Filed by Bowne Pure Compliance
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33118
ORBCOMM INC.
(Exact name of registrant as specified in its charter)
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Delaware
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41-2118289 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
2115 Linwood Avenue, Fort Lee, New Jersey 07024
(Address of principal executive offices)
(201) 363-4900
(Registrants telephone number)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
number of shares outstanding of the registrants common stock as of November 6, 2008 is
42,102,917
ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
88,471 |
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$ |
115,587 |
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Accounts receivable, net of allowances for doubtful
accounts of $228 and $388 |
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3,898 |
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5,284 |
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Inventories |
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1,775 |
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2,722 |
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Advances to contract manufacturers |
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158 |
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158 |
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Prepaid expenses and other current assets |
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1,336 |
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1,078 |
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Total current assets |
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95,638 |
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124,829 |
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Long-term receivable |
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542 |
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Satellite network and other equipment, net |
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86,345 |
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49,704 |
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Intangible assets, net |
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4,457 |
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5,572 |
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Restricted cash |
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5,680 |
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Inventories |
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1,900 |
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Other assets |
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1,455 |
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992 |
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Deferred tax assets |
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184 |
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184 |
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Total assets |
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$ |
195,659 |
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$ |
181,823 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
3,522 |
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$ |
4,373 |
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Accrued liabilities |
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16,843 |
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12,305 |
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Current portion of deferred revenue |
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3,320 |
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1,435 |
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Total current liabilities |
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23,685 |
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18,113 |
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Note payable related party |
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1,251 |
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1,170 |
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Deferred revenue, net of current portion |
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7,790 |
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1,507 |
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Other liability |
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184 |
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184 |
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Total liabilities |
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32,910 |
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20,974 |
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Minority interest |
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1,205 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, par value $0.001; 250,000,000 shares
authorized;
42,091,318 and 41,658,066 shares issued and outstanding |
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42 |
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42 |
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Additional paid-in capital |
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227,979 |
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224,899 |
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Accumulated other comprehensive loss |
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(527 |
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(656 |
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Accumulated deficit |
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(65,950 |
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(63,436 |
) |
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Total stockholders equity |
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161,544 |
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160,849 |
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Total liabilities and stockholders equity |
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$ |
195,659 |
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$ |
181,823 |
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See notes to condensed consolidated financial statements.
3
ORBCOMM Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Service revenues |
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$ |
6,336 |
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$ |
4,551 |
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$ |
16,948 |
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$ |
12,718 |
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Product sales |
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1,633 |
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2,361 |
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4,624 |
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6,782 |
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Total revenues |
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7,969 |
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6,912 |
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21,572 |
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19,500 |
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Costs and expenses (1): |
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Costs of services |
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2,624 |
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1,989 |
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6,786 |
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6,308 |
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Costs of product sales |
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1,557 |
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2,446 |
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4,551 |
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7,084 |
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Selling, general and administrative |
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4,586 |
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4,238 |
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14,205 |
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14,034 |
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Product development |
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207 |
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217 |
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669 |
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834 |
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Gain on customer claims settlements |
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(125 |
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(1,368 |
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Total costs and expenses |
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8,849 |
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8,890 |
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24,843 |
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28,260 |
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Loss from operations |
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(880 |
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(1,978 |
) |
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(3,271 |
) |
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(8,760 |
) |
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Other income (expense): |
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Interest income |
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375 |
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1,600 |
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1,497 |
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4,218 |
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Other income (expense) |
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(259 |
) |
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8 |
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(236 |
) |
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41 |
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Interest expense |
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(48 |
) |
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(52 |
) |
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(146 |
) |
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(157 |
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Total other income |
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68 |
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1,556 |
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1,115 |
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4,102 |
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Loss before pre-control earnings of consolidated
subsidiary and minority interest |
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(812 |
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(422 |
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(2,156 |
) |
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(4,658 |
) |
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Pre-control earnings of consolidated subsidiary |
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(128 |
) |
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Minority interest |
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(189 |
) |
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(230 |
) |
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Net loss |
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$ |
(1,001 |
) |
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$ |
(422 |
) |
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$ |
(2,514 |
) |
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$ |
(4,658 |
) |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.02 |
) |
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$ |
(0.01 |
) |
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$ |
(0.06 |
) |
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$ |
(0.12 |
) |
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Weighted average common shares outstanding: |
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Basic and diluted |
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42,070 |
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41,444 |
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41,945 |
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39,066 |
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(1) Stock-based compensation included in costs
and expenses: |
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Costs of services |
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$ |
22 |
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$ |
65 |
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$ |
71 |
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$ |
375 |
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Costs of product sales |
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7 |
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29 |
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48 |
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|
116 |
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Selling, general and administrative |
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|
852 |
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791 |
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2,557 |
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3,333 |
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Product development |
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12 |
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(10 |
) |
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42 |
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62 |
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$ |
893 |
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$ |
875 |
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$ |
2,718 |
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$ |
3,886 |
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See notes to condensed consolidated financial statements.
4
ORBCOMM Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Nine months ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(2,514 |
) |
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$ |
(4,658 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Change in allowance for doubtful accounts |
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(160 |
) |
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133 |
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Depreciation and amortization |
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2,203 |
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|
1,757 |
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Accretion on note payable related party |
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98 |
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98 |
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Stock-based compensation |
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2,718 |
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3,886 |
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Foreign
exchange losses |
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243 |
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Pre-control earnings of consolidated subsidiary and minority interest |
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358 |
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Non cash portion of gain on customer claims settlement |
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(882 |
) |
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Expiration of gateway purchase option |
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(325 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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2,451 |
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|
289 |
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Inventories |
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(632 |
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35 |
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Advances to contract manufacturers |
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366 |
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19 |
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Prepaid expenses and other current assets |
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(219 |
) |
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365 |
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Accounts payable and accrued liabilities |
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(78 |
) |
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|
515 |
|
Deferred revenue |
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|
924 |
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318 |
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Net cash provided by operating activities |
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4,551 |
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2,757 |
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Cash flows from investing activities: |
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Capital expenditures |
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(26,747 |
) |
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(15,417 |
) |
Purchases of marketable securities |
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(57,325 |
) |
Sales of marketable securities |
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87,025 |
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Change in restricted cash |
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(5,680 |
) |
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Cash
acquired in step acquisition of subsidiary |
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366 |
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Net cash provided by (used in) investing activities |
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(32,061 |
) |
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14,283 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock in connection with secondary
public offering, net of underwriters discounts and commissions and
offering costs of $2,523 |
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31,804 |
|
Proceeds from exercise of warrants and options |
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|
322 |
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|
397 |
|
Payment of offering costs in connection with initial public offering |
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(609 |
) |
Payment of offering costs in connection with secondary public offering |
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(40 |
) |
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Net cash provided by financing activities |
|
|
282 |
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|
31,592 |
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|
Effect of exchange rate changes on cash and cash equivalents |
|
|
112 |
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(76 |
) |
|
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Net increase (decrease) in cash and cash equivalents |
|
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(27,116 |
) |
|
|
48,556 |
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Cash and cash equivalents: |
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|
Beginning of period |
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115,587 |
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|
62,139 |
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End of period |
|
$ |
88,471 |
|
|
$ |
110,695 |
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Supplemental cash flow disclosures: |
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Non cash investing activities: |
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Capital expenditures incurred not yet paid |
|
$ |
12,562 |
|
|
$ |
2,692 |
|
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Stock-based compensation included in capital expenditures |
|
$ |
40 |
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|
$ |
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Net assets from step acquisition of subsidiary |
|
$ |
1,363 |
|
|
$ |
|
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|
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Asset basis adjustment due to expiration of gateway purchase option |
|
$ |
161 |
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$ |
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|
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Gateway
received in settlement of long-term receivable |
|
$ |
230 |
|
|
$ |
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|
|
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Non cash financing activities
|
|
|
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|
Secondary public offering expenses incurred not yet paid |
|
$ |
|
|
|
$ |
834 |
|
|
|
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|
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|
|
See notes to condensed consolidated financial statements.
5
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. In the third quarter of 2007, the Company began providing
terrestrial-based cellular communication services. The Company
provides these terrestrial services through reseller agreements with major
cellular wireless providers. The Company provides services through a
constellation of 27 owned
and operated low-Earth orbit satellites and accompanying ground infrastructure through which
small, low power, fixed or mobile satellite subscriber communicators, and terrestrial units
connected to the cellular wireless providers network, that can be connected to other public or
private networks, including the Internet (collectively, the ORBCOMM System). The ORBCOMM
System is designed to enable businesses and government agencies to track, monitor, control and
communicate with fixed and mobile assets.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (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 Companys Annual Report on Form 10-K for the
year ended December 31, 2007.
In the opinion of management, the financial statements as of September 30, 2008 and for the
three and nine-month periods ended September 30, 2008 and 2007 include all adjustments
(including normal recurring accruals) necessary for a fair presentation of the consolidated
financial position, results of operations and cash flows for the periods presented. The results
of operations for the three and nine months ended September 30, 2008 and 2007 are not
necessarily indicative of the results to be expected for the full year.
The financial statements include the accounts of the Company, its wholly-owned and
majority-owned subsidiaries, and investments in variable interest entities in which the Company
is determined to be the primary beneficiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. The portions of majority-owned subsidiaries
that the Company does not own are reflected as minority interests in the consolidated balance
sheet.
Investments in entities over which the Company has the ability to exercise significant
influence but does not have a controlling interest are accounted for under the equity method of
accounting. The Company considers several factors in determining whether it has the ability to
exercise significant influence with respect to investments, including, but not limited to,
direct and indirect ownership level in the voting securities, active participation on the board
of directors, approval of operating and budgeting decisions and other participatory and
protective rights. Under the equity method, the Companys proportionate share of the net income
or loss of such investee is reflected in the Companys consolidated results of operations. The
Companys interests in entities that it accounts for pursuant to the equity method had no
carrying value as of September 30, 2008 and December 31, 2007. The Companys equity in the
earnings or losses of those investees for the three months and nine months ended September 30,
2008 and 2007 is not significant. Non-controlling interests in companies are accounted for by
the cost method where the Company does not exercise significant influence over the investee.
The Companys cost basis investments had no carrying value as of September 30, 2008 and
December 31, 2007.
The
Company has incurred losses from inception including a net loss of $2,514 for the nine
months ended September 30, 2008 and as of September 30, 2008, the Company has an accumulated
deficit of $65,950. As of September 30, 2008, the Companys primary source of liquidity
consisted of cash and cash equivalents, which the Company believes will be sufficient to
provide working capital and milestone payments for its next-generation
satellites for at least the next twelve
months.
