Item 1.
Business
We are a global provider of industrial Internet of Things (“IoT”) solutions, including network connectivity, devices, device management and web reporting applications. These solutions enable optimal business efficiencies, increased asset utilization and reduced asset write-offs, helping customers realize benefits on a worldwide basis. Our industrial IoT products and services are designed to track, monitor, control and enhance security for a variety of assets, such as trailers, trucks, rail cars, sea containers, power generators, fluid tanks, marine vessels, diesel or electric powered generators (“gensets”), oil and gas wells, pipeline monitoring equipment, irrigation control systems, and utility meters, in the transportation and supply chain, heavy equipment, fixed asset monitoring and maritime industries, as well as for governments. Additionally, we provide satellite Automatic Identification Service (“AIS”) data services to assist in vessel navigation and to improve maritime safety for government and commercial customers worldwide. We also have vehicle fleet management, as well as in-cab and vehicle fleet solutions in our transportation solution portfolio. We provide our services using multiple network platforms, including our own constellation of low-Earth orbit (“LEO”) satellites and our accompanying ground infrastructure, as well as terrestrial-based cellular communication services obtained through reseller agreements with major cellular (Tier One) wireless providers. We also offer customer solutions utilizing additional satellite network service options that we obtain through service agreements we have entered into with third-party mobile satellite providers. Our satellite-based customer solution offerings use small, low-power, mobile satellite subscriber communicators for remote asset connectivity, and our terrestrial-based solutions utilize cellular data modems with subscriber identity modules (“SIMs”). We also resell service using the two-way Inmarsat plc (“Inmarsat”) satellite network to provide higher bandwidth, low-latency satellite products and services, leveraging our IsatDataPro (“IDP”) technology. Our customer solutions provide access to data gathered over these systems through connections to other public or private networks, including the Internet. We are dedicated to providing what we believe are the most versatile, leading-edge industrial IoT solutions in our markets that enable our customers to run their business operations more efficiently and achieve significant returns on investment.
Customers benefiting from our network, products and solutions include original equipment manufacturers (“OEMs”), such as Caterpillar Inc., Doosan Infracore America, Hitachi Construction Machinery Co., Ltd., John Deere, Komatsu Ltd., and Volvo Construction Equipment; vertical market technology integrators known as value-added resellers (“VARs”) and international value-added resellers (“IVARs”), such as American Innovations, and value-added solutions providers, such as Onixsat, Satlink and Sascar (collectively referred to as “MCPs”); and end-to-end solutions customers such as Carrier Corporation, C&S Wholesale, Canadian National Railways, CR England, Hub Group, Inc., JB Hunt Transport Services, Inc. (“JB Hunt”), KLLM Transport Services, Marten Transport, Prime Inc., Swift Transportation, Target, Tropicana, Tyson Foods, Walmart and Werner Enterprises.
We derive service revenues primarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on our satellite network, as well as other satellite networks and cellular wireless networks that we resell to our customers (i.e., our MCPs, MCAs and direct customers). We also generate recurring AIS service revenues from subscription-based services supplying recurring AIS data services to customers and resellers, as well as monthly subscription-based service revenues from our platform that provides operational and transaction data management and business intelligence. In addition, we earn service revenues from extended warranty service agreements extending beyond the initial warranty period of typically one year; installation services; royalty fees from third parties for the use of our proprietary communications protocol, recognized at a point in time when the third parties notify us of the units they have manufactured and a unique serial number is assigned to each unit; and fees from providing engineering, technical and management support services to our customers.
We derive product sales primarily from sales of complete industrial IoT telematics devices, modems and cellular wireless SIMs (for our terrestrial-communication services) to our resellers (i.e., our MCPs and MCAs) and direct customers. Revenues generated from product sales are either recognized when the products are shipped or when customers accept the product, depending on the specific contractual terms. Shipping costs billed to customers are included in product sales and the related costs are included as cost of product sales.
Unless otherwise noted or the context otherwise requires, references in this Form 10-K to “ORBCOMM,” “the Company,” “our company,” “we,” “us” or “our” refer to ORBCOMM Inc. and its direct and indirect subsidiaries.
Business Development Activities
Credit Agreement and Security Agreement
On December 2, 2020, we and certain of our subsidiaries entered into a senior secured Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as administrative agent and collateral agent, and with the other lenders thereto (the “Lenders”), in connection with the refinancing of our $250.0 million aggregate principal amount of
8.0% Senior Secured Notes due 2024 (the “Senior Secured Notes”). The Credit Agreement supersedes and replaces the prior credit agreement providing for a $25.0 million revolving credit facility. Pursuant to the Credit Agreement, the Lenders provided a senior revolving credit facility in an aggregate amount of up to $50.0 million (the “Revolving Facility”) and a senior term loan facility in the aggregate amount of $200.0 million (the “Term Facility” and together with the Revolving Facility, collectively the “Facilities”). The proceeds of the Facilities, along with cash on hand, were used to redeem all $220.0 million outstanding principal amount of our 8.0% Senior Secured Notes due 2024 and pay certain related fees, expenses and accrued interest.
The Facilities mature on December 2, 2025. At our election, loans under the Facilities will bear interest at an alternative base rate or an adjusted London Interbank Offered Rate (“LIBOR”), plus an applicable margin subject to a set pricing grid, with respect to the Revolving Facility and the Term Facility.
The Facilities are secured by a first-priority security interest in substantially all our and our subsidiaries’ assets under an Amended and Restated Security Agreement among us, our subsidiaries and JPMorgan Chase (the “Security Agreement”). The Revolving Facility has no scheduled principal amortization until the maturity date. The Term Facility has quarterly installments of principal amortization in an aggregate amount specified for each 12-month period following the closing date as set forth in the Credit Agreement
Subject to the terms set forth in the Credit Agreement, we may borrow, repay and reborrow the Revolving Facility at any time prior to the maturity date and may prepay the Term Facility at any time without penalty or premium, subject to limitations as to minimum amounts of prepayments and customary indemnification for breakage costs in the case of prepayment of Eurodollar Loans other than on the last day of a related interest period.
The Credit Agreement contains customary representations and warranties, conditions to funding, covenants and events of default. The Credit Agreement contains covenants that, among other things, limit us and our subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting our subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various baskets as set forth in the Credit Agreement.
On December 2, 2020, we redeemed all $220.0 million outstanding principal amount of our 8.0% Senior Secured Notes due 2024 at a price equal to (a) 104% of the principal amount of the Senior Secured Notes being redeemed plus (b) accrued and unpaid interest, resulting in a call premium fee of $8.8 million and an additional expense associated with the remaining unamortized debt issuance cost of $2.9 million. On December 2, 2020, we borrowed $200.0 million under the Term Facility and $20.0 million under the Revolving Facility to fund in part the redemption of the Senior Secured Notes.
At December 31, 2020, we had $200.0 million outstanding under the Term Facility and $20.0 million outstanding under the Revolving Facility. As of December 31, 2020, we were in compliance with all financial covenants under the Credit Agreement.
Stock Repurchase Program
On August 5, 2019, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $25.0 million of our outstanding shares of common stock through open market transactions and privately negotiated transactions, until August 5, 2020. In addition, open market repurchases of our shares of common stock could be made pursuant to applicable securities laws and regulations, including Rule 10b-18, as well as Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the years ended December 31, 2020 and 2019, we repurchased 836,904 and 1,930,414 shares at an average share price of $2.98 and $4.86, respectively. In mid-March 2020, the Company suspended further purchases under the repurchase program given the economic uncertainty arising from the novel coronavirus (“COVID-19”) pandemic.
Shelf Registration
We have an effective shelf registration statement filed with the Securities and Exchange Commission (“SEC”), registering up to $100.0 million of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement is due to expire on March 23, 2023 and replaces our previous shelf registration statement for an unspecified amount of debt and/or equity securities filed in 2018.
Strategic Alliance with Inmarsat
In early 2016, in connection with the strategic alliance with Inmarsat announced on November 4, 2013, we introduced two interchangeable modems that work with either our ORBCOMM Generation 2 (“OG2”) VHF network or Inmarsat’s L-band network. These modems have the same footprint, connectors, power input, and programming environment to allow for easy exchange of modems during the terminal manufacturing process for the different networks. Manufacturers and partners are able to place into their products the appropriate modem that corresponds with either our OG2 VHF network or Inmarsat’s L-band network based on
geography, message size and delivery speed for ease of use and flexibility. In addition, users are able to take advantage of our relationships with Tier One cellular providers for dual-mode cellular and satellite service with either satellite network. We also offer our unique ORBCOMMConnect Platform, which seamlessly translates and integrates the communications from our diverse network service partners into a uniform set of commands and information. This facilitates a uniform platform for provisioning, billing and multi-mode access for industrial IoT applications, supported by Inmarsat’s machine-to-machine (“M2M”) Access Platform, enabling access to network and terminal management tools for wholesale integration with us.
These versatile offerings are available in our end-to-end solutions for heavy equipment, fixed asset monitoring and transportation industries, as well as through our MCPs. We leverage our relationship with Inmarsat to access their worldwide fleet of L-band GEO satellites to provide IDP, a satellite packet data service offering the highest throughput and lowest latency in the market. We extended and enhanced our agreement with Inmarsat to provide L-band geostationary (“GEO”) satellite service expected through at least 2035. As part of this agreement, we will collaborate with Inmarsat on joint product innovation and distribution of our next-generation IoT satellite services, called OGx, expected to be available in 2022, as well as telematics devices and end-to-end solutions that offer a combination of high bandwidth data packets with low-cost terminals.
Our Business Strengths and Competitive Advantage
With years of experience in providing global industrial IoT solutions, we continue to deliver advanced products and services that connect the world’s assets to increase visibility, operational efficiency and profitability and enable faster and smarter business decisions through data analytics and reporting for our customers across a wide range of vertical markets. As industrial IoT and business intelligence technologies transform the competitive landscape at an increasing pace, customers are looking for more sophisticated solutions that extend beyond track and trace applications to unlock incremental value in their business and support the evolving need for increased data, bandwidth and processing power to enable a 5G IoT ecosystem.
Our key competitive advantages include a broad range of industrial IoT network connectivity solutions, including cellular network connectivity through our partnerships with Tier One cellular carriers, and global, two-way satellite data communication connectivity through our own network of LEO satellites and accompanying ground infrastructure, as well as through a strategic partnership with Inmarsat described under “Business Development Activities - Strategic Alliance with Inmarsat.”
By leveraging our deep industry expertise and market domain knowledge in the transportation and distribution, supply chain and logistics, heavy equipment and maritime industries, as well as for governments, we are changing the way enterprises track, monitor, protect, control, and predict the behavior of assets around the world. We provide individual application components, such as modems and chip sets, as well as full end-to-end solutions, such as freight transportation monitoring, cold chain compliance, refrigerated asset monitoring, vehicle fleet management, in-cab driver safety and cargo security systems. Our combination of global network services along with our state-of-the-art devices, and an open, cloud-based analytics platform and information management engine provides what we believe is the industrial IoT market’s most comprehensive service offering and positions us as a leader and innovator in this marketplace. In addition, our global solution delivery team provides end-to-end customer service - from installation to deployment to ongoing customer care - to support our diverse customer base anywhere in the world. We believe that our approach to industrial IoT solutions along with the depth of our expertise are unique in our industry and position us to respond effectively to rapidly changing market demands.
