscriber
communicators it manufactures for use on our communications
system, and (2) whether we can permit or facilitate
MobiApps to market or sell subscriber communicators using the
ASIC product for our communications system
and/or allow
such subscriber communicators to be activated on our
communications system. On August 7, 2006, the Maryland
District Court transferred that action to the U.S. District
Court for the Southern District of California. On
October 20, 2006, ORBCOMM LLC moved to intervene in the
Southern District of California action and filed a
Complaint-In-Intervention
therein, seeking the relief it had requested in the Maryland
District Court. ORBCOMM LLC’s Motion to Intervene was
granted on January 4, 2007. Under the terms of our
agreement with MobiApps, we will be indemnified for our expenses
incurred in connection with this action related to the alleged
violations of Quake’s proprietary rights. On
February 15, 2007, Quake filed its answer to the
Complaint-In-Intervention
and counterclaims against intervenor ORBCOMM LLC, alleging that
ORBCOMM LLC interfered with Quake’s contractual relations
and conspired with MobiApps to misappropriate Quake’s proprietary information. ORBCOMM LLC
has sent notice to Quake’s counsel that ORBCOMM LLC
believes the assertion of these counterclaims violates
Rule 11 of the Federal Rules of Civil Procedure.
On May 11,
2007, ORBCOMM LLC and Stellar and Quake entered into a global
settlement agreement, pursuant to which the parties have agreed to
(1) dismiss with prejudice and without cost the Complaint and any
counterclaims; (2) discontinuing in its entirety the arbitration
relating to the Subscriber Communicator Manufacturing Agreement with
prejudice and without cost; and (3) dismiss with prejudice and
without cost Quake’s counterclaims against ORBCOMM LLC in the pending
action between Quake and MobiApps. Each party will bear its own legal
expenses with respect to each of these legal proceedings. Under the
terms of the settlement, ORBCOMM LLC and Stellar agreed to separate
and segregate our officers and employees from those of Stellar within 60 days and to
maintain separate office, testing and laboratory facilities for
Stellar by
February 2008. In
addition, as part of the settlement, we and Quake have entered into a
new subscriber communicator manufacturing agreement for a ten-year
term with respect to the manufacture of subscriber communicators for
use on our communications system.
Item 1A. Risk Factors
Other than
with respect to the risk factor discussed below, there have been no material changes in the risk factors as of March 31, 2007, as previously
disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2006.
We rely on a limited number of manufacturers for our
subscriber communicators. If we are unable to, or cannot find
third parties to, manufacture a sufficient quantity of
subscriber communicators at a reasonable price, the prospects for our business will be negatively impacted.
The development and availability on a timely basis of relatively
inexpensive subscriber communicators are critical to the
successful commercial operation of our system. Our Stellar
subsidiary relies on a contract manufacturer, Delphi to
produce subscriber communicators. Our customers may not be able
to obtain a sufficient supply of subscriber communicators at
price points or with functional characteristics and reliability
that meet their needs. An inability to successfully develop and
manufacture subscriber communicators that meet the needs of
customers and are available in sufficient numbers and at prices
that render our services cost-effective to customers could limit
the acceptance of our system and potentially affect the quality
of our services, which could have a material adverse effect on
our business, financial condition and results of operations.
Delphi Corporation filed for bankruptcy protection in October
2005. Our business may be materially and adversely affected if
Stellar’s agreement with Delphi Corporation is terminated
or modified as part of Delphi Corporation’s reorganization
in bankruptcy or otherwise. If our agreements with third party
manufacturers are, or Stellar’s agreement with Delphi
Corporation is, terminated or expire, our search for additional
or alternate manufacturers could result in significant delays,
added expense and an inability to maintain or expand our
customer base. Any of these events could require us to take
unforeseen actions or devote additional resources to provide our
services and could harm our ability to compete effectively.
There are
currently three manufacturers of subscriber communicators, including
Quake, Mobile Applitech, Inc. and our Stellar
subsidiary. On May 11, 2007, our ORBCOMM LLC subsidiary, our Stellar
subsidiary and Quake entered into a global settlement agreement
dismissing or discontinuing our legal proceedings with Quake
discussed in Part II, Item 1. “Legal Proceedings”. If our
agreements with third party manufacturers, including our new
subscriber communicator manufacturing agreement with Quake, are
terminated or expire, our search for additional or alternate
manufacturers could result in significant delays in customers
activating subscriber communicators on our communications system.
added expense for our customers and our inability to maintain or
expand our customer base.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds from Initial Public Offering
On
November 2, 2006, the SEC declared effective our Registration
Statement on Form S-1 (Registration No. 333-134088), relating to our initial public offering. After
deducting underwriters’ discounts and commissions and other offering costs, our net proceeds
were approximately $68.3 million. We intend to use the remaining
net proceeds from our initial public offering to provide working
capital and fund capital expenditures, primarily related to the
deployment of additional satellites, which will be comprised of our
quick-launch and next-generation satellites. As of March 31, 2007, we had not used any of the net proceeds
for such purposes. Pending such uses, we are investing the net proceeds in short-term interest
bearing cash equivalents and investment grade floating rate redeemable municipal debt securities.
Exercise of Warrants
During the
three months ended March 31, 2007, we issued 134,887 shares of
common stock upon the cashless exercise of warrants to purchase
173,311 common shares with per share exercise prices of $2.33 to
$4.26
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
21
Item 6. Exhibits
| 31.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(a). |
| |
| 31.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(a). |
| |
| 32.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith). |
| |
| 32.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350 (furnished herewith). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
|
|
ORBCOMM Inc. |
|
|
|
|
(Registrant) |
|
|
Date:
May 14, 2007
|
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/s/ Jerome B. Eisenberg
Jerome B. Eisenberg,
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Chairman of the Board and Chief Executive Officer |
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(Principal Executive Officer) |
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Date:
May 14, 2007
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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 Officer) |
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