6
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 September 30, 2008 and 2007, one customer comprised 17.3% and
44.0% of revenues, respectively. During the nine months ended September 30, 2008 and 2007, the
same customer comprised 19.5% and 44.4% of revenues, respectively. As
of September 30, 2008, this customer accounted for less than 10%
of accounts receivable and as of December 31, 2007,
this customer accounted for 42.8% of accounts receivable. For the three months and nine months
ended September 30, 2008, a second customer comprised 15.3% and 12.7% of revenues,
respectively. As of September 30, 2008 this customer accounted for 17.5% of accounts
receivable.
Inventories
Inventories are stated at the lower of cost or market, determined on a first-in, first-out
basis. Inventory consists primarily of finished goods available for sale to customers. The Company
reviews inventory quantities on hand and evaluates the realizability of inventories and adjusts the carrying value as
necessary as well as classifying inventory giving consideration to
forecasted product demand.
As of
September 30, 2008, the Company has classified $1,568 as
long-term inventory, the amount forecasted to be in excess of one
years supply.
As of
September 30, 2008, the Company holds $332 of component parts
inventory at the manufacturing facility of its principal supplier.
These component parts inventory is included in long-term inventory.
Income taxes
As of September 30, 2008, the Company had unrecognized tax benefits of $775. There were no
changes to the Companys unrecognized tax benefits during the three and nine months ended
September 30, 2008. 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 recognized during
the three and nine months ended September 30, 2008.
A valuation allowance has been provided for all of the Companys deferred tax assets except for
an unrecognized tax benefit of $184 because it is more likely than not that the Company will
not recognize the tax benefits of these deferred tax assets.
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 and expand disclosures about fair value measurements. SFAS 157
requires quantitative disclosures using a tabular format in all periods (interim and annual)
and qualitative disclosures about the valuation techniques used to measure fair value in all
annual periods. On January 1, 2008, the Company adopted SFAS 157 except with respect to its
non-financial assets and liabilities for which the effective date is January 1, 2009. The
adoption of SFAS 157 for the Companys financial assets and liabilities did not have a material
impact on the Companys consolidated financial statements. The Company also does not expect the
adoption of FAS 157 for its
non-financial assets and liabilities to have a material impact on
the Companys 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. The Company adopted SFAS 159 on January 1,
2008, however the Company did not elect the fair value option for any of its eligible financial
instruments on the effective date.
7
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that a
noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated
net income specifically attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency in the manner of reporting
changes in the parents ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for the
Company on January 1, 2009. The Company is currently evaluating the impact SFAS 160 will have
on its consolidated financial statements.
In December 2007, the FASB issued No. 141 (revised 2007), Business Combinations (SFAS 141R).
SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions
and other events in which one entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations. SFAS 141R expands on required
disclosures to improve the statement users abilities to evaluate the nature and financial
effects of business combinations. SFAS 141R is effective for the Company on January 1, 2009.
The impact of adopting SFAS 141R will be dependent on the business combinations that the
Company may pursue after its effective date.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
expanded qualitative, quantitative and credit-risk disclosures of derivative instruments and
hedging activities. These disclosures include more detailed information about gains and losses,
location of derivative instruments in financial statements, and credit-risk-related contingent
features in derivative instruments. SFAS 161 also clarifies that derivative instruments are
subject to concentration of credit risk disclosures under SFAS 107, Disclosure About Fair Value
of Financial Instruments , SFAS 161, which applies only to disclosures, is effective for the
Company on January 1, 2009. The Company does not currently engage in any derivative
transactions, and the Company does not anticipate SFAS 161 will have a significant impact on
its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. This statement shall be
effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. The Company is evaluating the
potential impact that the adoption of SFAS No. 162 may have on its consolidated financial
statements.
3. ORBCOMM Japan
On March 25, 2008, the Company received a 37% equity interest in ORBCOMM Japan and cash of $602
in satisfaction of claims against ORBCOMM Japan. The distribution was pursuant to a voluntary
reorganization of ORBCOMM Japan in accordance with a rehabilitation plan approved by the Tokyo
district court on December 25, 2007.
The Company and ORBCOMM Japan are parties to a service license agreement, pursuant to which
ORBCOMM Japan acts as a country representative and resells the Companys services in Japan.
ORBCOMM Japan owns a gateway earth station in Japan, holds the regulatory authority and
authorization to operate the gateway earth station and provides the Companys satellite
communication services in Japan.
The consideration the Company received for settlement of claims against ORBCOMM Japan exceeded
the $366 carrying value of current and long-term receivables from ORBCOMM Japan by $876 and the
Company recognized a gain for the same amount in the first quarter of 2008. The estimated fair
value of the Companys equity interest in ORBCOMM Japan was $640 at March 31, 2008.
The Companys aggregate claims against ORBCOMM Japan totaled approximately $2,910, of which
$2,410 related to amounts owed to the Company pursuant to a change in control payment provision
in the service license agreement that was triggered by a change in control of ORBCOMM Japan
prior to the reorganization. The Company had not previously recognized any amounts in its
financial statements related to the change in control provision because it believed that the
collection of the change in control payment was not reasonably assured. ORBCOMM Japans results
of operations were not significant for the period from March 25, 2008 through March 31, 2008.
8
On May 12, 2008, the Company entered into an amended service license agreement with ORBCOMM
Japan, which expires in June 2018. On May 15, 2008, in consideration for entering into the
amended service license agreement, the Company received 616 newly issued shares of common stock
from ORBCOMM Japan representing an additional 14% equity interest and the Company recognized a
gain of $242 during the three months ended June 30, 2008. As a result, the Companys ownership
interest in ORBCOMM Japan increased to 51%. On June 9, 2008, the Company and the minority
stockholder entered into an agreement, which terminated the minority stockholders substantive
participatory rights in the governance of ORBCOMM Japan and resulted in the Company obtaining a
controlling interest in ORBCOMM Japan.
As the 51% interest in ORBCOMM Japan was acquired in two transactions during 2008, the Company
has accounted for this transaction using the step acquisition method prescribed by Accounting
Research Bulletin No. 51, Consolidated Financial Statements
(ARB 51). As permitted by ARB
51, the Company consolidated ORBCOMM Japans results of operations as though the controlling
interest was acquired on April 1, 2008. For the nine months ended September 30, 2008, the
Company deducted in its statement of operations $128 of pre-control earnings of ORBCOMM
Japan for the period prior to the termination of the minority stockholders substantive participatory rights on
June 9, 2008 and $189 and $230, for the three and nine month
periods ended September 30, 2008, have been recognized as minority interest for the 49% interest in ORBCOMM Japan
held by the minority stockholders for the period after the change in control.
ORBCOMM Japan has net operating loss carryforwards that expire through 2014. As a result of
ORBCOMM Japans voluntary reorganization, the Company has recorded a full valuation allowance
for the deferred tax assets relating to the net operating loss carryforwards because it is more
likely than not that ORBCOMM Japan will not recognize the benefits of these deferred tax assets
due to its limited operating history following reorganization. The Company will maintain the
valuation allowance until sufficient positive evidence exists to support reversal.
4. Comprehensive Loss
The components of comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(1,001 |
) |
|
$ |
(422 |
) |
|
$ |
(2,514 |
) |
|
$ |
(4,658 |
) |
Foreign currency
translation
adjustment |
|
|
280 |
|
|
|
(95 |
) |
|
|
129 |
|
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(721 |
) |
|
$ |
(517 |
) |
|
$ |
(2,385 |
) |
|
$ |
(4,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Stock-based Compensation
The Companys share-based compensation plans consist of its 2006 Long-Term Incentives Plan (the
2006 LTIP) and its 2004 Stock Option Plan. As of September 30, 2008, there were 2,189,874
shares available for grant under the 2006 LTIP and no shares available for grant under the 2004
Stock Option Plan.
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $893 and $875, respectively. For the nine months ended September 30,
2008 and 2007, the Company recorded stock-based compensation expense of $2,718 and $3,886,
respectively. For the three and nine months ended September 30, 2008, the Company capitalized
stock-based compensation of $19 and $40, respectively, to satellite network and other
equipment. For the three and nine months ended September 30, 2007, the Company did not
capitalize any stock-based compensation to satellite network and other equipment.
9
The components of the Companys stock-based compensation expense are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
24 |
|
|
$ |
93 |
|
|
$ |
72 |
|
|
$ |
207 |
|
Restricted stock units |
|
|
601 |
|
|
|
705 |
|
|
|
2,017 |
|
|
|
3,128 |
|
Stock appreciation
rights |
|
|
268 |
|
|
|
77 |
|
|
|
629 |
|
|
|
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
893 |
|
|
$ |
875 |
|
|
$ |
2,718 |
|
|
$ |
3,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, the Company had an aggregate of $3,525 of unrecognized compensation
costs for all share-based payment arrangements.
Time-Based Restricted Stock Units
During the nine months ended September 30, 2008, the Company granted 169,551 time-based RSUs.
These RSUs vest over various periods through July 2011.
A summary of the Companys time-based RSUs for the nine months ended September 30, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Balance at January 1, 2008 |
|
|
356,538 |
|
|
$ |
11.20 |
|
Granted |
|
|
169,551 |
|
|
|
5.81 |
|
Vested |
|
|
(185,008 |
) |
|
|
11.09 |
|
Forfeited or expired |
|
|
(219 |
) |
|
|
9.58 |
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
340,862 |
|
|
$ |
8.58 |
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $575 and $553 related to the time-based RSUs. For the nine months ended
September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $1,656
and $1,609 related to the time-based RSUs. As of September 30, 2008, $1,180 of total
unrecognized compensation cost related to the time-based RSUs granted is expected to be
recognized over periods through July 2011.
10
Performance-Based Restricted Stock Units
During the nine months ended September 30, 2008, 129,784 performance-based RSUs were granted
when the Compensation Committee established financial and operational performance targets for
fiscal 2008. These RSUs will vest through May 2009. As of
September 30, 2008, the
Company estimates that 72% of the
performance targets will be achieved.
A summary of the Companys performance-based RSUs for the nine months ended September 30, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Balance at January 1, 2008 |
|
|
179,404 |
|
|
$ |
12.58 |
|
Granted |
|
|
129,784 |
|
|
|
4.81 |
|
Vested |
|
|
(61,079 |
) |
|
|
12.85 |
|
Forfeited or expired |
|
|
(110,980 |
) |
|
|
12.46 |
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
137,129 |
|
|
$ |
5.20 |
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $27 and $152 related to the performance-based RSUs, respectively. For
the nine months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation of $362 and $1,519 related to the performance-based RSUs, respectively. As of
September 30, 2008, $204 of total unrecognized compensation cost related to the
performance-based RSUs is expected to be recognized through May 2009.