Our customer base has widely divergent requirements for hardware, connectivity, middleware, and software that depend, in part, on specific industry, geography, and price requirements. Leveraging our engineering expertise in the global industrial IoT sector and through our diverse portfolio of devices, network services, and data analytics platform, we offer solutions that enable customers to minimize development time, reduce costs and increase operational efficiency, whether by saving on fuel, improving asset turn times, lowering maintenance costs or optimizing asset utilization. In addition to operational and transaction data management for customers in our key markets, our robust platform provides in-depth descriptive, predictive and prescriptive insights to increase the efficiency of customer processes and better manage costs, resulting in a strong return on investment. We believe our flexibility in responding to unique customer requirements, as well as our ability to provide all these products and services ourselves as a single source enhances our competitive positioning.
Through our satellite network, we provide worldwide coverage, including in the open ocean, allowing end users to access our communications system in areas outside the coverage of terrestrial networks. Our unique, proven technology offers full two-way data communication with minimal line-of-sight limitations and reliable performance. Using our satellite-based AIS service, which is equipped on each of our OG2 satellites, our customers have access to AIS data well beyond coastal regions in a cost-effective and timely fashion. We provide global AIS data service through a combination of satellite and terrestrial data, enabling government and commercial customers to track more than 225,000 AIS-equipped vessels worldwide per day, facilitating maritime surveillance and intelligence. We intend to continue working with system integrators and maritime information service providers to develop AIS-based value-added services and to facilitate the sales and distribution of AIS data.
We are continuing to make investments to support growth in the AIS markets by enhancing our service offerings. We are partnering with AAC Clyde Space AB (“Clyde Space”), who will build, launch and operate two next-generation low-cost AIS CubeSats, each of which hosts three dedicated AIS receivers, including a highly versatile Software Defined Radio, along with a state-of-the-art antenna concept to maximize AIS detections. The two new AIS CubeSats are expected to expand coverage of our constellation, increase visibility to smaller Class B ships and enhance our polar footprint with launches planned on two separate missions in 2021. In addition, we are working with Clyde Space and Saab, Inc. to develop a next-generation, space-based VHF Data Exchange System (VDES) satellite, expected to launch in 2022, to enhance maritime communications by providing more extensive global coverage and increased bandwidth and versatility.
Our Strategy
Our long-term growth strategy capitalizes on expanding our capabilities and distribution through a build, buy or partner approach based on time to market and return on investment. Our growth is a result of our ability to leverage our extensive world-class, in-house engineering capabilities to design new products, as well as reduce costs and improve the functionality of our products through product redesign initiatives. In addition, we continue to assess the IoT landscape for potential strategic acquisitions that could expand existing business lines, increase our resources and scalability and build collaborative partnerships with fellow industry leaders.
Our strategic relationships with key distributors and OEMs have enabled us to streamline our sales and distribution channels and, in some cases, shift much of the risk and cost of developing and marketing end-user applications to the OEMs and MCPs. We have established strategic relationships with major OEMs, such as Carrier Corporation, Komatsu Ltd., Volvo Construction Equipment and Oshkosh Corporation / JLG Industries, Inc., as well as key VARs and IVARs, such as Precise Innovations and American Innovations in North America, along with Onixsat, Satlink S.L. and Sascar in key international markets.
Industry Overview
Businesses and governments increasingly face the need to track, control, monitor and communicate with fixed and mobile assets located throughout the world. At the same these assets increasingly incorporate microprocessors, sensors and other devices that can provide a variety of information and analytical insight about the asset’s location, condition, operation and environment and are capable of responding to external commands and queries. As these intelligent devices proliferate, we believe that the need to establish two-way communications with these devices is greater than ever. The owners and operators of these intelligent devices are seeking low-cost and efficient communications systems that will enable them to communicate with these devices.
We operate in the industrial IoT industry, which includes various types of communications systems that enable intelligent machines, devices and fixed or mobile assets to communicate information from the machine, device, or fixed or mobile asset to and from back-office information systems of the businesses and government agencies that track, monitor, control and communicate with them. These industrial IoT data communications systems integrate a number of technologies and cross several different industries, including computer hardware and software systems, positioning systems, terrestrial and satellite communications networks and information technologies (such as data hosting and business intelligence).
There are four main components in any industrial IoT data communications system:
1.
Devices and peripherals. Devices and sensors collect, measure, record and gather data about intelligent or trackable remote or mobile assets and their environment to be used, analyzed or otherwise disseminated to other machines, applications or human operators. For example, these devices and sensors can:
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Report the location, speed and fuel economy data from trucks and locomotives;
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Monitor the location, condition and environmental factors of dry van trailers, railcars and marine shipping containers;
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Monitor the location, condition and temperature of refrigerated trailers, railcars and marine shipping containers that transport temperature-sensitive cargo, including remote command and control of temperature;
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Monitor vehicle fleet location, route details and fuel usage;
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Monitor driver in-cab behavior;
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Report operating data usage and required maintenance for heavy equipment;
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Monitor fishing vessels to enforce government regulations regarding geographic and seasonal restrictions;
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Report the location and condition of ocean buoys;
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Report energy consumption from a utility meter;
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Monitor corrosion in a pipeline;
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Monitor levels in liquid, gas and materials storage tanks;
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Measure water delivery in agricultural pipelines; and
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Monitor environmental conditions in agricultural facilities.
2.
Network connectivity and subscriber management. The communications network enables a connection to take place between the fixed or mobile asset and the back-office systems and users of that asset’s data. The proliferation of terrestrial and satellite-based wireless networks has enabled the creation of a variety of industrial IoT data communications applications. Networks that are being used to deliver asset data include terrestrial communications networks, such as cellular, radio paging and WiFi networks, and satellite communications networks, utilizing LEO or GEO satellites.
3.
Software-as-a-Service (“SaaS”) applications. Data collected from a remote asset is used in a variety of ways with SaaS applications that allow the end user to track, monitor, control, communicate with and predict the behavior of these assets with a greater degree of control and with much less time and expense than would be required to do so manually.
4.
Platform-as-a-Service (“PaaS”). Multiple devices over various networks are better managed with a device management platform, utilizing cloud-based portal technology to provide visibility and management to all devices. With a single interface for managing multiple networks and devices, connectivity and device-specific messaging is abstracted to a common interface and messaging application programming interface (API), allowing the end user to speak one language to all of their connected industrial IoT devices for complete interoperability.
Market Opportunity
We believe the following market opportunities, as well as the increasing mainstream deployment of industrial IoT solutions, will continue to position us as a leader and innovator in the global industrial IoT market. In addition, the significant impacts of the COVID-19 pandemic on our customers, the majority of which run essential businesses in the transportation, marine and heavy equipment markets and play critical roles in sustaining the world during this crisis, have reinforced the integral role of our IoT technology in maintaining their business operations, as well as ensuring visibility of their assets dispersed across large geographies.
Commercial transportation and distribution
For-hire transportation companies, including truckload carriers, shipping lines, railroads and third-party logistics providers, and the in-house transportation operations of enterprises are increasingly requiring industrial IoT telematics solutions to manage their transportation assets more safely and efficiently and to improve performance and utilization. These wireless devices report location, engine diagnostic data, fuel consumption, compliance, fuel taxes, driver electronic data logs, cargo condition, on/off utilization, empty/loaded condition, demurrage and detention, facility entry/exit, as well as a wide variety of other functions, in order to provide better control over business operations.
A growing number of truck and trailer fleet owners, operators and OEMs are integrating industrial IoT data communications systems into their transportation operations. In order to improve driver safety and effectively track hours of service, the Federal Motor Carrier Safety Administration instituted regulatory requirements for Electronic Logging Devices (ELDs), also known as the “ELD Mandate,” with a deadline of December 16, 2019. Similar ELD regulations have been established by the Canadian Transportation Authorities, which will be effective on June 12, 2021, as well as Electronic Work Diary (EWD) regulations developed by Australia’s National Heavy Vehicle Regulator, which were approved in November 2020. We offer what we believe is the most advanced and user-friendly ELD solution on the market for medium-to large-sized fleets, which not only enables regulatory compliance but also enables far greater operational efficiency. The trailer market also requires additional wireless applications, such as cargo sensor reporting, load monitoring, fuel measurement, control of refrigeration systems and door alarms, which we offer as part of our complete transportation solution portfolio. Future regulations may require position tracking of specific types of cargo, such as hazardous materials, and could also increase trailer tracking market opportunities. The coordination and integration of the broad collection of transportation assets, including trucks, trailers, containers, chassis and gensets, through an integrated service can provide significant benefits, synergies and savings to customers through operating efficiencies and increased logistical performance. The unified delivery of all these transport asset solutions provides a significant advantage for us, offering what we believe is the transportation industry’s most comprehensive, integrated platform for nearly all transportation assets.
Refrigerated or cold chain transportation shippers and transportation companies have a growing need to track and monitor environmental and control conditions and fill the visibility gap of cargo over rail, trucking and sea transport, representing an important market opportunity. Our industry-leading cold chain monitoring solutions, including those for trailers, railcars, gensets and sea
containers, address this significant market. In addition, the Food and Drug Administration’s Food Safety Modernization Act (“FSMA”) continues to impact the growth of our market opportunity in this sector as we continue to work with our customers to ensure they are informed, compliant and FSMA-ready. The FSMA ensures the safety of food across the supply chain through the introduction of new requirements for food manufacturers, processors, transporters and distributors. The FSMA requires every large food distribution company to implement wireless monitoring solutions at every step, from farm to table, which we expect will continue to increase the demand for our cold chain monitoring systems.
Fleet management
Enterprises that utilize large and geographically dispersed fleets of vehicles are demanding improved fleet visibility, operational efficiency, regulatory compliance, and improved asset management. The demand for fleet management solutions has increased due to driver hours of service regulations imposed in the United States by the ELD Mandate, innovations in workforce productivity, more efficient driver performance via electronic monitoring, and new safety applications. Wireless applications provide enterprise fleet operators with a wide variety of fleet management services, including driver hours of service compliance, asset tracking, instantaneous driver coaching and performance feedback, vehicle efficiency monitoring, fuel management, and asset utilization. We offer a driver-friendly, ELD-compliant in-cab solution to private and for-hire truck fleets. Fleet asset management is one of the largest and most dynamic markets for industrial IoT applications and offers a rapid growth opportunity for specialized solutions for in-cab telematics in the freight transportation industry.
Fleet safety and compliance
Commercial vehicle accidents caused by driver behavior is the most frequent and costly source of safety liability for many industrial companies. Lapses in driver behavior contribute to the majority of industrial safety-related injuries and deaths, costing billions of dollars annually. Improving fleet safety involves more than simple driver monitoring and reactive policy measures; it requires a proactive solution that provides verbal coaching to drivers in real-time to develop safer driving habits. We provide this technology, including the unique “Speed-by-StreetTM” feature, that is squarely focused on improving driver safety. This solution is the only real-time fleet safety solution that detects unsafe driver behavior, such as speeding, aggressive driving, and seat belt violations, and conducts in-cab verbal coaching, lowering the incidences of accidents and fineable offenses. Customers, particularly those in industrial environments such as oil and gas, utilities, services industries, and emergency services, increasingly benefit from safer fleet operations and better management of their drivers, expanding our reach into many new market segments.
Manufacturing, warehousing and supply chain management
In the increasingly complex and competitive world of manufacturing and supply chain operations, enterprises need to ensure that high-value materials, tools and supplies converge at the right time and place. Manufacturing and warehousing profitability is dependent on ensuring just-in-time availability and accurate real-time location of inventory in the supply chain. Companies employing sophisticated supply chain methods have the potential to realize greater profits than competitors using more traditional means. As regulatory pressure for buying multiple technologies rises, customers are increasingly demanding integrated solutions from single-source providers. We provide end-to-end industrial IoT solutions based on multi-modal short-range tracking technologies such as radio frequency identification (RFID), WiFi, condition sensors and actuators that are more capable of handling the complex demands of today’s manufacturing and supply chain operations.
Heavy equipment
Heavy equipment fleet owners and leasing companies seeking to improve fleet productivity and profitability require applications that report diagnostic information, location, time-of-use information, emergency notification, driver usage and maintenance alerts for their heavy equipment, which may be in remote, difficult-to-reach locations. Using industrial IoT data communications systems, heavy equipment fleet operators can remotely manage the productivity and mechanical condition of their equipment, potentially lowering operating costs through preventive maintenance. OEMs can also use industrial IoT applications to better anticipate the maintenance and spare parts needs of their customers, expanding the market for higher-margin spare parts orders. Heavy equipment OEMs are increasingly integrating industrial IoT data communications systems into their equipment at the factory or offering them as options through certified after-market dealers.
Fixed asset monitoring
Companies with widely dispersed fixed assets, such as remote oil and gas equipment, require a means of collecting data from them to monitor productivity, manage inventory, increase security, minimize downtime and realize other operational benefits, as well as manage remote operation of valves, compressors, pumps and electrical switches. Industrial IoT systems can provide automated
meter reading, oil and gas storage tank monitoring, pipeline monitoring and environmental monitoring, which can reduce labor costs, fuel costs, and the expense of on-site monitoring and maintenance.
Marine
Marine vessels need satellite-based communications due to the absence of reliable terrestrial-based coverage more than a few miles offshore. We offer industrial IoT solutions ranging from maritime sensors on buoys to features and functions to support luxury recreational marine vessels and commercial fishing vessels. These applications include onboard diagnostics and other marine telematics, alarms, requests for assistance, security, location reporting and tracking, two-way messaging, catch data and weather reports. Owners and operators of commercial fishing and other marine vessels are increasingly subject to regulations governing, among other things, commercial fishing seasons and geographic limitations, vessel tracking, safety systems, and resource management and protection.
We expect to leverage our investment in satellite technology to resell our IoT data services and the AIS data collected by our network to maritime services and governmental agencies. Further expansion of our maritime business has been driven by our distribution agreements with resellers to resell the M2M and AIS data for commercial purposes.
Government and homeland security
Governments worldwide are seeking to address the global terror threat by monitoring land borders and hazardous materials, as well as marine vessels and containers. In addition, modern military and public safety forces use a variety of applications, particularly in supply chain management, logistics and support, which could incorporate our products and services. Industrial IoT systems are used in applications to address infiltration across land borders by, for example, monitoring seismic sensors placed along the border to detect incursions. Industrial IoT systems are also used in applications to address homeland security requirements, such as tracking and monitoring vessels and containers.
Customers
We market and sell our products and services directly to OEM and government customers and end users, and indirectly through MCPs and MCAs, as discussed below.
Revenues in Foreign Geographic Areas
Revenues in 2020, 2019 and 2018 in foreign geographic areas represented approximately 48%, 49% and 37% of our consolidated annual revenues, respectively, mostly in South America, Europe and Japan. Other than South America and Europe, no single foreign geographic area accounted for more than 10% of our consolidated revenues. See also “Note 12 - Segment Information” in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Sales, Marketing and Distribution
We generally market our services and products through the following channels:
Market Channel Partners (MCPs). We are currently working with a number of MCPs and seek to add additional MCPs as we expand our business. The role of the MCP is to develop tailored applications that utilize our system and then market them, through non-exclusive licenses, to specific, targeted vertical markets and geographies. MCPs are responsible for establishing retail pricing, collecting revenues from end users and for providing customer service and support. Our MCPs have made significant investments in developing ORBCOMM-based applications. MCPs pay fees for access to our system based on either a fixed monthly recurring charge or on the amount of data transmitted.
Generally, subject to regulatory restrictions, MCPs that have an IVAR arrangement allow us to enter into a single agreement with any given IVAR and allow the IVARs to pay directly to us a single price on a single monthly invoice in a single currency for worldwide service, regardless of the territories in which they sell, avoiding the need to negotiate prices in each territory.
Market Channel Affiliates (MCAs). We primarily market and distribute our services outside the United States through our subsidiary companies, several of which are overseas joint ventures, that are assigned specific international territories. We rely on these MCAs to establish business in their respective territories, including obtaining and maintaining necessary regulatory and other approvals, as well as managing local resellers. We believe our MCAs, through their local expertise, are able to operate in these territories in a more efficient and cost-effective manner. We currently have MCAs covering over 135 countries and territories. As we seek to expand internationally, we expect to add additional MCAs to cover Asia and some regions not currently covered in Africa. We
pay our MCAs a commission on revenues received from IVARs from each subscriber activated in the specific territory assigned to the MCA.
Direct to End Users. We also market directly to end users, providing services and products tailored to particular vertical markets, establishing retail pricing, collecting revenues and providing customer service and support.
Competition
Over the last several years, we have transitioned from a satellite network operator to a multi-network service provider to an industrial IoT solutions company to today, where we offer the full industrial IoT technology stack and leverage our satellite network, as well as price competitive networks, as a key differentiator. We believe no other industrial IoT company offers more options for hardware, software, connectivity, and responsive analytics at competitive price points. However, we are not the only provider of data communication services, and our industrial IoT products and services are increasingly subject to competition from existing and new entrants into the markets we serve. Competing service providers can be divided into four main categories: telematics and industrial IoT solution providers (including OEMs), terrestrial tower-based cellular networks, LEO mobile satellite and geostationary satellite service providers.
Telematics and industrial IoT solution providers
The growth in the industrial IoT industry has led to other competitors that compete with our products and services, including system integrators, device management and open source platforms, enterprise and commercial fleets, for-hire carriers, tank monitoring applications and petroleum logistics solutions, as well as OEMs in the refrigeration and transportation markets. In addition, IoT device manufacturers are seeking to expand into solutions to increase recurring service revenue. However, our industry-leading combination of global network services along with our state-of-the-art devices, breadth of related services and robust cloud-based analytics and reporting platform, for multiple market segments, asset classes and fleets of any size, provide what we believe is the global industrial IoT market’s most comprehensive service offering and positions us as a leader and innovator in this marketplace.
Terrestrial tower-based cellular networks
While terrestrial tower-based cellular networks are capable of providing services comparable to ours at higher data rates, they lack seamless global coverage. Terrestrial coverage is dependent on the location of tower transmitters, which are generally located in densely populated areas or heavily traveled routes. Several data and messaging markets, such as long-haul trucking, railroads, oil and gas, agriculture, utility distribution and heavy construction, have significant activity in sparsely populated areas with limited or no terrestrial coverage. In some geographic areas, terrestrial tower-based networks have gaps in their coverage and may require a back-up system to fill such coverage gaps. We have entered into re-seller agreements with several major Tier One cellular wireless providers to provide our customers options for incorporating terrestrial communications connectivity for industrial IoT solutions, in either single-mode or dual-mode configurations that use both terrestrial and satellite network platforms. In addition, cellular providers are expanding into IoT solutions.
Low-Earth orbit mobile satellite service providers
LEO mobile satellite service providers operating above the 1 GHz band, or big LEO systems, can provide data connectivity with global coverage that can compete with our communications services. The primary focus of big LEO satellite service providers has been on circuit-switched communications tailored for time- and bandwidth-intensive voice traffic, which is less efficient than the transfer of short data messages. However, big LEO satellite service providers have shifted to focus more on industrial IoT data communications. These systems generally entail higher costs for the satellite fleet operator and the end users. Our principal big LEO mobile satellite service competitors are Iridium Communications Inc. and, to a lesser extent, Globalstar, Inc.
Geostationary satellite service providers
Geostationary satellite system operators can offer services that compete with ours. Certain pan-regional or global systems (operating in the L- or S-bands), such as Inmarsat, are designed and licensed for mobile high-speed data and voice services. We believe that the equipment cost and service fees for narrowband data communications using these systems are also higher than ours, and that these geostationary providers cannot offer global service with competitive communications devices and costs. In addition, they have other limitations, such as requiring a clear line of sight between the communicator equipment and the satellite, being affected by adverse weather or atmospheric conditions, and being vulnerable to catastrophic single-point failures of their satellites with limited backup options. In addition, we resell satellite airtime service provided by Inmarsat to meet specific customer needs.
Product Development
We develop products and service enhancements that we sell directly to our end-user customers, as well as design new products and services that enhance features and capabilities, while at the same time reducing costs of our products and services.
ORBCOMM Communications System
Overview
Our industrial IoT data communications services are provided by offering a unique combination of both satellite and terrestrial networks including our proprietary LEO satellite constellation, consisting of our OG2 satellites, which are equipped with additional AIS capabilities, operating in the VHF band. In addition, we offer data communication services provided by third-party satellite constellations, such as our partnership with Inmarsat, through which we provide L-band GEO satellite service via both IDP, a satellite packet data service offering the highest payload and lowest latency in the market, and a 3G-based service, and the Globalstar, Inc. satellite network. In addition, we provide data communication services utilizing Tier One wireless carriers through partnerships with AT&T, Verizon, T-Mobile, Telefonica, Orange, Rogers, Jersey Telecom and Vodafone, whose Access Point Name (“APN”) networks are tightly integrated into our own production network to provide a common interface for a mix of carrier and service options for our customers.