The fair value of the performance-and time-based RSU awards granted in 2008 is based upon the
closing stock price of the Companys common stock on the date of grant.
Time-Based Stock Appreciation Rights
During the nine months ended September 30, 2008, the Company granted 1,075,000 time-based SARs.
These SARS vest over various periods through December 2010.
A summary of the Companys time-based SARs for the nine months ended September 30, 2008 is as
follows:
The
weighted-average grant date fair value of the time-based SARs during
the nine months ended September 30, 2008 was $2.27 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(In thousands) |
|
Outstanding at
January 1, 2008 |
|
|
66,667 |
|
|
$ |
11.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,075,000 |
|
|
|
4.96 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008 |
|
|
1,141,667 |
|
|
$ |
5.31 |
|
|
|
9.41 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2008 |
|
|
44,444 |
|
|
$ |
11.00 |
|
|
|
8.00 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected
to vest at
September 30, 2008 |
|
|
1,141,667 |
|
|
$ |
5.31 |
|
|
|
9.41 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $246 and $30 relating to the time-based SARs, respectively. For the nine
months ended September 30, 2008 and 2007, the Company recorded stock-based compensation of
$522 and $91 relating to the time-based SARs, respectively. As of September 30, 2008, $2,038 of
total unrecognized compensation cost related to the time-based SARs is expected to be
recognized over periods through December 2010.
11
Performance-Based Stock Appreciation Rights
During the nine months ended
September 30, 2008, 130,555 performance-based SARs were granted
when the Compensation Committee established financial and operational performance targets for
fiscal 2008. These SARs will vest through March 2009. As of
September 30, 2008,
Company estimates that 74% of the performance targets will be achieved.
A summary of the Companys performance-based SARs for the nine months ended September 30, 2008
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, 2008 |
|
|
217,289 |
|
|
$ |
11.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
130,555 |
|
|
|
10.43 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(70,945 |
) |
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008 |
|
|
276,899 |
|
|
$ |
10.73 |
|
|
|
8.76 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2008 |
|
|
146,344 |
|
|
$ |
11.00 |
|
|
|
8.13 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected
to vest at
September 30, 2008 |
|
|
242,760 |
|
|
$ |
11.00 |
|
|
|
8.66 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of the performance-based SARs granted during the
nine months ended September 30, 2008 was $1.19 per share.
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $21 and $47 relating to the performance-based SARs, respectively. For
the nine months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $106 and $460 relating to the performance-based SARs, respectively. As
of September 30, 2008, $55 of total unrecognized compensation cost related to the
performance-based SARs is expected to be recognized through March 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.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Risk-free interest rate |
|
2.50% to 3.20% |
|
|
|
4.93% |
|
Expected life (years) |
|
|
5.50 and 6.00 |
|
|
|
5.50 |
|
Estimated volatility factor |
|
|
43.98% and 46.08% |
|
|
|
43.93% |
|
Expected dividends |
|
None |
|
|
None |
|
12
2004 Stock Option Plan
A summary of the status of the Companys stock options as of September 30, 2008 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, 2008 |
|
|
832,957 |
|
|
$ |
3.02 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(50,878 |
) |
|
|
3.73 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2008 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
5.40 |
|
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
2008 |
|
|
777,911 |
|
|
$ |
2.97 |
|
|
|
5.40 |
|
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
September 30, 2008 |
|
|
782,079 |
|
|
$ |
2.98 |
|
|
|
5.40 |
|
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2008, the Company issued 19,628 shares of common
stock upon the exercise of stock options at per share exercise prices of $2.33 to $4.26. The
Company received gross proceeds of $80 from the exercise of these stock options. In addition,
the Company issued 14,853 shares of common stock upon the cashless exercise of stock options to
purchase 31,250 common shares with per share exercise prices of $2.78 to $4.26.
As of September 30, 2008, $48 of total unrecognized compensation cost related to stock options
issued to employees is expected to be recognized ratably through March 31, 2009.
6. Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss 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 and stock warrants would have an antidilutive effect as the Company incurred a
net loss for the three and nine months ended September 30, 2008 and 2007.
The potentially dilutive securities excluded from the determination of diluted loss per share,
as their effect is antidilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Common stock warrants |
|
|
285,410 |
|
|
|
712,500 |
|
Stock options |
|
|
782,079 |
|
|
|
850,790 |
|
RSUs |
|
|
477,991 |
|
|
|
550,858 |
|
SARs |
|
|
1,418,566 |
|
|
|
283,956 |
|
|
|
|
|
|
|
|
|
|
|
2,964,046 |
|
|
|
2,398,104 |
|
|
|
|
|
|
|
|
7. Satellite Network and Other Equipment
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life |
|
|
September 30, |
|
|
December 31, |
|
|
|
(years) |
|
|
2008 |
|
|
2007 |
|
Land |
|
|
|
|
|
$ |
381 |
|
|
$ |
381 |
|
Satellite network |
|
|
5-10 |
|
|
|
19,080 |
|
|
|
9,463 |
|
Capitalized software |
|
|
3-5 |
|
|
|
1,148 |
|
|
|
887 |
|
Computer hardware |
|
|
5 |
|
|
|
1,019 |
|
|
|
920 |
|
Other |
|
|
5-7 |
|
|
|
804 |
|
|
|
565 |
|
Assets under construction |
|
|
|
|
|
|
73,219 |
|
|
|
45,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,651 |
|
|
|
57,922 |
|
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(9,306 |
) |
|
|
(8,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,345 |
|
|
$ |
49,704 |
|
|
|
|
|
|
|
|
|
|
|
13
During the nine months ended September 30, 2008 and 2007, the Company capitalized costs
attributable to the design and development of internal-use software
in the amount of $289 and
$466, respectively. Depreciation and amortization expense for the three months ended September
30, 2008 and 2007 was $521 and $247, respectively. This includes
amortization of internal-use
software of $77 and $61 for the three months ended September 30, 2008 and 2007, respectively.
Depreciation and amortization expense for the nine months ended September 30, 2008 and 2007 was
$1,088 and $642, respectively. This includes amortization of
internal-use software of $216 and
$159 for the nine months ended September 30, 2008 and 2007, respectively.
Assets under construction primarily consist of costs relating to milestone payments and other costs pursuant to the
Companys satellite payload and launch procurement agreements with Orbital Sciences and
OHB-System AG for its
quick-launch satellites and the procurement agreement with Sierra
Nevada Corporation (SNC) for its next-generation
satellites (See Note 15) and upgrades to its infrastructure
and ground segment.
On June 19, 2008, the Coast Guard demonstration satellite and five quick-launch satellites were successfully launched.
Each of the satellites successfully separated from the launch vehicle in the proper orbit and is undergoing in-orbit
testing and positioning. The majority of in-orbit testing of the payload subsystems has been completed to verify proper
operation of the subscriber links, gateway links and AIS payload functionality. All satellites are providing AIS data
and three satellites are assisting with the regular messaging service as in-orbit testing is completed. As a result of
on-going in-orbit testing of these satellites, the Companys satellite providers are investigating the lower than
nominal gateway transmission power on one satellite and outages to the reaction wheel components of the attitude
control system on each of the satellites. One of the new satellites has experienced an unrecovered outage to both a
redundant and a non-redundant reaction wheel which could reduce its communication capabilities. In addition, two of
the new satellites have experienced outages to redundant reaction wheels that remain unrecovered. Software has been
developed by the bus manufacturer and uploaded to five of the satellites to mitigate the effect of any future reaction
wheel outages. One satellite that received this software patch has experienced an additional outage to its remaining
redundant reaction wheel that remains unrecovered. While the satellite bus provider has informed the Company that they
expect to be able to resolve or develop operational procedures to satisfactorily mitigate the affect of these
anomalies, there can be no assurance in this regard. The Company is unable to quantify the impact, if any, that these
anomalies will have on the expected useful life and communication capabilities of the satellites until the in-orbit
testing is completed and more information about the root cause of the anomalies becomes available.
During the three months ended September 30, 2008, the United States
Coast Guard (USCG) began delivering Automatic Identification Systems (AIS) data from the Coast Guard Concept
demonstration satellite which was accepted by the USCG. Accordingly, the Company reclassified $8,590 from assets under construction to satellite network as the Company
began recognizing revenue from the contract and depreciation on the
satellite (See Note 11).
During the three months ended September 30, 2008, one of the Companys plane D satellites, which had limited availability and a battery anomaly
preventing nighttime operation, is no longer providing regular operational service although it may continue to provide operational service on a limited basis. The
remaining five plane D satellites have been repositioned to minimize coverage gaps that impact
system latency and overall capacity. In addition, one of
the Company’s plane B satellites is no longer providing operational
service. The remaining seven plane B satellites have been repositioned to
minimize coverage gaps that impact system latency and overall capacity. The Company does not expect the absence of these satellites
to materially affect its business. These satellites are fully depreciated.
8. Restricted Cash
Restricted cash consists of cash collateral of $5,000 for a performance bond required by the
FCC in connection with the Company obtaining expanded FCC authorization to construct, launch
and operate an additional 24 next-generation satellites. Under the terms of the performance
bond, the cash collateral will be reduced in increments of $1,000 upon completion of specified
milestones.
Restricted cash also includes $680 deposited into an escrow account under the terms of the
Orbital Sciences procurement agreement for the quick-launch satellites. The amounts in escrow
will be paid to Orbital Sciences one year following the successful completion of in-orbit
testing of the five quick-launch satellites (See Note 15).
The interest income earned on the restricted cash balances is unrestricted and included in
interest income in the consolidated statements of operations.
14
9. Intangible Assets
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Useful life |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
(years) |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
Acquired licenses |
|
|
6 |
|
|
$ |
8,115 |
|
|
$ |
(3,658 |
) |
|
$ |
4,457 |
|
|
$ |
8,115 |
|
|
$ |
(2,543 |
) |
|
$ |
5,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $372 and $371 for the three months ended September 30, 2008 and 2007,
respectively, and was $1,115 and $1,114 for the nine months ended September 30, 2008 and 2007,
respectively.