We utilize our ORBCOMMConnect Platform to seamlessly translate and integrate the communications from our diverse network service partners into a uniform and easily manageable set of commands and responses and information delivery. This creates a common user platform for provisioning, billing and multi-mode access for industrial IoT applications and enables access to network and terminal management tools for rapid wholesale integration with our network. We sell or lease to our customers a subscriber component, which consists of satellite subscriber communicators and cellular terrestrial units, or wireless modems incorporating SIMs, used by end users to transmit and receive messages to and from their assets and our system. In addition, our web applications provide specialized data feeds that are established through our application gateway interface to third-party dispatch systems and proprietary customer software applications to provide customers with data and analytics from telematics products and specialized sensors.
The data generated by our customer base typically comes from end-user or ORBCOMM-developed applications. The data may be transferred to either a satellite terminal or a terrestrial-based wireless device using a SIM on the partner cellular provider’s network. If the data is transferred to a satellite subscriber communicator, data is transmitted to the next satellite that comes into view in near real-time. The data is then routed by the satellite to the next gateway earth station (“GES”) that it successfully connects to, which in turn forwards it to the ORBCOMM gateway control center (“GCC”). Within the GCC, the data is processed, safe-stored, and forwarded to its ultimate destination and, if requested, an acknowledgment that the message content has been received is transmitted back to the subscriber communicators. If the data is transferred to a cellular device, data is routed through the partner carrier’s network via VPN to the ORBCOMM GCC and forwarded to its ultimate destination in real time. The destination for transferred data may be another subscriber communicator, a SIM, a corporate resource management system, any personal or business Internet e-mail address, a pager or a text message-capable cellular phone, or any combination of the above. In addition, data can be sent in the reverse direction (a feature which is utilized by many applications to remotely control assets) using similar methods.
System Status
OG1 satellites
With the launch of the OG2 satellites, we have completed the gradual phasing out of the ORBCOMM Generation 1 (“OG1”) satellites.
OG2 satellites
On July 14, 2014, we launched six of our next-generation OG2 satellites, all of which were placed into proper orbit. On September 15, 2014, following an in-orbit testing period, we initiated commercial service for the six OG2 satellites. On December 21, 2015, we launched the remaining 11 next-generation OG2 satellites, all of which were placed into proper orbit. On March 1, 2016, following an in-orbit testing period, we initiated commercial service for the 11 OG2 satellites. Of the 17 OG2 satellites placed in service, we have lost communication with six satellites including, most recently, one OG2 satellite that experienced a communication issue in October 2018 but remained under our operational control up until November 2020. In February 2021, we briefly regained operational control of this OG2 satellite. Our engineering and operations teams continue efforts to re-establish operational control of this OG2 satellite and are developing new software in an attempt to restore AIS and/or messaging services. If we are unable to regain operational control and restoration of AIS and/or messaging services on this OG2 satellite, we would write off its net book value of approximately $7.0 million as of December 31, 2020. In 2015 and 2016, we recorded a non-cash impairment charge to write off the
net book value for one OG2 satellite each year, and in 2017 we recorded a non-cash impairment charge to write off the net book value of three OG2 satellites.
In 2017, following a loss of communication with three OG2 satellites, we established a comprehensive investigative team that included outside independent consultants, internal engineers and OG2 contractors to determine the root cause of the anomalies affecting these three OG2 satellites and associated corrective measures. The investigative team identified two potential primary causes for the loss of communication and developed operational procedures and software enhancements to mitigate the risk of a similar anomaly occurring on other OG2 satellites. The investigative team did not identify a systemic design flaw in the OG2 satellites. The satellite network capacity remains multiple times more capable than current demand, while there has been an increase on message delivery times.
The operational OG2 satellites are providing both M2M messaging and AIS service for our global customers. The satellites have been divided into four separate planes and were placed into differing altitudes to allow each plane to drift to the proper orbit. All of the drifting operations are complete and the OG2 satellites are equally spaced in four planes providing customers the optimum coverage.
ORBCOMM gateways
The GESs in the United States and internationally are performing well. With the incorporation of an improved store and forward capability on the OG2 satellites, the reliance on multiple GESs is reduced which has afforded us the ability to take the GES located in Kazakhstan offline without a major reduction in messaging performance. In addition to routine maintenance, we continue to perform hardware and software upgrades which have improved the functionality of the GESs. Specifically, new antenna control and drive systems have been installed in several of the GESs in conjunction with the aforementioned upgrades.
ORBCOMM network capacity
With the addition of our OG2 satellites, the ORBCOMM network capacity has been increased. Each OG2 satellite has up to six times the capacity of the OG1 satellites because each OG2 satellite has six downlink transmitters where the OG1 satellites had only one. Currently, the OG2 satellites are meeting our capacity needs with just two downlink channels per satellite.
Inmarsat Services
In October 2020, ORBCOMM and Inmarsat entered a long-term agreement to provide IoT services and solutions expected through at least 2035. In addition, ORBCOMM and Inmarsat will be developing a next-generation service called OGx, which incorporates the current IDP service and will feature new offerings to suit future customer demand. The OGx network is expected to become available in 2022.
This agreement also transitions the primary operational control of the IDP services to ORBCOMM. For 2020, while under the operational control of Inmarsat, the system performance was over 99.6% network availability. For the legacy IsatM2M services, we provide operational support to Inmarsat’s engineering and operations teams. The IsatM2M services are nearly at their end of life planned for December 2021. Over the past several years, our customers have been replacing their IsatM2M devices with IDP devices, and we expect such replacements to continue for the remainder of 2021. Like the IDP services, network availability for IsatM2M services has been consistent and reliable.
For both the IDP and IsatM2M services, we remain in control of the message delivery gateway that is the interface to our customers for message delivery. The gateway is a redundant system providing customer access via two independent Internet lines which offer connectivity to their mobile terminals and messages over multiple transports and protocols. It is a high-availability system responsible for connection, storing and relaying messages between customers and Inmarsat satellite network systems, as well as providing terrestrial messaging services between customers and mobile terminals.
Terrestrial Services
We have active partnerships with many of the major terrestrial carriers, both domestically and abroad, including AT&T, Verizon, T-Mobile, Telefonica, Orange, Rogers, Jersey Telecom and Vodafone. We have tightly integrated each carrier’s APN into our production network to provide a common interface for a mix of carrier and service options for our customers. The integration planning of each carrier network is at the core of our goal to provide a consistent and reliable uniform messaging environment over a variety of networks. We maintain redundant connections to carriers through an East Coast primary data center and West Coast backup data center. Our Network Control Center, staffed 24 hours a day, monitors all aspects of the network to ensure prompt response to network anomalies when they occur. Aside from a traditional Network Management System utilizing Simple Network Management Protocol for infrastructure monitoring, device and carrier specific tests simulate customer traffic and provide performance metrics for support staff and engineers. A three-tier support structure is employed to ensure that staff with domain specific knowledge are quickly assigned to address anomalies and implement resolutions.
AIS Services
Our AIS data services are provided through a combination of our OG2 satellites, which are all enabled with advanced AIS data receivers, and third-party space-based assets and terrestrial AIS data providers.
Regulation of Our Business in the United States
FCC authorizations
Any entity seeking to construct, launch, or operate a commercial satellite system in the United States must first be licensed by the U.S. Federal Communications Commission (“FCC”). ORBCOMM License Corp., a wholly owned subsidiary of ours, holds the FCC license for our VHF LEO Satellite System (the “Space Segment License”). ORBCOMM License Corp. also holds additional FCC licenses relating to our United States GESs, and our VHF and L-band subscriber communicator deployments in the United States. We believe that our business, as currently conducted, is in full compliance with all applicable FCC rules, policies and license conditions.
FCC license renewals
The current 15-year term of our Space Segment License expires in April 2025, and the renewal application must be filed between 30 and 90 days prior to the end of the twelfth year of the current license term (i.e., between 30 and 90 days prior to April 2022). The current FCC earth station licenses for three of the four the U.S. GESs expire on May 17, 2035. The FCC license for the fourth U.S. GES and the “blanket” VHF subscriber communicator license expire on June 12, 2035. Our two L-band subscriber communicator licenses expire on January 22, 2034 and April 19, 2026, respectively. Renewal applications for our FCC earth station licenses must be filed between 30 and 90 days prior to expiration. Although the FCC has been positively disposed thus far towards granting our applications for license renewals, there can be no assurance that the FCC will in fact grant our earth station license renewals, or renew our other FCC licenses in the future.
We believe that our business as currently conducted is in full compliance with all applicable FCC rules, policies, and license conditions. We also believe that we will have the ability to continue to comply with all applicable FCC requirements, although we cannot provide assurance that will be the case.
Non-common carrier status
All of our FCC licenses authorize our provision of commercial services on a “non-common carrier” basis. As a result, our service offerings are subject to limited FCC regulations, and we are not required to comply with the obligations, restrictions and reporting requirements applicable to common carriers or to providers of Commercial Mobile Radio Services, or CMRS. There can be no assurance, however, that in the future, we will not be deemed by the FCC to provide services that are designated common carrier or CMRS, or that the FCC will not exercise its discretionary authority to apply its common carrier or CMRS rules and regulations to our service offerings. If this were to occur, we would be subject to FCC obligations that include record retention requirements, limitations on use or disclosure of customer proprietary network information and truth-in-billing regulations. In addition, we would need to obtain FCC approval for foreign ownership in excess of 25% and authority under Section 214 of the Communications Act of 1934, as amended, to provide international services. Finally, we would be subject to additional reporting obligations with regard to international traffic and circuits, and Equal Employment Opportunity Act compliance.
United States regulatory controls
We are subject to U.S. import and export control laws and regulations, specifically the Arms Export Control Act, the International Traffic in Arms Regulations, and the Export Administration Regulations. We are also subject to other regulatory regimes, including trade and economic sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control and the Foreign Corrupt Practices Act, and we believe we are in full compliance with all such laws and regulations. We also believe that we have obtained all the specific authorizations currently needed to operate our business and believe that the terms of the relevant licenses are sufficient given the scope and duration of the activities to which they pertain. We are also subject to the increasing data privacy regulatory regimes being implemented in various states and foreign countries with regard to data privacy, controls and information security obligations. We believe that our processes, procedures and security measures meet the requirements of those regimes.
Regulation of Our Business in Other Countries
Our business and our business objectives are inherently worldwide, and our product and service offerings are subject to national telecommunication regulation and other applicable laws and regulations of every country in which we, our MCAs, and our MCPs conduct business. These other applicable laws and regulations include various European Union compliance obligations, the UK Bribery Act, the General Data Protection Regulation, and other national privacy and information security compliance regimes in countries, including Canada, Australia, Argentina, China and Brazil. These rules and policies, all of which are subject to change from time to time without prior notice, specify technical parameters for the operation of network facilities and subscriber communicators, determine the permissible uses of network facilities and subscriber communicators, and otherwise establish the terms and conditions pursuant to which our products and services can be offered and utilized in any given country. As a result, we, our MCAs, our MCPs and, in some cases, our respective customers, must comply with various overseas legal and regulatory regimes, and obtain and maintain requisite local regulatory and other governmental approvals in each country where our product and services are offered and utilized. The process for obtaining the applicable regulatory authorization varies from country to country, and in some instances may require technical studies or actual experimental field tests under the direction and/or supervision of the local regulatory authority. Certain countries continue to require that some or all telecommunications services be provided by a government-owned or controlled entity. Therefore, under such circumstances, we may be required to offer our products or services through a government-owned or controlled entity. Failure to obtain or maintain any requisite authorizations in any given country could mean that some or all of our products and services may not be provided or utilized in that country.
We believe, but cannot provide assurance that we, our MCAs, our MCPs, and our customers are in compliance with all applicable laws and policies and have obtained all necessary regulatory or other governmental approvals required to conduct our respective current business activities in each of the countries where we currently operate. However, it may not be possible for us, our MCAs, our MCPs, and our customers to maintain compliance with all applicable laws and policies, or obtain, modify, or maintain requisite regulatory or other governmental approvals in the future. Moreover, future changes in applicable regulatory or governmental approval requirements may result in disruptions of our ability to provide or utilize some or all of the products and services we offer in one or more countries, or alternatively, result in added operational costs, which could materially harm our business.
Non-U.S. GESs for our satellite constellation
To date, in addition to those in the United States, GESs for our VHF satellite constellation have been authorized and deployed in Argentina, Australia, Brazil, Curaçao, Italy, Japan, Kazakhstan, Malaysia, Morocco, South Africa and South Korea. GESs are generally licensed on an individual facility basis. This process normally entails radio frequency coordination within the country of operation for the specific frequencies to be used in the designated geographic location of the subject GES. This domestic frequency coordination is in addition to any international coordination that may be required, as determined by the proximity of the GES location to foreign borders (see “- International Regulation of Our VHF LEO Satellite System” below). Based on the best available information, we believe that each of the GES authorizations is sufficient for the provision of our VHF satellite constellation services in the areas served by the relevant facilities. We will need additional GES authorizations in other countries as we install additional ORBCOMM GESs around the world.
Equipment standards
Each manufacturer of the applicable subscriber communicator is contractually responsible to obtain and maintain the governmental authorizations necessary to operate their subscriber communicators in each jurisdiction. Most countries generally require all radio transmission equipment used within their borders to comply with operating standards that may include specifications relating to required minimum acceptable levels for radiated power, power density and spurious emissions into adjacent frequency bands not allocated for the intended use. Technical criteria established by telecommunications equipment standards issued by the FCC and/or the European Telecommunications Standards Institute, or ETSI, are generally accepted and/or closely duplicated by domestic equipment approval regulations in most countries. To the best of our knowledge, all of the subscriber communicator models that we, our MCAs, and our MCPs offer on the market comply with established FCC and ETSI standards.
International Regulation of Our VHF LEO Satellite System
The use of certain orbital planes and related system radio frequency assignments by our VHF LEO Satellite System, as licensed by the FCC, is subject to the frequency coordination and registration process of the International Telecommunication Union (“ITU”). In order to protect satellite systems from harmful radio frequency interference from other satellite communications systems, the ITU maintains a Master International Frequency Register (“MIFR”) of radio frequency assignments and their associated orbital locations. Each ITU member state (referred to as an administration) is required by treaty to give notice of, coordinate and register its proposed use of radio frequency assignments and associated orbital locations with the ITU’s Radio Communication Bureau.
The FCC serves as the notifying administration for the United States and is responsible for filing and coordinating the allocated radio frequency assignments and associated orbital locations for our VHF LEO Satellite System with both the ITU’s Radio Communication Bureau and the national administrations of other countries. While the FCC, as our notifying administration, is responsible for coordinating our VHF LEO Satellite System, in practice the satellite licensee is generally responsible for identifying any potential interference concerns with existing systems or those enjoying date priority and for coordinating with such systems. If we are unable to reach agreement and finalize coordination, the FCC would then assist with such coordination.
The FCC has notified the ITU that our VHF LEO Satellite System was initially placed into service in April 1995 and that it has operated without any substantiated complaints of interference since that time. The FCC has also informed the ITU that our system has successfully completed the international coordination process and has been formally registered in the MIFR. We continue to support FCC efforts to complete any additional required international coordination relating to our system and our new satellites, as necessary. If design modifications we may make to our future satellites entail substantial changes to the frequency utilization by the subject system component(s), additional international coordination may be required or reasonably deemed advisable. However, we believe that ITU coordination can be successfully completed in all circumstances where such coordination is required, although we cannot provide assurance that we will successfully complete such ITU coordination. Failure to complete requisite ITU coordination could have a material adverse effect on our business. Regardless, to date, and to our best knowledge, the system has not caused harmful interference to any other radio system, or suffered harmful interference from any other radio system.
Intellectual Property
We use and hold intellectual property rights for a number of trademarks, service marks and logos for our system. We have two main marks - “ORBCOMM” - which is registered or is pending registration in approximately 125 countries and the ORBCOMM logo, which is represented by the ORBCOMM name in black type with a distinctive red graphic within the second “O.”
The telematics solutions services provided by our affiliates use trademarks, including FLEETEDGE®, REEFERTRAK® and CARGOWATCH®” that are registered in the U.S. and numerous countries around the world. Other trademarks, such as “GLOBALTRAK,” are seeking registration only in the U.S., while others, such as “STARTRAKTM” and “VESSELCONNECTTM,” are subject to common law protection. In addition, we have the R:COM® trademark registered in the U.S. and European Community and “BLUE TREE SYSTEMS & DEVICE” registered in the European Community.
Our telematics solutions services are protected by approximately 100 patents maintained across the United States, Europe, Australia, China, Mexico and Canada. We also have a significant number of pending patent applications relating to our devices and solutions services. Further, we expect to file additional patent applications in the appropriate countries to protect our technology investments and innovations.
We believe that all intellectual property rights used in our system were independently developed or duly licensed by us, by those we license the rights from or by the technology companies who supplied portions of our system. We cannot provide assurance, however, that third parties will not bring suit against us for patent or other infringement of intellectual property rights.
The value of intellectual property assets recorded for accounting purposes is primarily related to technology-based intangible assets resulting from acquisitions.
Human Capital
Employees
In order for us to be successful in the long run, we have invested in our employees, taking a local approach towards development, engagement and retention. We have over 700 employees across the globe, with approximately 303 employees in the United States and approximately 423 employees outside the United States in North and South America, Europe, Africa and Asia. We believe we have developed a collaborative and dynamic workplace where our people look forward to coming every day, contributing to and building a successful future for the Company. In keeping with our philosophy of investing in our employees, the vast majority, 739, of the people who work with us are full time and 57 are contractors or part time employees. As of December 31, 2020, our employee population was engaged in the following functions: approximately 20% in administration, 14% in sales and marketing, 41% in product development and 25% in technical operations. None of our employees are covered by a collective bargaining agreement.
Company Culture
All employees adhere to and take an active role in supporting our core values expressed in our Code of Conduct, which helps us ensure that everyone is focused on making it a safe, inclusive and ethical place to work. To ensure our employees know and understand how to participate in developing an ethical culture, we poll our employees annually to gauge what areas we need to
improve, making our employees part of the solution. We maintain a 24/7 ethics hotline, which can be reached by phone, email or via a web-based interface.
Every employee has a voice at the Company. Through our annual employee survey, our employees know that their opinions and issues are valued. We have received responses in the high or very high categories from a significant majority of our employees with respect to their recommending us as a good place to work, their level of satisfaction as an employee of ours and their likelihood of remaining an employee in two years. We believe that these results indicate that we have a significantly stable workforce.
Compensation and Benefits
We provide robust compensation and benefit programs to attract, retain and meet the needs of our employees. Through various equity plans, every full-time employee has an opportunity to own shares of our stock and are incentivized to support our growth and success. In addition, our 401(k) Plan and other generally available benefit programs allow us to remain competitive in our markets with respect to recruiting new employee talent, and we believe that these benefit programs enhance employee productivity and loyalty to the Company.
Diversity and Inclusion
We embrace and encourage our employees’ differences. As a global company, we believe that it is the differences that make us a stronger company. Our differences allow a diversity of ideas on which we are built. We encourage the professional development of our employees through management sponsored empowerment groups, such as our Women’s Professional Network, which provides a forum for women to network with and mentor each other. We also continue to provide mandatory harassment and sensitivity training for our employees to promote inclusion and equality within the Company. As a result of these efforts, over 93% of our employees feel as though they are treated with respect by their coworkers.
Health and Safety
At ORBCOMM, the safety, health and welfare of our employees is a priority. While most of our employees work in the relative safety of an office setting, our staff often visit customer sites to install our devices in their truck fleets or shipping containers. Despite the inherent risks of working in places such as truck depots, trainyards, shipyards, and oil and gas refineries, no employee suffered a workplace injury in 2020. In response to the COVID-19 pandemic and the various government-issued work from home orders, we have facilitated remote work for the majority of our employees. For employees who were considered essential employees according to state definitions and were required to either work in an office setting or visit customers for on-site support, we provided appropriate personal protection equipment to ensure our employee’s health and safety.
Corporate Information
ORBCOMM Inc. was incorporated in Delaware in 2003. Our principal executive offices are located at 395 W. Passaic Street, Rochelle Park, New Jersey 07662, and our telephone number is (703) 433-6300. Our website is www.orbcomm.com and information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet website that contains reports, proxy statements and other information regarding issuers like us that file electronically with the SEC, which can be found at http://www.sec.gov. Our annual, quarterly and current reports, and amendments to those reports can be obtained free of charge through the Investors section of our website as soon as reasonably practicable after we electronically file such documents with, or furnish them to, the SEC or from the SEC through its website.
Information About Our Executive Officers
Certain information regarding our executive officers is provided below:
Name
Age
Position(s)
Marc J. Eisenberg
Chief Executive Officer and President
Constantine Milcos
Executive Vice President and Chief Financial Officer
Christian G. Le Brun
Executive Vice President and General Counsel
Craig Malone
Executive Vice President, Product Development
John J. Stolte, Jr.
Executive Vice President, Technology and Operations
Marc J. Eisenberg is our Chief Executive Officer and President, a position he has held since March 31, 2008, and a member of our Board of Directors since March 7, 2008. From June 2006 to March 30, 2008, he was our Chief Operating Officer and from March 2002 to June 2006, he was our Executive Vice President, Sales and Marketing. Mr. Eisenberg was a member of the board of directors of ORBCOMM Holdings LLC from May 2002 until February 2004. Prior to joining ORBCOMM, from 1999 to 2001, Mr. Eisenberg was a Senior Vice President of Cablevision Electronics Investments, where among his duties he was responsible for selling Cablevision services such as video and internet subscriptions through its retail channel. From 1984 to 1999, he held various positions, most recently as the Senior Vice President of Sales and Operations with the consumer electronics company The Wiz, where he oversaw sales and operations and was responsible for over 2,000 employees and $1.0 billion a year in sales. Mr. Eisenberg is the son of Jerome B. Eisenberg, our Chairman of the Board.