Estimated amortization expense for intangible assets subsequent to September 30, 2008 is as
follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
Remainder of 2008 |
|
$ |
371 |
|
2009 |
|
|
1,486 |
|
2010 |
|
|
1,486 |
|
2011 |
|
|
1,114 |
|
|
|
|
|
|
|
$ |
4,457 |
|
|
|
|
|
10. Accrued Liabilities
The Companys accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Advances from USCG (See Notes 11 and 15) |
|
$ |
|
|
|
$ |
7,228 |
|
Gateway settlement obligation (See Note 15) |
|
|
|
|
|
|
644 |
|
Accrued compensation and benefits |
|
|
2,197 |
|
|
|
1,821 |
|
Accrued interest |
|
|
725 |
|
|
|
712 |
|
Accrued professional services |
|
|
625 |
|
|
|
425 |
|
Accrued satellite network and other equipment (including milestone payments
for satellites) |
|
|
11,903 |
|
|
|
|
|
Other accrued expenses |
|
|
1,393 |
|
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
$ |
16,843 |
|
|
$ |
12,305 |
|
|
|
|
|
|
|
|
15
11. Deferred Revenues
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Professional services |
|
$ |
7,146 |
|
|
$ |
|
|
Service activation fees |
|
|
2,853 |
|
|
|
1,796 |
|
Manufacturing license fees |
|
|
63 |
|
|
|
75 |
|
Prepaid services |
|
|
1,048 |
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
11,110 |
|
|
|
2,942 |
|
Less current portion |
|
|
(3,320 |
) |
|
|
(1,435 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
7,790 |
|
|
$ |
1,507 |
|
|
|
|
|
|
|
|
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 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 was granted a non-exclusive, royalty-free license to use the
designs, software 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. 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, upon acceptance by the USCG,
over 6 years, the expected life of the customer relationship.
The
Concept Validation Project demonstration satellite was launched on
June 19, 2008. During the three months ended September 30,
2008, the USCG accepted AIS data from the Concept Validation Project
demonstration
satellite and
elected to receive the initial post-launch maintenance for $380 and the AIS data
transmission services for $198 over the initial term of 14 months. On
September 30, 2008, the USCG
exercised its option to increase the AIS data transmission services to $575.
During the three
months ended September 30, 2008, the Company recognized service revenues
of $199 related to the Concept Validation Project. This amount was less than
the contractual value of the services delivered to the USCG in the period as
these revenues are required to be recognized over
the expected life of the customer relationship. The contractual value in excess of the revenue
recognized during the period increases deferred revenue.
Deferred professional services revenues at September 30, 2008, represent amounts related to
the USCG under the contract. At December 31, 2007 amounts received from the USCG were reflected
as an accrued liability in the consolidated balance sheet (See Notes
10 and 15).
On
September 30, 2008, the Company and the USCG entered into an
amendment to the agreement under which the Company will provide up to
200 hours of additional technical support for
$104.
12. Note Payable
In connection with the acquisition of a majority interest in Satcom in 2005, the Company
recorded an indebtedness to OHB Technology A.G. (formerly known as OHB Teledata A.G.) (OHB),
a stockholder of the Company. At September 30, 2008, the principal balance of the note payable
was 1,138 ($1,645) and it had a carrying value of $1,251. At December 31, 2007, the principal
balance of the note payable was 1,138 ($1,661) and it had a carrying value of $1,170. The
carrying value was based on the notes estimated fair value at the time of acquisition. The
difference between the carrying value and principal balance is being amortized to interest
expense over the estimated life of the note of six years. Interest expense related to the note
for each of the three months and nine months ended September 30, 2008 was $32 and $98,
respectively. Interest expense related to the note for each of the three months and nine months
ended September 30, 2007 was $33 and $99, respectively This note does not bear interest and has
no fixed repayment term. Repayment will be made from the distribution profits (as defined in
the note agreement) of ORBCOMM Europe LLC. The note has been classified as long-term and the
Company does not expect any repayments to be required prior to September 30, 2009.
16
13. Stockholders Equity
Warrants to purchase the Companys common stock outstanding at September 30, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
Shares subject |
|
|
|
|
to |
|
Exercise price |
|
Warrants |
|
|
$ 2.33 |
|
|
12,522 |
|
|
$ 3.38 |
|
|
14,902 |
|
|
$ 4.26 |
|
|
257,986 |
|
|
|
|
|
|
|
|
|
|
285,410 |
|
|
|
|
|
|
During the nine months ended September 30, 2008, the Company issued 99,434 shares of common
stock upon the exercise of warrants at per share exercise prices ranging from $2.33 to $4.26.
The Company received gross proceeds of $241 from the exercise of these warrants. In addition,
the Company issued 45,848 shares of common stock upon the cashless exercise of warrants to
purchase 82,282 common shares with per share exercise prices ranging from $2.33 to $4.26.
During the nine months ended September 30, 2008, warrants to purchase 6,777 common shares with
per share exercise prices of $2.33 and $3.38 expired.
At September 30, 2008, the Company has reserved the following shares of common stock for future
issuance:
|
|
|
|
|
|
|
Shares |
|
Employee stock compensation plans |
|
|
4,868,510 |
|
Warrants to purchase common stock |
|
|
285,410 |
|
|
|
|
|
|
|
|
5,153,920 |
|
|
|
|
|
14. Geographic Information
The Company operates in one reportable segment, machine to machine 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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Unites States |
|
|
74 |
% |
|
|
91 |
% |
|
|
79 |
% |
|
|
91 |
% |
Japan |
|
|
21 |
% |
|
|
|
|
|
|
16 |
% |
|
|
|
|
Other |
|
|
5 |
% |
|
|
9 |
% |
|
|
5 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
No other single geographic areas are more than 10% of revenues for the three months and nine
months ended September 30, 2008 and 2007.
17
15. Commitments and Contingencies
Procurement agreements in connection with quick-launch satellites
On
April 21, 2006, the Company entered into an agreement with
Orbital Sciences to design, manufacture, test and deliver 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.
Payments under the agreement were
due upon the achievement of specified milestones by Orbital Sciences. As of September 30, 2008,
the Company has made milestone payments of $16,150 under this agreement. The Company
anticipates making the remaining payments subject to adjustments under the agreement of $150 in
2008 and $700 in 2009.
On June 5, 2006, the Company entered into an agreement with OHB System, AG, an affiliate of
OHB, to design, develop and manufacture six satellite buses, integrate such buses with the
payloads provided by Orbital Sciences, and launch the six
integrated satellites. The original
price for the six satellite buses and launch services was $20,000 and payments under the
agreement were due upon specific milestones achieved by OHB System, AG.
The
Company launched five of the six satellites on June 19, 2008. Due to delays associated
with the construction of the final quick-launch satellite, the Company is retaining it for
future deployment.
On July 2, 2008, the Company and OHB System, AG entered into an agreement to amend the June 5,
2006 agreement in connection with the successful launch of the Coast Guard demonstration
satellite and the five quick-launch satellites on June 19, 2008. Pursuant to the agreement, the
Company and OHB System, AG agreed to a revised schedule of milestone and related payments for
the launch of the five quick-launch satellites and delivery schedule of the sixth quick-launch
satellite, with no modification to the price in the agreement entered into on June 5, 2006,
including certain launch support and in-orbit testing services for the sixth quick-launch
satellite. In addition, the Company agreed to pay an additional $450 to OHB System, AG relating
to the construction of the five quick-launch satellites. The Company and OHB System, AG have
also agreed to waive any applicable on-time delivery incentive payments and to waive any
applicable liquidating damages, except for any liquidating delay damages with respect to
delivery delay of the sixth quick-launch satellite.
As of September 30, 2008, the
Company has made milestone payments of $17,767 under this agreement. In addition, OHB System, AG
will provide services relating to the development, demonstration and launch of the Companys
next-generation satellites at a total cost of $1,350 of which $820 was paid in the third quarter
of 2008. The Company anticipates making the remaining payments under the agreement of $1,000 in the
fourth quarter of 2008, for the six satellite buses and the related integration and launch services.
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 11). In connection with this agreement, the Company entered into
procurement agreements with Orbital Sciences and OHB System, AG. As of September 30, 2008, there were no remaining obligations under these
procurement agreements.
As a result of delays in launching the satellite, in February 2007, the USCG issued a
unilateral modification to the contract setting a definitive launch date of July 2, 2007. On
September 13, 2007, the Company and USCG entered into an amendment to the agreement to extend
the definitive launch date to December 31, 2007. In consideration for agreeing to extend the
launch date, the Company will provide up to 200 hours of additional support for up to 14 months
after the launch date at no cost and reduce USCGs cost for the post-launch maintenance options
and for certain usage options.
The USCG project was planned to be launched with the Companys quick-launch satellites, however
the launch did not occur by December 31, 2007. On January 14, 2008, the Company received a cure
notice from the USCG notifying the Company that unless the satellite is launched within 90 days
after receipt of the cure notice, the USCG would have been able to terminate the contract for
default and pursue the remedies available to it, one of which is procuring supplies and
services similar to those
terminated and holding the Company liable for any excess costs of procurement.
18
On April 14, 2008, the Company and the USCG entered into an amendment to the agreement
extending the definitive launch date to August 15, 2008. In consideration for agreeing to the
extend the launch date, the Company will provide the USCG with all AIS data from each of the
quick-launch satellites being launched with the Coast Guard demonstration satellite, to the
extent the satellites are providing service, for 90 continuous days (upon request by the USCG
during the first 180 days of the base operating period) at no additional cost. In addition, the
USCG will have certain intellectual property rights over the AIS data received by the AIS
receivers aboard the quick-launch satellites and the Coast Guard demonstration satellite solely
during the 90-day evaluation period to share only with other U.S. government agencies, provided
that during the 90-day evaluation period the Company is permitted to use the AIS data from the
quick-launch satellites in connection with the Companys other programs.
The five quick-launch satellites and the Coast Guard demonstration satellite are currently undergoing in-orbit testing which is expected to be completed within
a few months at which time the quick-launch satellites will be placed in service.
Procurement agreement in connection with next-generation satellites
On May 5, 2008, the Company entered into a procurement agreement with SNC pursuant to which SNC will construct eighteen low-earth-orbit satellites in three sets
of six satellites (shipsets) for the Companys
next-generation satellites (the Initial
Satellites). Under the agreement, SNC will also provide launch support services, a test
satellite (excluding the mechanical structure), a satellite software simulator and the
associated ground support equipment. Under the agreement, the Company may elect to use the
launch option to be offered by SNC or it may contract separately with other providers for
launch services and launch insurance for the satellites.
Under the agreement, the Company has the option, exercisable at any time until the third
anniversary of the execution of the agreement, to order up to thirty additional satellites
substantially identical to the Initial Satellites (the Optional Satellites).
The total contract price for the Initial Satellites is $117,000, subject to reduction upon
failure to achieve certain in-orbit operational milestones with respect to the Initial
Satellites or if the pre-ship reviews of each shipset are delayed more than 60 days after the
specified time periods described below. The Company has agreed to pay SNC up to $1,500 in
incentive payments for the successful operation of the Initial Satellites five years following
the successful completion of in-orbit testing for the third shipset of six satellites. The
price for the Optional Satellites ranges from $5,000 to $7,700 per satellite depending on the
number of satellites ordered and the timing of the exercise of the option.
The agreement also requires SNC to complete the pre-ship review of the Initial Satellites (i)
no later than 24 months after the execution of the agreement for the first shipset of six
satellites, (ii) no later than 31 months after the execution of the agreement for the second
shipset of six satellites and (iii) no later than 36 months after the execution of the
agreement for the third shipset of six satellites. Payments under the agreement will begin upon
the execution of the agreement and will extend into the second quarter of 2012, subject to
SNCs successful completion of each payment milestone. As of September 30, 2008, the Company
has made milestone payments of $12,870 under the agreement. The Company anticipates making
payments under the agreement of $17,550 during the remainder of 2008. Under the agreement, SNC has agreed to provide the Company with an optional secured credit
facility for up to $20,000 commencing 24 months after the execution of the agreement and
maturing 44 months after the effective date. If the Company elects to establish and use the
credit facility it and SNC will enter into a formal credit facility on terms established in the
agreement.
19
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. The Company had options, which expired in December 2007,
to purchase any or all of the remaining 4.5 GESs for aggregate consideration of $2,700.
However, the Company would have been required to 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. During 2007, the Company and ViaSAT entered into
discussions to extend the option, however such discussions were terminated during the second
quarter of 2008 with the parties having no further obligations under the settlement agreement.
As a result, the Companys accrued liability of $644 related to the settlement agreement was
reversed in June 2008 and the Company reduced costs of product sales by $161, cost of services
by $164 and satellite network and other assets by $319.
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 September 30, 2008 and
2007, airtime credits used totaled approximately $38 and $45, respectively and for the nine
months ended September 30, 2008 and 2007, airtime credits used totaled approximately $151 and
$133, respectively. As of September 30, 2008 and December 31, 2007, unused credits granted by
the Company were approximately $2,339 and $2,490, respectively.
Purchase
commitment
On August 29, 2008, the Company entered into an agreement with Delphi Automotive Systems LLC to purchase approximately
$4,800 of a future model of a subscriber communicator over a two-year period beginning once the subscriber communicator
model is commercially available.
Litigation
From time to time, the Company is involved in various litigation matters involving ordinary and
routine claims incidental to its business. Management currently believes that the outcome of
these proceedings, either individually or in the aggregate, will not have a material adverse
effect on the Companys business, results of operations or financial condition. The Company is
also involved in certain litigation matters as discussed below.
Class Action Litigation
On September 20 and 25, 2007, two separate plaintiffs filed purported class action lawsuits in
the United States District Court for the District of New Jersey against the Company and certain
of its officers. On June 2, 2008, the Court consolidated the actions, appointed Erwin Weichel,
David Peterson and William Hunt as lead plaintiffs and approved the lead plaintiffs selection
of co-lead and liaison counsel. On July 17, 2008, the lead plaintiffs filed their consolidated
complaint against the Company and certain of its officers, and added as defendants the two
co-lead underwriters of the Companys initial public offering, UBS Securities LLC and Morgan
Stanley & Co. Incorporated. The consolidated complaint alleges, among other things, that the
Companys registration statement related to its initial public offering in November 2006
contained material misstatements and omissions in violation of the Securities Act of 1933. The
action cited, among other things, a drop in the trading price of the Companys common stock
that followed disclosure on August 14, 2007 of a change in the Companys definition of billable
subscriber communicators and reduced guidance for the remainder of 2007 released with the
Companys 2007 second quarter financial results. The action seeks to recover compensatory and
rescissory damages, on behalf of a class of shareholders who purchased common
stock in and/or traceable to the Companys initial public offering on or about November 3, 2006
through August 14, 2007. The Company intends to defend the matter vigorously.
No provision for
losses, if any, that might result from the matter have been recorded in the Companys
consolidated financial statements as this action is in its preliminary stages and the Company
is unable to predict the outcome and, therefore, it is not probable that a liability has been
incurred and the amount of loss, if any, is not reasonably estimable.
In addition, the Company has received a request for indemnification pursuant
to the Underwriting Agreement entered into in connection with the initial public offering from UBS
Securities, LLC and Morgan Stanley & Co. Incorporated for any losses or costs they may incur as a
result of this lawsuit.
The Company cannot determine the extent of any costs associated with
the idemnification, if any, and no liability has been established.
However, it is at least reasonably possible that a liability may be
established for estimated legal costs in the near term.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Safe Harbor Statement Under the Private Securities Litigation Reform of Act 1995.
Certain statements discussed in Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form
10-Q constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans,
objectives and expectations for future events and 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 Companys
expectations, are subject to known and unknown risks and uncertainties, which could cause
actual results to differ materially from the results, projected, expected or implied by the
forward-looking statements, some of which are beyond the Companys control, that may cause the
Companys actual results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking statements. These risks and uncertainties include but are not limited to:
substantial losses we have incurred and expect to continue to incur; demand for and market
acceptance of our products and services and the applications developed by our resellers; loss
or decline or slowdown in the growth in business from Asset Intelligence division of General
Electric Company (GE), other value-added resellers or VARs and international value-added
resellers or IVARs; loss or decline or slowdown in growth in business of any of the specific
industry sectors the Company serves, such as transportation; litigation proceedings;
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; the impact of global recession and continued
worldwide credit and capital constraints; 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, 2007. 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 27 low-Earth orbit, or
LEO, satellites and accompanying ground infrastructure. We now operate 27 satellites as one of
our plane D satellites, which had limited availability and a battery anomaly preventing
nighttime operation, is no longer providing regular operational service although it may continue to
provide service on a limited basis. The remaining five plane D satellites have been
repositioned to minimize coverage gaps that impact system latency and overall capacity. In addition, one of
our plane B satellites is no longer providing operational service. The
remaining seven plane B satellites have been repositioned to minimize coverage
gaps that impact system latency and overall capacity. We do not expect the
absence of these satellites to materially affect our business.
On June 19, 2008, the Coast Guard demonstration satellite and five quick-launch satellites were successfully launched.
Each of the satellites successfully separated from the launch vehicle in the proper orbit and is undergoing in-orbit
testing and positioning. The majority of in-orbit testing of the payload subsystems has been completed to verify proper
operation of the subscriber links, gateway links and AIS payload functionality. All satellites are providing AIS data
and three satellites are assisting with the regular messaging service as in-orbit testing is completed. As a result of
on-going in-orbit testing of these satellites, our satellite providers are investigating the lower than nominal gateway
transmission power on one satellite and outages to the reaction wheel components of the attitude control system on each
of the satellites. One of the new satellites has experienced an unrecovered outage to both a redundant and a
non-redundant reaction wheel which could reduce its communication capabilities. In addition, two of the new satellites
have experienced outages to redundant reaction wheels that remain unrecovered. Software has been developed by the bus
manufacturer and uploaded to five of the satellites to mitigate the effect of any future reaction wheel outages. One
satellite that received this software patch has experienced an additional outage to its remaining redundant reaction
wheel that remains unrecovered. While the satellite bus provider has informed us that they expect to be able to resolve
or develop operational procedures to satisfactorily mitigate the affect of these anomalies, there can be no assurance
in this regard. We are unable to quantify the impact, if any, that these anomalies will have on the expected useful
life and communication capabilities of the satellites until the in-orbit testing is completed and more information
about the root cause of the anomalies becomes available.
These satellites
will be positioned to augment our existing constellation, which, upon
successful completion of in-orbit testing, would increase our
satellites in service to 33 and provide additional capacity and improved
message delivery speeds for current and future users. In addition, these
satellites are equipped with AIS payloads enabling them to receive and
report AIS transmissions to be used for ship tracking and other navigational
activities.
In
July 2008, we began transmitting AIS test data to the U.S. Coast
Guard (the USCG). In August 2008, the USCG accepted the
AIS data and elected to receive the initial post-launch maintenance
and AIS data transmission services. At that time, we placed the Coast
Guard demonstration satellite in service and began to recognize
revenues ratably over the six year expected life of the customer
relationship. On September 30, 2008, the USCG increased the
initial amount of the usage for the AIS data transmission services for
an additional $0.4 million. Such additional consideration will be
recognized over the remaining expected life of the customer
relationship.
Our two-way communications system enables our customers and end-users, which include large and
established multinational businesses and government agencies, to track, monitor, control and
communicate cost-effectively with fixed and mobile assets located
anywhere in the world. We also provide terrestrial-based cellular communication services through re-seller
agreements with major cellular wireless providers. These terrestrial-based communication services enable our
customers who have higher bandwidth requirements to receive and send messages from
communication devices based on terrestrial-based technologies using the cellular providers
wireless network as well as from dual-mode devices combining our satellite subscriber
communicators with devices for terrestrial-based technologies. As a result, our customers are
now able to integrate into their applications a terrestrial communications device that will
allow them to add messages, including data intensive messaging from the cellular providers
wireless network.
21
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. (Hitachi) and the Volvo Group, IVARs, such as the GE, VARs, such as Fleet
Management Services, XATA Corporation and American Innovations, Ltd., and government agencies,
such as the U.S. Coast Guard.
Presently our unique M2M data
communications system is comprised of three elements: (i) a
constellation of 27 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 15 gateway earth stations, four regional gateway control
centers and a network control center in Dulles, Virginia, through which data sent to and from
satellite subscriber communicators are routed and includes a communications node for
terrestrial services through which data sent to and from terrestrial units are routed and (iii)
satellite subscriber communicators and cellular terrestrial units, or wireless subscriber
identity modules (SIMS), attached to a variety of fixed and mobile assets worldwide.
Our principal products and services are satellite-based data communications services and
product sales from subscriber communicators. We have also commenced
terrestrial-based cellular communication services, which consist of reselling airtime using
cellular providers wireless technology networks and product sales from cellular wireless SIMS
for use with devices or equipment that enable the use of the cellular providers wireless
networks for data communications. 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. In addition, the terrestrial cellular communication
services we offer support
higher bandwidth applications that are not typical for an ORBCOMM application. These data
messages are sent by terrestrial-based subscriber communicators using wireless SIMS which are
routed through the cellular providers wireless network to our ground facilities and forwarded
to the ultimate destination in real time.