Constantine Milcos is our Executive Vice President and Chief Financial Officer, a position he has held since April 5, 2019. From September 2013 to April 2019, Mr. Milcos was our Senior Vice President and Chief Accounting Officer. Prior to joining ORBCOMM, Mr. Milcos served in various accounting roles at Medco Health Solutions from 2003 to 2013, most recently serving as Vice President, SEC Reporting, Technical Accounting and Controls from 2008 to 2013. In addition, from 1999 to 2003, he was an accountant with KPMG, LLP. Mr. Milcos is a Certified Public Accountant licensed in the State of New York.
Christian G. Le Brun is our Executive Vice President and General Counsel, a position he has held since March 31, 2008. From April 2005 to March 30, 2008, Mr. Le Brun was our Senior Vice President and General Counsel. Prior to joining ORBCOMM, from 1999 to 2005, Mr. Le Brun was an attorney with Chadbourne & Parke LLP, where he oversaw a broad range of transactions, including mergers, acquisitions, divestitures, corporate restructurings and work-outs, as well as debt and equity financing arrangements involving publicly-held and private companies. In addition, from 1994 to 1999, he was a corporate attorney with Pullman & Comley, LLC. Mr. Le Brun is a member of the New York State Bar.
Craig Malone is our Executive Vice President, Product Development, a position he has held since July 8, 2013. Mr. Malone joined ORBCOMM in 2011 as the Senior Vice President of Product Development. Mr. Malone has over 20 years of experience in leading teams engaged in the development of innovative products and solutions for the M2M, wireless and telecommunications industries. Prior to joining ORBCOMM, Mr. Malone was the Senior Vice President of Product Development and Operations at Skybitz. He also served as the Vice President of Product Development and Chief Technology Officer at GeoLogic Solutions and held executive positions at Philips Electronics and Raytheon Company.
John J. Stolte, Jr. is our Executive Vice President, Technology and Operations, a position he has held since April 2001. From January to April 2001, he held a similar position with ORBCOMM Global L.P. Mr. Stolte has over 25 years of technology management experience in the aerospace and telecommunications industries. Prior to joining ORBCOMM Global L.P., Mr. Stolte held a number of positions at Orbital Sciences Corporation from September 1990 to January 2001, most recently as Program Director, where he was responsible for the design, manufacturing and launch of the ORBCOMM satellite constellation. From 1982 to 1990, Mr. Stolte worked for McDonnell Douglas in a number of positions, including at the Naval Research Laboratory where he led the successful integration, test and launch of a multi-billion dollar defense satellite.
Item 1A.
Item 1A.
Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. Any of these risks could also materially and adversely affect our business, financial condition, results of operations or the price of our common stock. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business
Our business plan depends on both increased demand for our products and services and our ability to successfully secure and retain business from large enterprise customers.
Our business plan is predicated on the growth in demand for our products and services, which is often dependent on the growth of business from our existing customers through their purchasing of additional products and services, the renewal of existing agreements and selling our products and services to new and existing large enterprise customers. Demand for such data products and services may not grow, or may even contract, either generally or in particular geographic markets, for particular types of services or during particular time periods. A lack of demand for our products and services could harm our ability to develop our business and increase our revenue and could exert downward pressure on prices. A decline in prices would decrease our revenues and negatively affect our ability to generate cash for investments and other working capital needs. Our business plan assumes that potential customers and end users will accept certain limitations that can be inherent in our product and service offerings. For example, our VHF satellite system is optimized for small packet, or narrowband, data transmissions, is subject to certain delays in the relay of messages, referred to as latencies, and may be subject to certain line-of-sight limitations between our satellites and the end user’s subscriber communicator.
Specifically, our ability to successfully implement our business plan depends on a number of factors, including:
•
our ability to successfully secure new large enterprise customers and accurately predict their development and deployment schedule;
•
our ability to continue to successfully and timely introduce innovative new products and services that satisfy market demand, including new products and services provided via our satellite constellation, our other satellite network platforms, our terrestrial communication network platforms, our dual-mode or multi-mode network platform products and services, and our emerging data analytics business;
•
our ability to sell our products and services in additional countries and vertical markets;
•
the ability of our various MCAs and MCPs to market and sell our products and services, and to continue to successfully develop, market, and sell additional offerings based on our products and services;
•
our ability to continue to offer our customers a diversity of satellite and terrestrial communication network platform options, including our ability to maintain and limit the effects of decreased health, in-orbit anomalies, capacity and control of our ORBCOMM VHF satellites;
•
our ability to renew or maintain our business with existing customers at existing levels or to attract new customers;
•
our ability to obtain or maintain the necessary regulatory or other required governmental approvals in particular countries or territories;
•
our ability to meet customers’ increasing demand for more sophisticated and complex solutions;
•
our ability to meet transportation market customers’ increasing demand for a sales model that combines the cost of hardware and service for one monthly price over a multi-year term; and
•
our ability to maintain competitive prices for our products and services and control costs.
We substantially rely on our subsidiary companies and various third parties to market and sell our products and services, and to develop and sell additional offerings utilizing our products and services. If these parties are unsuccessful in these endeavors, our business will be harmed.
To successfully develop, market, and sell our products and services, we substantially rely on our subsidiary companies, several of which are overseas joint ventures, to address particular products or services, vertical segments, or distinct market territories (we refer collectively to these subsidiary companies as MCAs). We also substantially rely on our various third-party product and service
developers and providers, distributors, resellers, solution providers and others (we refer collectively to these third parties as MCPs). The willingness and ability of our existing and potential new MCPs to engage or continue to engage in our business depends on a number of factors, including whether they perceive our services to be compatible with their business objectives, whether the prices they can charge end users will provide an adequate return, and the burden imposed by market challenges or regulatory constraints. The design, development and implementation of successful solutions require the commitment of substantial financial and technological resources by us and our MCPs. Certain of our MCPs are, and many potential new MCPs will be, newly formed or small ventures with limited financial resources, and such entities might not be successful in their efforts to effectively market our products and services, or to design new offerings that utilize our products and services. The inability of our MCAs and MCPs to successfully market and sell to end users could have a material adverse effect on our business, financial condition and results of operations. We also believe that our success depends upon the competitive pricing of product and service offerings by us, our MCAs and our MCPs. However, we have little or no control over our third-party MCPs with respect to customer pricing decisions.
We have incurred net losses since our inception, other than in 2012 and 2013, and may incur additional net losses in the future. As a result, we have an accumulated deficit of $244.9 million as of December 31, 2020. To become profitable, we must increase our revenues at a faster rate than increases in our expenses.
We have had annual net losses since our inception, other than in fiscal years 2012 and 2013, and as of December 31, 2020, we have an accumulated deficit of $244.9 million. Our future results will continue to reflect significant operating expenses, including expenses associated with expanding our sales and marketing efforts, maintaining the infrastructure to operate as a public company, and the ongoing depreciation, operation and maintenance of our fleet of VHF and AIS satellites and associated ground network facilities, as well as the additional facilities we own and operate in connection with our other satellite and terrestrial network platform service offerings. The continued development of our business will also require additional capital expenditures for, among other things, the installation and maintenance of additional GESs and associated satellite network ground facilities around the world relating to our VHF and AIS satellite systems, expenditures for the ongoing maintenance, repair, upgrade, or expansion of other network facilities that we own and operate, as well as capital expenditures in new products and technologies. In addition, our acquisitions have resulted in increases in intangible assets, which are subject to amortization and potential impairment. Accordingly, as we make these capital and acquisition investments, our future results will include greater depreciation and amortization expense which reflect the full cost of acquiring these new assets, and we may incur additional operating losses and net losses in the future.
In order to become profitable, we must continue to increase revenue at a faster rate than increases in expenses. We may not be able to sustain such profitability, if achieved.
We face substantial competition from existing and potential competitors in the telecommunications, AIS data and industrial IoT industries, including numerous OEMs, industrial IoT companies specializing in fleet management solutions as well as terrestrial and satellite-based network systems with greater resources, which could reduce our market share and revenues. Many of these competitors in the transportation and cargo markets offer hardware and solutions in a bundled offering for a single monthly fee, which could reduce our market share and revenues if we do not continue to match this bundled sales model.
Competition in the telecommunications, AIS data and industrial IoT industries is intense, reflecting rapid, continuous technological advances, alliances between industry participants seeking to capture significant market share and a highly fragmented market with low barriers to entry. We face competition from numerous existing and potential alternative products and services provided by various companies, including sophisticated two-way satellite-based data and voice communication services and digital cellular services, such as GSM, 3G, 4G, LTE, 5G, two-way terrestrial services such as Low-Power Wide-Area Network (“LPWAN”), and a diverse group of industrial IoT providers aggressively pricing their products and services, including by bundling their hardware and service for a single monthly fee, to gain market share. The rigorously competitive environment in which we operate can have a substantial negative influence on pricing flexibility, capital expenditure requirements, gross profit margins and market share, both for our products and services and the offerings of our MCPs. For example, we face ongoing market pressures from several global satellite communication services operators that offer mobile satellite data products and services that directly compete with our products and services. New and advanced technology which can perform essentially the same functions as our products and services, such as newly deployed or proposed competing satellite systems (at least two of which are using or intend to use VHF-Band mobile satellite service spectrum), as well as other new competitive market offerings utilizing terrestrial wireless transmission technologies, are in various stages of development by others in the industry.
The industrial IoT and telematics industry includes numerous companies developing technologies to compete with our products and services, including OEMs such as Thermo King Corporation and Carrier Corporation with respect to the refrigerated cargo market, and truck and trailer OEMs with respect to the transportation market. OEMs and large enterprise customers have also begun developing their own device management and open-source platforms which operate independently of the ORBCOMM platform. Certain OEMs provide factory-installed devices and may in turn compete directly or indirectly with us by partnering with one or more of our competitors, and we cannot provide any assurance that we would be able to participate in this new ecosystem. These
technologies are being developed, marketed and supported by entities that may have significantly greater financial, technical, marketing and distribution resources than we do. These technologies could adversely impact the demand for our products and services. Research and development by others may lead to technologies that render some or all of our services non-competitive or obsolete in the future. In addition, a continuing trend toward consolidation and strategic alliances in the telecommunications industry, as well as the potential development of new satellite constellations, could give rise to significant new competitors. With respect to AIS-enabled satellites, a number of competitors have entered and may continue to enter the market, which we expect to give rise to additional competition. Furthermore, some foreign competitors may benefit from government subsidies, or other protective measures, afforded by their home countries. Some of these competitors may provide more efficient or less expensive products or services than we are able to provide by utilizing more aggressive pricing policies and offering customers more attractive terms than we can, which could reduce our market share and adversely affect our revenues and business.
Our success depends, in part, on our ability to effect suitable investments, alliances and acquisitions and our ability to successfully integrate the businesses and systems we acquire.