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 assets 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 resellers (i.e, VARs and country representatives). These
resellers, which are our direct customers, market to end-users.
ORBCOMM Japan
On
March 25, 2008, we received a 37% equity interest in ORBCOMM Japan,
which was accounted for as an investment in affiliates at March 31,
2008. ORBCOMM Japans results of operations were not
significant for the period from March 25, 2008 through March 31, 2008. On May 15, 2008, we
received an additional 14% equity interest in Japan and, as a result, our ownership interest
increased to 51%. On June 9, 2008, we entered into an agreement with the minority stockholder,
which terminated its substantive participatory rights in the governance of ORBCOMM Japan and as
a result, we obtained the controlling interest in ORBCOMM Japan.
We consolidated the results of ORBCOMM Japan as though the controlling interest was acquired on
April 1, 2008 and therefore deducted $0.1 million of ORBCOMM Japans earnings for the period
prior to June 9, 2008 (the date we acquired our controlling interest) in our consolidated
statement of operations. See Note 3 to the condensed consolidated financial statements for
further discussion.
22
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, satellite network and other equipment, capitalized development costs,
intangible assets, inventory valuation, the valuation of deferred tax assets, uncertain tax
positions and the fair value of securities underlying share-based payment arrangements. We base
our estimates on historical and anticipated results and trends and on various other assumptions
that we believe are reasonable under the circumstances, including assumptions as to future
events. These estimates form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. By their nature, estimates
are subject to an inherent degree of uncertainty. Actual results may differ from our estimates
and could have a significant adverse effect on our results of operations and financial
position. For a discussion of our
critical accounting policies see Part II, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year
ended December 31, 2007. There have been no material changes to our critical accounting
policies during the three and nine months ended September 30, 2008.
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.
The following table (in thousands) reconciles our net loss to EBITDA for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(1,001 |
) |
|
$ |
(422 |
) |
|
$ |
(2,514 |
) |
|
$ |
(4,658 |
) |
Interest income |
|
|
(375 |
) |
|
|
(1,600 |
) |
|
|
(1,497 |
) |
|
|
(4,218 |
) |
Interest expense |
|
|
48 |
|
|
|
52 |
|
|
|
146 |
|
|
|
157 |
|
Depreciation and
amortization |
|
|
892 |
|
|
|
619 |
|
|
|
2,203 |
|
|
|
1,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(436 |
) |
|
$ |
(1,351 |
) |
|
$ |
(1,662 |
) |
|
$ |
(6,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months: EBITDA during the three months ended September 30, 2008 improved by $0.9 million
over 2007 including $0.4 million from ORBCOMM Japan. This improvement was due to increases in
net service revenues of $1.8 million and gross profit from product sales of $0.2 million,
offset by increases in operating expenses of $0.8 million and foreign currency transactions of
$0.2 million. Operating expenses increased during the three months ended September 30, 2008 primarily due to
an increase in payroll costs of $0.3 million and $0.3 million in operating expenses of ORBCOMM
Japan.
Nine Months: EBITDA during the nine months ended September 30, 2008 improved by $5.3 million
over 2007 including $0.7 million from ORBCOMM Japan. This improvement was due to an increase in
net service revenues of $4.2 million and gross profit from product sales of $0.4 million and a
decrease in operating expenses of $0.9 million. Operating expenses decreased during the nine months ended September 30, 2008, due to a decrease
in
stock-based compensation of $1.2 million, a gain of $1.4 million primarily from the settlement
of claims against ORBCOMM Japan and a $0.3 million reduction in operating expenses associated
with an asset purchase option. The decreases in operating expenses were
primarily offset by an increase in payroll costs of $0.7 million and $0.7 million in operating
expenses of ORBCOMM Japan.
23
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, and the reselling of
airtime from the utilization of terrestrial-based subscriber communicators SIMS on the cellular
providers wireless networks, and services to the USCG, which
includes concept validation, AIS data transmissions and post-launch
maintenance.
These service revenues generally consist of a one-time activation for each subscriber
communicator and SIMS activated for use on our communications systems and 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. During the third
quarter of 2007, we began selling SIMS (for our terrestrial-communications services) to our
resellers and direct customers.
The table below presents our revenues for the three and nine months ended September 30, 2008
and 2007, together with the percentage of total revenue represented by each revenue category
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine
months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Service revenues |
|
$ |
6,336 |
|
|
|
79.5 |
% |
|
$ |
4,551 |
|
|
|
65.8 |
% |
|
$ |
16,948 |
|
|
|
78.6 |
% |
|
$ |
12,718 |
|
|
|
65.2 |
% |
Product sales |
|
|
1,633 |
|
|
|
20.5 |
% |
|
|
2,361 |
|
|
|
34.2 |
% |
|
|
4,624 |
|
|
|
21.4 |
% |
|
|
6,782 |
|
|
|
34.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,969 |
|
|
|
100.0 |
% |
|
$ |
6,912 |
|
|
|
100.0 |
% |
|
$ |
21,572 |
|
|
|
100.0 |
% |
|
$ |
19,500 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months: Total revenues for the three months ended September 30, 2008 increased by $1.1
million, or 15.3%, to $8.0 million from $6.9 million for the three months ended September 30,
2007. Total revenues for the three months ended September 30, 2008 included $1.5 million from
ORBCOMM Japan.
Nine Months: Total revenues for the nine months ended September 30, 2008 increased by $2.1
million, or 10.6%, to $21.6 million from $19.5 million for the nine months ended September 30,
2007. Total revenues for the nine months ended September 30, 2008 included $2.9 million from
ORBCOMM Japan.
Service revenues
Three Months: Service revenues increased $1.8 million for the three months ended September 30,
2008, or 39.2%, to $6.3 million, or approximately 79.5% of total revenues, from $4.6 million,
or approximately 65.8% of total revenues for the three months ended September 30, 2007.
Nine Months: Service revenues increased $4.2 million for the nine months ended September 30,
2008, or 33.3%, to $16.9 million, or approximately 78.6% of total revenues, from $12.7 million,
or approximately 65.2% of total revenues for the nine months ended September 30, 2007.
The increase in service revenues for the three and nine months ended September 30, 2008 over
the corresponding 2007 periods were primarily due to an increase in the number
of billable subscriber communicators activated on our communications system, incremental
service revenue margin provided by ORBCOMM Japan for the three and nine months ended September
30, 2008 of $0.3 million and $0.6 million, respectively and
$0.2 million of revenues
from the Coast Guard agreement. As of September 30, 2008, there were
approximately 442,000 billable subscriber communicators on the ORBCOMM System compared to
approximately 318,000 billable subscriber communicators as of September 30, 2007, an increase
of approximately 39.0%. Service revenue growth can be impacted by the customary lag between
subscriber communicator activations and recognition of service revenue from these units. In
addition, this customary lag has been increased by the slowdown in deployments of activated
units to end users by GE.
Product sales
Three Months: Revenue from product sales decreased $0.7 million for the three months ended
September 30, 2008 or 30.8%, to $1.6 million, including
$1.2 million from ORBCOMM Japan, or approximately 20.5% of total revenues, from
$2.4 million, or approximately 34.2% of total revenues for the three months ended September 30, 2007.
Nine Months: Revenue from product sales decreased $2.2 million for the nine months ended
September 30, 2008 or 31.8%, to $4.6 million, including
$2.3 million from ORBCOMM Japan, or approximately 21.4% of total revenues, from
$6.8 million, or approximately 34.8% of total revenues for the nine months ended September 30,
2007.
The decrease
in revenues for the three and nine months ended September 30, 2008 over the
corresponding 2007 periods were due to lower sales reflecting no
sales to GE in the quarters ended June 30, 2008 and
September 30, 2008. We expect this
trend to continue through the remainder of 2008 due to lower demand for subscriber
communicators by VARs in the transportation sector, primarily GE, which is in default under its
subscriber communicator supply agreement with our Stellar subsidiary. See Part II, Item 5,
Other Information in this Form 10-Q for a further discussion.
24
Costs of services
Costs of services include the expenses associated with our network engineers, the repair and
maintenance of our ground infrastructure, the depreciation associated with our communications
system and the amortization of licenses acquired.
Three Months: Costs of services increased by $0.6 million, or 31.9%, to $2.6 million for the
three months ended September 30, 2008 from $2.0 million during the three months ended September
30, 2007. As a percentage of service revenues, cost of services were 41.4% of service revenues
for the three months ended September 30, 2008 compared to 43.7% for the three months ended
September 30, 2007.
Nine Months: Costs of services increased by $0.5 million or 7.6% to $6.8 million for the nine
months ended September 30, 2008 from $6.3 million during the nine months ended September 30,
2007. As a percentage of service revenues, cost of services were 40.0% of service revenues for
the nine months ended September 30, 2008 compared to 49.6% for the nine months ended September
30, 2007.
The increase in costs of services for the three and nine months ended September 30, 2008 over
the corresponding 2007 periods were primarily due to costs related to our terrestrial-based
cellular communication services which commenced in the third quarter of 2007 and an increase in
depreciation expense of $0.3 million primarily related to the Coast Guard demonstration satellite.
We expect that costs of services will increase in future periods due to depreciation expense
associated with the recently launched five quick-launch satellites once they are placed in
service.
Costs of product sales
Costs of product sales include the cost of subscriber communicators and SIMS and related
peripheral equipment, as well as the operational costs to fulfill customer orders, including
costs for employees.
Three Months: Costs of product sales decreased for the three months ended September 30, 2008 by
$0.9 million, or 36.4%, to $1.6 million, which included
$0.8 million from ORBCOMM Japan, from $2.4 million for the three months ended September
30, 2007. Product cost represented 71.4% of the cost of product sales for the
three months ended September 30, 2008, which decreased by $1.0 million, or 46.5%, to $1.1
million for the three months ended September 30, 2008 from $2.1 million for the three months
ended September 30, 2007. We had a gross profit from product sales (revenues from product sales
minus costs of product sales including distribution costs) of $0.1 million, including $0.4
million of gross profit from ORBCOMM Japan for the three months ended September 30, 2008
compared to a gross loss from product sales of $0.1 million for the three months ended
September 30, 2007.
Nine Months: Costs of product sales decreased for the nine months ended September 30, 2008 by
$2.5 million, or 35.8%, to $4.6 million, which included
$1.5 million from ORBCOMM Japan, from $7.1 million for the nine months ended September
30, 2007. Product cost represented 69.2% of the cost of product sales for the
nine months ended September 30, 2008, which decreased by $2.8 million, or 46.9%, to $3.1
million for the nine months ended September 30, 2008 from $5.9 million for the nine months
ended September 30, 2007. Excluding a cost reduction of $0.2 million from the gateway earth
station sold in 2007, we had a gross
loss from product sales (revenues from product sales minus costs of product sales including
distribution costs) of $0.1 million including $0.8 million of gross profit from ORBCOMM Japan
in 2008 for the nine months ended September 30, 2008 compared to a gross loss from product
sales of $0.3 million for the nine months ended September 30, 2007.
Excluding the gross profit from product sales from ORBCOMM Japan and a cost reduction of the
gateway earth station sold in 2007, the gross loss from product sales for the three and nine
months ended September 30, 2008 was related to lower revenues from subscriber communicator
sales which were not sufficient to cover costs associated with distribution, fulfillment and
customer service costs associated with completing customer orders.
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.
Three Months: Selling, general and administrative expenses increased $0.4 million, or 8.2%, to
$4.6 million for the three months ended September 30, 2008 from $4.2 million for the three
months ended September 30, 2007. The increase is primarily due to a $0.3 million increase in
employee costs, resulting from increases in stock-based compensation of $0.1 million and
payroll costs of $0.2 million.
Nine Months: Selling, general and administrative expenses increased $0.2 million, or 1.2%, to
$14.2 million for the nine months ended September 30, 2008 from $14.0 million for the nine
months ended September 30, 2007. The increase is primarily due to a $0.1 million increase in
employee costs, resulting from an increase in payroll costs of $0.9 million, offset by a
decrease in stock-based compensation of $0.8 million.
25
Product development expenses
Product development expenses consist primarily of the expenses associated with the staff of our
engineering development team, along with the cost of third parties that are contracted for
specific development projects.
Three Months: Product development expenses were $0.2 million for the three months ended
September 30, 2008 and 2007.
Nine Months: Product development expenses for the nine months ended September 30, 2008 and 2007
were $0.7 million and $0.8 million, respectively, decreasing 19.7% in the current year period
over the same period in the prior year.
Product development expenses decreased primarily relating to timing of product development
activities.
Gain on customer claims settlements
In June 2008 and September 2008, we recognized $0.1 million gains on a settlement of a claim
against a VAR upon receipt of the settlement proceeds.
On March 25, 2008, we received a 37% equity interest in ORBCOMM Japan and cash of $0.6 million
in satisfaction of claims against ORBCOMM Japan, pursuant to a voluntary reorganization of
ORBCOMM Japan in accordance with the rehabilitation plan approved by the Tokyo district court
on December 25, 2007. The fair value of the consideration we received for settlement of claims
against ORBCOMM Japan exceeded the $0.4 million carrying value of current and long-term
receivables from ORBCOMM Japan by $0.9 million and we recognized a gain for the same amount for
the three months ended March 31, 2008.
On May 15, 2008, we received 616 newly issued shares of common stock from ORBCOMM Japan
representing an additional 14% equity interest and recognized a gain of $0.2 million during the
nine months ended September 30, 2008.
Other income (expense)
Other income is comprised primarily of interest income from our investments, foreign exchange
gains and losses and interest expense.
Three Months: Other income was $0.1 million for the three months ended September 30, 2008
compared to $1.6 million for the three months ended September 30, 2007.
Nine Months: Other income was $1.1 million for the nine months September 30, 2008 compared to
$4.1 million for the nine months ended September 30, 2007.
The decrease in other income (expense) for the three and nine months ended September 30, 2008
was primarily due to lower interest rates from investing in low risk and low interest rate U.S.
Treasury securities in 2008 compared to higher interest rates from investing in investment
grade floating rate redeemable municipal debt securities in 2007 and losses from foreign
currency transactions.
Pre-control earnings in subsidiary and minority interest
Pre-control earnings in subsidiary and minority interest relates to earnings that are
attributable to the other shareholder of ORBCOMM Japan. Pre-control earnings in subsidiary
are comprised of earnings prior to the change in control, and
minority interest is comprised of
earnings after the change in control, not attributable to us.
For the nine months ended September 30, 2008 the pre-control earnings in ORBCOMM
Japan was $0.1 million. For the three and nine months ended September 30, 2008 minority
interest was $0.2 million.
Net losses
Three Months: As a result of the items described above, we had a net loss of $1.0 million for
the three months ended September 30, 2008 compared to a net loss of $0.4 million for the three
months ended September 30, 2007, an increase of $0.6 million, or 137.2%.
Nine Months: As a result of the items described above, our net loss narrowed to $2.5 million
for the nine months ended September 30, 2008, compared to a net
loss of $4.7 million for the
nine months ended September 30, 2007, decreasing by $2.1 million, an improvement of 46.0%.
26
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs and to fund capital
expenditures to support our current operations, and facilitate growth and expansion. Since our
inception, we have financed our operations from sales of our common stock through public
offerings and private placements of debt, convertible redeemable preferred stock, membership
interests and common stock. We have incurred losses from operations since inception, including
a net loss of $2.5 million for the nine months ended September 30, 2008 and as of September 30,
2008 we have an accumulated deficit of approximately $65.9 million. As of September 30, 2008,
our primary source of liquidity consisted of cash and cash equivalents including U.S. Treasury
securities totaling $88.5 million.
Operating activities
Cash provided by our operating activities for the nine months ended September 30, 2008 was
$4.6 million resulting from a net loss of $2.5 million, offset by adjustments for non-cash
items of $4.3 million and $2.8 million of cash generated from working capital. Adjustments for
non-cash items primarily consisted of $2.2 million for depreciation and amortization and $2.7
million for stock-based compensation, offset by $0.9 million non-cash gains primarily related
to obtaining our 51% interest in ORBCOMM Japan and a $0.3 million reduction of expenses due to
expiration of an asset purchase option. Working capital activities primarily consisted of net
sources of cash of $2.5 million for a decrease to accounts receivable primarily related to
timing of collections and a $0.9 million increase in deferred revenue primarily related to an
increase in pre-payments of service revenues by OEMs.
Cash provided by our operating activities for the nine months ended September 30, 2007 was $2.8
million resulting from adjustments for non-cash items of $5.9 million and $1.5 million of cash
generated from working capital, offset by a net loss of $4.6 million. Adjustments for non-cash
items primarily consisted of $1.8 million for depreciation and amortization and $3.9 million
for stock-based compensation. Working capital activities primarily consisted of a net source of
cash of $0.3 million for a decrease to accounts receivable due to timing of collections, a
source of cash from an increase of $0.5 million in accounts payable and accrued liabilities
primarily related to professional fees and a source of cash from an increase of $0.3 million in
deferred revenues primarily related to billings we rendered in connection with our Coast Guard
demonstration satellite.
Investing activities
Cash used in our investing activities for the nine months ended September 30, 2008 was $32.1
million, resulting from capital expenditures of $26.7 million and an increase of $5.7 million
to restricted cash as collateral for a performance bond in connection with obtaining FCC
authorization to construct, launch and operate an additional twenty-four next-generation
satellites and the Orbital Sciences procurement agreement for the quick-launch satellites.
Capital expenditures included $24.4 million for
the Coast Guard demonstration satellite, quick-launch and next-generation satellites and $2.3
million of improvements to our internal infrastructure and ground segment.
Cash provided by our investing activities for the nine months ended September 30, 2007 was
$14.3 million resulting from sales of marketable securities of $88.0 million offset by capital
expenditures of $15.4 million and purchases of marketable securities consisting of investment
grade floating rate redeemable municipal debt securities totaling $58.3 million. Capital
expenditures included $12.8 million for the Concept Validation Project, quick-launch and
next-generation satellites and $1.5 million of improvements to our internal infrastructure and
ground segment.
Financing activities
Cash provided by our financing activities for the nine months ended September 30, 2008 was $0.3
million resulting primarily from proceeds received from the issuance of an aggregate of 119,062
shares of common stock upon the exercise of warrants and stock options to purchase common stock
at per share exercise prices ranging from $2.33 to $4.26.
Cash provided by our financing activities for the nine months ended September 30, 2007 was
$31.6 million resulting primarily from $31.8 million in net proceeds received from our
secondary public offering of common stock, after deducting underwriters discounts and
commissions and offering costs.
Future Liquidity and Capital Resource Requirements
We expect cash flows from operating activities, along with our existing cash and cash
equivalents will be sufficient to provide working capital and fund capital expenditures, which
primarily includes milestone payments under the procurement agreement for the next-generation satellites for at least the next 12 months. For the remainder of 2008, we
expect to incur approximately $17.6 million of capital expenditures primarily for our
next-generation satellites.
Contractual Obligations
Other than with respect to the contractual obligation discussed below there have been no
material changes in our contractual obligations as of September 30, 2008, as previously
disclosed in Part II, Item 7. Managements 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, 2007.
On May 5, 2008, we entered into a Procurement Agreement (the Agreement) with Sierra Nevada
Corporation (SNC) pursuant to which SNC will construct eighteen low-earth-orbit satellites in
three sets of six satellites (shipsets) for our
next-generation satellites (the Initial
Satellites). Under the Agreement, SNC will also provide launch support services, a test
satellite (excluding the mechanical structure), a satellite software simulator and the
associated ground support equipment. Under the Agreement, we may elect to use the launch option
to be offered by SNC or it may contract separately with other providers for launch services and
launch insurance for the satellites.
27
Under the Agreement, we have the option, exercisable at any time until the third anniversary of
the execution of the Agreement, to order up to thirty additional satellites substantially
identical to the Initial Satellites (the Optional Satellites).
The total contract price (for the initial Satellites) is $117 million, subject to reduction
upon failure to achieve certain in-orbit operational milestones with respect to the Initial
Satellites or if the pre-ship reviews of each shipset are delayed more than 60 days after the
specified time periods described below. We have agreed to pay SNC up to $1.5 million in
incentive payments for the successful operation of the Initial Satellites five years following
the successful completion of in-orbit testing for the third shipset of six satellites. The
price for the Optional Satellites ranges from $5.0 million to $7.7
million per satellite depending on the number of satellites ordered and the timing of the
exercise of the option.
The Agreement also requires SNC to complete the pre-ship review of the Initial Satellites (i)
no later than 24 months after the execution of the Agreement for the first shipset of six
satellites, (ii) no later than 31 months after the execution of the Agreement for the second
shipset of six satellites and (iii) no later than 36 months after the execution of the
Agreement for the third shipset of six satellites. Payments under the Agreement will begin upon
the execution of the Agreement and will extend into the second quarter of 2012, subject to
SNCs successful completion of each payment milestone.