Since mid-2011, we have expanded our business both organically and through several key acquisitions. On an ongoing basis, we review investment, alliance and acquisition prospects that would complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Our prospects and ability to strategically pursue possible new acquisitions or joint ventures are subject to our ability to:
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evaluate the goodwill and acquisition-related intangible assets for impairment as when such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings;
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successfully engage with our existing MCAs and MCPs, and develop new MCA and MCP relationships; and
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use all of our capabilities to expand our business across existing and new verticals and key markets throughout the world by driving existing and new customers to our array of product and service offerings.
Even if we are able to successfully identify and consummate suitable acquisition transactions, the consummation of such acquisitions may result in:
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issuances of equity securities dilutive to our existing shareholders;
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the incurrence of substantial debt and assumption of unknown liabilities;
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the potential loss of key employees from the acquired company;
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amortization expenses related to intangible assets; and
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the diversion of management’s attention from other business concerns.
Furthermore, the integration of acquired businesses and their products and services may be expensive, time-consuming and a strain on our resources and present certain challenges, including:
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the impairment of relationships with employees and customers;
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the inability to successfully complete, or delays in, the integration and consolidation of the acquired businesses and software platforms in which we have been investing for several years;
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the inability to maintain brand recognition of the acquired businesses;
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the inability to maintain corporate controls, procedures and policies;
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the failure of acquired features, functions, products or services to achieve market acceptance; and
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potential unknown liabilities associated with acquired businesses.
Defects, errors or other insufficiencies in our products or services have and could result in end users rejecting our offerings, which could damage our reputation and harm our financial condition.
We must continue to successfully develop and deploy innovative, reliable, and cost-effective products and services that keep pace with rapidly changing markets and customer requirements. These efforts, which often entail complex or accelerated development cycles, can result in offerings that have undetected errors or defects, especially when first introduced or when subsequent versions are introduced. Any such errors or defects could result in the disruption or failure of our products or services, or even personal injury or property damage. Any such occurrence could damage our reputation as well as the reputation of respective MCAs or MCPs, and result in lost customers, lost revenue, diverted development resources, increased service, recall and warranty costs, and even liability claims.
In addition, it is possible that our products could become the subject of a product recall as a result of a product defect. We do not maintain recall insurance, so any recall could have a material adverse effect on our business, financial condition and results of operations. In addition to the direct expenses of liability claim awards, recalls and litigation, any of the foregoing might cause us adverse publicity, which could harm our reputation and compromise our ability to sell our products in the future.
Our failure to meet minimum service level commitments to certain customers, including certain of our transportation and many of our AIS data customers, could cause us to issue credits for future subscriptions or pay penalties, which could harm our results of operations.
Certain of our customer agreements currently, and may in the future, provide minimum service level commitments regarding items such as uptime, functionality or performance, including certain of our transportation and many of our AIS data customers. The loss of one or more of our AIS-enabled OG2 satellites or third-party AIS satellites could cause our AIS service to fall below minimum service level commitments. If we are unable to meet the stated service level commitments for these customers or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these customers with credits for future service, provide services at no cost, allow customers to terminate service, or pay other penalties which could adversely impact our revenue. We do not currently have any reserves on our balance sheet for these commitments.
Because a few significant customers represent a substantial portion of our revenues, the loss, significant decline or slowdown in growth in business of any of these customers could seriously harm our business.
Our revenues depend on a small number of significant customers such as JB Hunt, Caterpillar Inc., Komatsu Ltd., Carrier Corporation, and Satlink S.L., which collectively represented approximately 22.1% and 21.0% of our revenues in 2020 and 2019, respectively, and are expected to represent a substantial portion of our revenues in the near future. As a result, the loss of any one of these customers, or decline or slowdown in the growth in business of these customers, which has occurred and could continue to occur at any time, could have a material adverse effect on our business, financial condition and results of operations. In addition, because service revenues depend either partially or entirely on the usage levels of data transmission by our customers and end users, the decline or slowdown in the growth of usage patterns of these customers, which has occurred and could continue to occur with or without a reduction in the number of our billable subscribers, could have a material adverse effect on our business, financial condition and results of operations.
We could be adversely affected if we are not successful in expanding and managing our business outside of the United States and there are numerous risks inherent to our international operations that are beyond our control.
Our business and our business objectives are inherently worldwide. As a result, we are subject to certain political and economic risks, such as changes in international and foreign jurisdictional law and regulation, varying applicable telecommunication industry and governmental standards, tariffs or taxes and other trade barriers, exchange controls, expropriation, and political and economic instability, including fluctuations in the value of foreign currencies. Certain of these risks may be greater in developing countries or regions, where economic, political or diplomatic conditions may be significantly more volatile than those commonly experienced in the United States and other industrialized countries.
Unless we continue expanding our business, particularly in markets outside of the United States, our ability to grow our business could be adversely affected. Although we currently have MCAs registered to do business in approximately 45 countries outside of the United States, we also must substantially rely on MCPs to establish and grow our business in many overseas markets. In some countries, due to market conditions, foreign ownership restrictions, or other business or legal constraints, we are compelled or even required to rely on MCPs to obtain and maintain necessary local regulatory and other approvals for some or all of the products and services sought to be offered. We and/or our MCAs or MCPs may not be successful in obtaining and maintaining the necessary regulatory and other approvals in some countries or territories and, if these efforts are not successful, we will be unable to do business in such countries. Moreover, even if those approvals are obtained and maintained, efforts to develop markets and/or distribution networks within any given country may not be successful. Certain of our MCPs are, or are likely to be, newly formed or small ventures with limited or no operational history and limited financial resources, and any such entities may not be successful in their efforts to secure adequate financing and continue operating. In addition, in certain countries and territories outside the United States, we must currently rely on MCPs to operate and maintain various components of our system, such as several of the GESs for our VHF satellite system. These entities may not be successful in operating and maintaining such components of our communications system and may not have the same financial incentives as we do to maintain those components in good repair.
Our business is affected by the regulatory laws and policies of the countries in which we operate. In addition, in certain countries regulatory frameworks may be rudimentary or in an early stage of development, which can make it difficult to secure the necessary approvals to operate in those jurisdictions. In addition, efforts to implement network facilities in certain foreign countries may be complicated, constrained, or even prohibited due to legal requirements we must comply with in the United States or other jurisdictions that may contravene with legal requirements in the new country markets to which we seek access. Furthermore, our ability to provide services in these countries is also constrained by national laws and policies regarding the installation and operation of in-country network facilities that manage and control the flow of communication traffic coming to and from the respective national territories. Our inability to offer our products and services in one or more important new markets could have a negative impact on our
business. Even where the necessary regulatory and other governmental approvals can be obtained in these countries, the cost of developing, deploying, operating and maintaining required local network infrastructure, or other costs associated with ongoing regulatory compliance, may be prohibitive, which could impair our ability to expand our product and service offerings in such areas and undermine our value for potential customers in these markets.
While expanding our international operations would advance our growth, it would also increase numerous risks, including:
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difficulties in penetrating new markets due to established and entrenched competitors;
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difficulties in developing products and services that are tailored to the needs of local customers;
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difficulties in developing products and services at competitive prices due to foreign exchange fluctuations;
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lack of local acceptance, recognition, or knowledge of our products and services;
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unavailability of or difficulties in establishing relationships with local customers and distributors;
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significant investments, including the development, deployment and maintenance of dedicated network facilities in certain countries with laws that require such facilities to be installed and operated within their jurisdiction to connect the traffic coming to and from their territory;
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unpredictable events resulting in economic or political instability in certain countries;
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changes in laws and policies affecting trade and investment in certain jurisdictions;
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exposure to varying or inconsistently enforced legal standards, including, but not limited to, intellectual property protection and foreign state ownership laws;
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difficulties in obtaining required regulatory or other governmental approvals;
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difficulties in enforcing legal rights, even those provided for under applicable law;
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local domestic ownership requirements;
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changing and conflicting local regulatory or legal requirements; and
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excessive tax, import duty, tariff, or other governmental fee requirements.
If we become subject to unanticipated domestic or foreign tax or fee liabilities, including being required to collect sales, use, services or other related taxes for our solutions in jurisdictions where we have not historically done so, it could materially increase our costs and have a material adverse effect on our operating results.
We operate in various tax jurisdictions and believe that we comply, in all material respects, with our obligations to file returns and pay taxes and fees in these jurisdictions. However, our position is subject to review and possible challenge by the authorities of these jurisdictions. If the applicable authorities were to successfully challenge our current tax or fee positions, or if there were changes in the manner in which we conduct our activities, or changes in the interpretation or application of existing laws, we could become subject to material unanticipated tax or fee liabilities. We may also become subject to additional tax, tariff, or fee liabilities as a result of changes in laws, which could in certain circumstances, have a retroactive effect. Further, our current tax rates are subject to change by the various taxing authorities in the jurisdictions in which we operate. These changes can result in additional, unanticipated taxes and fees which could adversely affect our business.
Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. We do not believe that we are required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, taxing authorities in one or more countries or states may determine that taxes should have, but have not, been paid with respect to our solutions and seek to impose sales, use, services, or other tax collection obligations on us, including for past sales in addition to being required to collect sales or similar taxes for our solutions going forward. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales, including very substantial interest and penalty charges, and decrease our ability to compete for future sales. Each country and state has different rules and regulations governing sales and use taxes and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe sales and use taxes apply in a particular jurisdiction, voluntarily engage tax authorities in order to determine how to comply with their rules and regulations. Although our customer contracts provide that our customers must pay all applicable sales and similar taxes, customers may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our customers do not reimburse us for all or a portion of these amounts, we could incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our solutions going forward will effectively
increase the cost of such solutions to our clients, which could have a material adverse effect on our business, results of operations and financial condition.
Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes, as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the future.
Economic, political and other conditions could have a material adverse effect on our business, results of operations or financial condition.
Economic, political and other conditions both in the U.S. and globally could have a material adverse effect on our business, results of operations or financial condition. A significant portion of our revenues are generated from customers located in foreign countries. Some foreign economies have been impacted by government agencies and unstable economic cycles. Governments have often changed monetary, taxation, credit, tariff and other policies to influence the course of their country’s economy. For example, government actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports. Our customers may be adversely affected by exchange rate movements; exchange control policies; expansion or contraction of the local economy; inflation; tax policies; other economic political, diplomatic and social developments; interest rates; liquidity of domestic capital and lending markets; and social and political instability. Specifically, the ongoing trade dispute with China and the UK’s departure from the European Union may have an adverse effect on both our and our customers’ operating expenses and result in increased obstacles to operational efficiency.
We rely on a limited number of manufacturers for many of our products and devices. If we are unable to, or cannot find third parties to, manufacture a sufficient quantity of our products and devices at a reasonable price, the prospects for our business will be negatively impacted.