Under the Agreement, SNC has agreed to provide us with an optional secured credit facility for
up to $20.0 million commencing 24 months after the execution of the Agreement and maturing 44
months after the effective date. If we elect to establish and use the credit facility we and
SNC will enter into a formal credit facility on terms established in the Agreement.
On July 2, 2008, we and OHB-System AG entered into an agreement to amend the June 5, 2006
agreement in connection with the successful launch of the Coast Guard demonstration satellite
and the five quick-launch satellites on June 19, 2008. Pursuant to the agreement, we and
OHB-System AG agreed to a revised schedule of milestone and related payments for the launch of
the five quick-launch satellites and delivery schedule of the sixth quick-launch satellite,
with no modification to the $20 million contract value entered into on June 5, 2006, including
certain launch support and in-orbit testing services for the sixth
quick-launch satellite. In
addition, we agreed to pay an additional $0.5 million to OHB-System AG relating to the
construction of the five quick-launch satellites. We and OHB-System, AG have agreed to waive
any applicable on-time delivery incentive payments and to waive any applicable liquidating
damages, except for any liquidating delay damages with respect to delivery delay of the sixth
quick-launch satellite.
On August 29, 2008, we entered into an agreement with Delphi Automotive Systems LLC to purchase approximately $4.8
million of a future model of a subscriber communicator over a two-year period beginning once the subscriber
communicator model is commercially available.
Off-Balance Sheet Arrangements
We have no 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 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. On January 1, 2008, we adopted SFAS 157, except with respect to our
non-financial assets and liabilities, for which the effective date is January 1, 2009. The
adoption of SFAS 157 for our financial assets and liabilities did not have a material impact on
our consolidated financial statements. We also do not expect the adoption of SFAS 157 for our
non-financial assets and liabilities to have a material impact 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 is effective for us on January 1,
2008. However, we did not elect the fair value option for any of our eligible financial
instruments on the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that a
noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated
net income specifically attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency in the manner of reporting
changes in the parents ownership interest and requires fair value measurement of any
noncontrolling equity investment
retained in a deconsolidation. SFAS 160 is effective for us on January 1, 2009. We are
currently evaluating the impact SFAS 160 will have on our consolidated financial statements.
In December 2007, the FASB issued No. 141 (revised 2007), Business Combinations (SFAS 141R).
SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions
and other events in which one entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations. SFAS 141R expands on required
disclosures to improve the statement users abilities to evaluate the nature and financial
effects of business combinations. SFAS 141R is effective for us on January 1, 2009. The impact
of adopting SFAS 141R will be dependent on the business combinations that we may pursue after
its effective date.
28
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). FAS 161 requires
expanded qualitative, quantitative and credit-risk disclosures of derivative instruments and
hedging activities. These disclosures include more detailed information about gains and losses,
location of derivative instruments in financial statements, and credit-risk-related contingent
features in derivative instruments. SFAS 161 also clarifies that derivative instruments are
subject to concentration of credit risk disclosures under SFAS No. 107, Disclosure About Fair
Value of Financial Instruments , SFAS 161, which applies only to disclosures, is effective for
us on January 1, 2009. We do not currently engage in any derivative transactions, and we do not
anticipate SFAS 161 will have a significant on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. This statement shall be
effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles . We are currently evaluating the
potential impact that the adoption of SFAS No. 162 may have on
our consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Other
than with respect to the impact of foreign currency rates, discussed
below, there has been no material changes in our assessment of our sensitivity to market risk as of
September 30, 2008, 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, 2007.
Impact of Foreign Currency Rates
Certain liabilities in one of our foreign subsidiaries are denominated in U.S. dollars. Foreign currency transactions
gains and losses, arising from the remeasurement of these liabilities, are included in our consolidated statements of
operations. As a result, we are exposed to foreign exchange risk.
Concentration
of credit risk
During the three months ended September 30, 2008 and 2007, revenues from GE, comprised 17.3%
and 44.0% of revenues, respectively. During the nine months ended September 30, 2008 and 2007,
revenues from GE comprised 19.5% and 44.4% of revenues, respectively.
For the three months and nine months ended September 30, 2008, revenues from Hitachi comprised
15.3% and 12.7% of revenues, respectively. For the three and nine months ended September 30, 2007,
revenues from Hitachi comprised less than 10% of revenues.
Item 4. Disclosure Controls and Procedures
Evaluation of the Companys disclosure controls and procedures. The Companys management
evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)), as of September 30, 2008. Based on their evaluation,
the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of September 30, 2008.
Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We discuss certain legal proceedings pending the Company in the notes to the condensed
consolidated financial statements and refer you to that discussion for important information
concerning those legal proceedings, including the basis for such actions and relief sought. See
Note 15 to the condensed consolidated financial statements for this discussion.
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 September 30, 2008, as previously
disclosed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2007.
A global recession and continued worldwide credit and capital constraints could adversely affect us.
Recent global economic conditions, including concerns about a potential global recession, tightening of credit and
capital markets and failures or material business deteriorations of financial institutions and other entities, have
resulted in unprecedented government intervention in the U.S., Europe and other regions of the world. In addition, the
current market turmoil and tightening of credit have led to lack of customer confidence, increased market volatility
and a reduction of generall business activity. If these conditions continue or worsen, risks to us include:
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potential declines in revenues, profitability and cash flow due to reduced orders for our products and
services, payment delays or other factors caused by economic challenges faced by our customers, end-users and
prospective customers and end-users; |
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potential adverse impacts on our ability and our customers and vendors ability to access credit and capital
sources; and |
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potential reprioritization by our customers, end-users and prospective customers and end-users of resources
away from investments in capital improvements, equipment, vehicles or vessels which use our products and services
including in the transportation market among other markets which use our products and services. |
Any such impacts could have a material adverse effect on our business, financial condition, operating results and cash
flow.
29
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 September 30, 2008, we have used $45.5 million for such
purposes. Pending such uses, we are investing the net proceeds in short-term interest bearing
cash equivalents.
Exercise of Warrants
During the nine months ended September 30, 2008, we issued 99,434 shares of common stock upon
the exercise of warrants at per share exercise prices ranging from $2.33 to $4.26. We received
gross proceeds of $0.2 million from the exercise of these warrants. In addition, we issued
45,848 shares of common stock upon the cash less exercise of warrants to purchase 82,282 common
shares with per share exercise prices ranging from $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
GE Equipment Services is a strategic partner that develops applications that use our M2M data
communications system. Our largest GE customer is the AI subsidiary of GE Equipment Services,
which is dedicated to M2M data communications applications and which renewed its IVAR agreement
with us through 2010. On October 10, 2006, our Stellar subsidiary entered into an agreement
(the 2006 Agreement) with AI to supply up to 412,000 units (of which 270,000 are
non-cancelable) of
in-production and future models of Stellars subscriber communicators from
August 1, 2006 through December 31, 2009 to support AIs applications utilizing our M2M data
communications system.
AI
purchased 72% and 8% of its minimum non-cancelable volume for 2007
and for the nine months ended September 30,
2008, respectively, under the 2006 Agreement and, as a result, AI is in default under the terms
of the 2006 Agreement. We are currently in discussions with AI to
amend the 2006 Agreement. However, there can be no assurance as to whether or when a mutually satisfactory amendment will
be agreed to by the parties. In the event that we and AI are unable to reach a mutually
satisfactory resolution regarding the 2006 Agreement, we may pursue remedies available to us.
Item 6. Exhibits
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10.1 |
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Amendment of
Solicitation/Modification of Contract dated August 28, 2008 amending the
Validation Services Agreement dated as of May 20, 2004 between the Company and the U.S. Coast Guard. |
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10.2 |
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Amendment of
Solicitation/Modification of Contract dated September 30, 2008
amending the Validation Services Agreement dated as of May 20,
2004 between the Company and the U.S. Coast Guard. |
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10.3 |
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Amendment of
Solicitation/Modification of Contract dated September 30, 2008
amending the Validation Services Agreement dated as of May 20,
2004 between the Company and the U.S. Coast Guard. |
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*10.4 |
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Amendment Number Two to Cooperation Agreement dated as of November 3, 2008 by and among the Company, Stellar Satellite Communications Ltd. and the Delphi Electronics & Safety Division of Delphi Incorporated. |
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*10.5 |
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Pricing Agreement dated as of September 8, 2008 by and between Stellar Satellite Communications Ltd. and Delphi Automotive Systems, LLC, acting through its Delphi Electronics & Safety Division. |
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31.1
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Certification of Chief Executive Officer required by Rule 13a-14(a). |
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31.2
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Certification of Chief Financial Officer required by Rule 13a-14(a). |
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32.1
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Certification of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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32.2
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Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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* |
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Portions of this exhibit have been omitted and filed separately with the Office of the
Secretary of the Securities and Exchange Commission pursuant to a confidential treatment
request. |
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ORBCOMM Inc.
(Registrant)
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Date: November 10, 2008 |
/s/ Marc J. Eisenberg
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Marc J. Eisenberg, |
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Chief Executive Officer
(Principal Executive Officer) |
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Date: November 10, 2008 |
/s/ Robert G. Costantini
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Robert G. Costantini, |
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Executive Vice President and Chief
Financial Officer
(Principal Financial Officer) |
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31
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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10.1
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Amendment of
Solicitation/Modification of Contract dated August 28, 2008 amending the
Validation Services Agreement dated as of May 12, 2004 by and between the Company and the U.S.
Coast Guard. |
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10.2 |
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Amendment of
Solicitation/Modification of Contract dated September 30, 2008
amending the Validation Services Agreement dated as of May 20,
2004 between the Company and the U.S. Coast Guard. |
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10.3 |
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Amendment of
Solicitation/Modification of Contract dated September 30, 2008
amending the Validation Services Agreement dated as of May 20,
2004 between the Company and the U.S. Coast Guard. |
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*10.4 |
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Amendment Number Two to Cooperation Agreement dated as of November 3, 2008 by and among the Company, Stellar Satellite Communications Ltd. and the Delphi Electronics & Safety Division of Delphi Incorporated. |
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*10.5 |
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Pricing Agreement dated as of September 8, 2008 by and between Stellar Satellite Communications Ltd. and Delphi Automotive Systems, LLC, acting through its Delphi Electronics & Safety Division. |
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31.1
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Certification of Chief Executive Officer required by Rule 13a-14(a). |
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31.2
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Certification of Chief Financial Officer required by Rule 13a-14(a). |
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32.1
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Certification of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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32.2
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Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. Section 1350. |
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* |
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Portions of this exhibit have been omitted and filed separately with the Office of the
Secretary of the Securities and Exchange Commission pursuant to a confidential treatment
request. |
32