The development, manufacture and availability on a timely basis of electronics components, materials and parts are critical to the successful commercial operation of our system. We rely on contract manufacturers to procure these components in order to produce the products and devices that we market and sell. Many of these components are manufactured in Asia whose supply chain is currently being impacted by the coronavirus outbreak and its widening effect on trade. If the outbreak continues, there will likely be an adverse effect on the availability of components necessary to complete the manufacturing of our products. COVID-19 is just one contributing factor to these challenges causing the electronics industry worldwide to suffer supply chain setbacks. Electronic component shortages are causing a ripple effect on the global supply chain and are creating challenges in our ability to source electronic components necessary to manufacture a sufficient quantity of our products and devices which, if not overcome, would adversely impact our ability to reach our revenue and product margin targets. Our solutions subsidiaries rely on a few contract manufacturers. We may not be able to furnish our customers with a sufficient supply of products and devices at price points or with functional characteristics and reliability that meet their needs. An inability or delay to successfully source these materials and manufacture products and devices that meet the needs of customers and are available in sufficient numbers and at prices that render our services cost-effective to customers could limit the acceptance of our system and potentially affect the quality of our services, which could have a material adverse effect on our business, financial condition and results of operations.
Our business may be materially and adversely affected if any of our direct or indirect relationships with these contract manufacturers is terminated or modified. If our arrangements with third-party manufacturers are terminated, our search for additional or alternate manufacturers could result in significant delays, added expense and an inability to maintain or expand our customer base. Any of these events could require us to take unforeseen actions or devote additional resources to provide our services and could harm our ability to compete effectively.
Significant interruptions, discontinuation, slowdown or loss of the supply of subscriber communicators from our vendor Sanmina or a change in our commercial relationship with Sanmina could have a material adverse effect on our business.
Our business is heavily dependent on Sanmina, a contract manufacturer with significant operations in Mexico, for the manufacture of our subscriber communicators that we design and sell. Consequently, significant interruptions, discontinuation, slowdown or loss of Sanmina’s manufacturing and supply of products will negatively affect our ability to grow, provide reliable service and could have a material adverse effect on our business. While we currently have a good relationship with Sanmina, we cannot provide assurance that our future commercial relationship or arrangements with Sanmina will not change in a manner that has an adverse effect on our business. In addition, any change in trading agreements between the United States and Mexico could have a significant impact on our business.
During the COVID-19 pandemic, Sanmina has been permitted to continue to manufacture our subscriber communicators as our products are used within the communications sector (providing services using terrestrial, satellite, and wireless transmissions systems)
and designated as essential “critical infrastructure sectors” as defined by the U.S. Cybersecurity and Infrastructure Security Agency (CISA). Sanmina had recently been limited to work at 80% capacity to protect the health of its workers; however, we cannot provide any guarantee that our contract manufacturer will continue to be permitted to manufacture our ordered levels of demand. Sanmina’s ability to manufacture our products is also dependent upon electronic component availability. The prioritization of electronic components towards medical and/or emergency products could negatively affect Sanmina’s ability to manufacture our products.
If our arrangements with third-party manufacturers, including Sanmina, are terminated or expire, our search for additional or alternate manufacturers could result in significant delays in customers activating products on our communications system, added expense for our customers and our inability to maintain or expand our customer base.
We are, and in the future may continue to be, subject to legal proceedings that could adversely affect our business.
We may be subject to legal claims involving stockholder, consumer, antitrust, intellectual property infringement, product liability and other issues. We are also currently in litigation related to employment and employment related defamation matters, patent infringement and contractual matters, among other issues. Litigation is subject to inherent uncertainties, including increases in demands for our management team’s attention and potential high costs and unfavorable rulings. If an unfavorable ruling were to occur, it could include money damages and have a material adverse effect on our business, financial condition and results of operations for the period in which the ruling occurred or future periods. See also “Note 14 - Commitments and Contingencies” in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Our business relies on intellectual property, some of which third parties own, and we, our MCAs, MCPs or respective customers may inadvertently infringe upon their patents and proprietary rights. We have been, and may in the future become, subject to claims that our products violate the patent or intellectual property rights of others, which could be costly and disruptive to us.
Many entities, including some of our competitors, currently or may in the future, hold patents and other intellectual property rights that cover or affect products or services related to those that are offered by us, our MCAs, our MCPs, or our respective customers. We cannot provide assurance that we are aware of all third-party intellectual property rights upon which any of our products or services may infringe. As a result, certain of our products or services have and can be expected to continue to become subject to intellectual property infringement claims or litigation. In addition, certain of our patents, trademarks, copyrights or other intellectual property rights may be challenged by our competitors or others. The defense of intellectual property suits is both costly and time-consuming, even if ultimately successful, and may divert management’s attention from other business concerns. An adverse determination in litigation to which we may become a party could, among other things:
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subject us, our MCAs, our MCPs, or our respective customers to significant liabilities to third parties, including treble damages;
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require disputed rights to be licensed from a third party for royalties that may be substantial;
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require cessation of the use of important technology;
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prohibit the sale of some or all products and services;
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require the redesign of products in such a way as to avoid infringing upon others’ patents; or
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cause the loss of the exclusive use of certain technologies, resulting in a loss of a competitive market advantage.
We cannot estimate the extent to which we, our MCAs, our MCPs, or our respective customers may be required to obtain intellectual property licenses in the future, or the availability and cost of any such licenses. To the extent that we are required to pay royalties to third parties to whom we are not currently making payments, these increased costs of doing business could negatively affect our profitability or liquidity. If a competitor holds intellectual property rights, it may not allow the use of its intellectual property at any price, which could adversely affect our competitive position.
Operating in foreign jurisdictions also increases the risks to our technology and intellectual property, such as risks of theft or compromise of technology, data or intellectual property.
Because we operate our business in a highly regulated industry, we may be subjected to increased regulatory restrictions and oversight which could disrupt our service or increase our operating costs.
Telecommunications product and service providers are subject to extensive regulation under the laws of various national and international regulatory bodies, all of which are subject to change, from time to time without prior notice. These rules and policies establish the terms and conditions pursuant to which we, our MCAs and our MCPs must conduct our respective businesses by, among other things, requiring that certain regulatory and other governmental authorizations be obtained and maintained, establishing technical parameters for the operation of facilities and subscriber communicators, and determining the permissible uses of facilities
and subscriber communicators. Additionally, under some circumstances, these rules and policies may require us, our MCAs and our MCPs to suspend or terminate the operation or use of network facilities we operate or utilize, or otherwise alter or disrupt our ability to provide services. Any such events could significantly disrupt or preclude the operation of some or all of our communications systems. These rules and policies may also impose regulatory constraints on the use of subscriber communicators within certain countries or territories. They may also cause delays in the marketing of our services and products, may impose costly fees and procedures on us, our MCAs or our MCPs, and may give a competitive advantage to larger companies with whom we compete. Applicable laws and regulations also impose many other compliance obligations, which may differ from county to country, including those relating to import and export control, anti-corruption, data privacy, and information security. Possible future changes to regulations and policies in the countries in which we operate may result in additional regulatory requirements or restrictions on the services and equipment we provide, which may have a material adverse effect on our business and operations. Although we believe that we, our MCAs and our MCPs comply with applicable laws and regulations, and have obtained all the regulatory or other governmental approvals required to conduct our respective businesses as they are currently operated, it may not be possible to obtain, modify or maintain such approvals in the future. Moreover, future changes in applicable laws, regulations, and regulatory or governmental approval requirements may result in disruptions of our ability to provide some or all of the products and services we offer, or alternatively, result in added operational costs, which could materially harm our business.
The U.S. Departments of Justice, State and Treasury and other international regulatory agencies and authorities impose a broad range of criminal and civil penalties against companies and individuals who engage in business with prohibited parties (on lists published by these departments and agencies) or who engage in prohibited business activities, such as bribery and violations of export control laws. A violation of these laws, rules or regulations could have a material adverse effect on our ability to operate our business. Although we have implemented policies and processes to address these prohibited activities, we cannot guarantee that employees, partners, vendors, representatives or agents will not engage in conduct that would result in our being held responsible for the improper conduct. We have in the past been, and may in the future be, subject to investigations by regulatory authorities, including the Department of Commerce’s Bureau of Industry and Security. We believe that there is no pending investigation, claim or litigation that will have a material adverse effect on our operations.
We do not currently maintain in-orbit or other insurance for our OG1 or OG2 satellites.
We do not currently maintain in-orbit insurance coverage for our OG1 or OG2 satellites to address the risk of potential systemic anomalies, failures, collisions with our satellites or other satellites or debris, or catastrophic events affecting the existing satellite constellation. An uninsured failure of one or more of our satellites could have a material adverse effect on our financial condition and results of operations.
We do not maintain third-party liability insurance with respect to our satellites. Accordingly, we have no insurance to cover any third-party damages that may be caused by any of our satellites. If we experience significant uninsured losses, such events could have a material adverse impact on our business, financial condition and results of operations.
Certain areas of our business rely upon third-party wireless network service providers, which are potential competitors, to deliver existing and developing services.
Certain services we provide rely on our relationships with third-party wireless network service providers, including Verizon, AT&T, T-Mobile, Telefonica, Orange, Rogers and Vodafone with respect to cellular communications and Inmarsat with respect to ORBCOMM L-band satellite services. Our ability to provide these services and grow our business depends on continued access to these wireless networks and our ability to purchase sufficient capacity at competitive pricing. Increases in the fees charged by cellular carriers for data transmission or changes in the cellular networks, such as a cellular carrier discontinuing support of the network currently used by our devices, thereby requiring retrofitting of our devices, could increase our costs and impact our profitability. In addition, our services depend on the continuing reliability and security of these third-party networks, which could be adversely affected by errors, defects, interrupted service and/or a breach of the network security. While our existing agreements have multiple year terms, certain of these wireless network service providers are, and in the future could become, competitors. This competition could adversely affect our relationships and their willingness to sell us airtime at commercially reasonable rates.
Significant interruptions, discontinuation or loss of services provided by Inmarsat and its subsidiaries, a change in our commercial relationship with the Inmarsat group, or delays or an inability to develop and implement the OGX service could have a material adverse effect on our business.
The revenues generated by our provision of L-band mobile satellite network services are materially dependent on the satellite network services provided to us by Inmarsat group. Consequently, any significant interruptions, discontinuation or loss of those services due to the temporary or permanent failure of Inmarsat satellites or associated Inmarsat terrestrial network facilities, or delays or an inability to develop and implement the OGX service would negatively affect our ability to provide service and could have a
material adverse effect on our L-band mobile satellite product and service revenues. Increases in the fees charged by Inmarsat or discontinuing the L-band service used by our customers’ fielded devices, thereby requiring retrofitting of our devices, would increase our costs and negatively impact our profitability.
We face risks and uncertainties related to the current COVID-19 pandemic.
COVID-19 surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. The effects of the COVID-19 pandemic are expected to adversely affect our business, financial condition and results of operations. The magnitude of the impact of COVID-19 is unpredictable; consequently, the impact it will have on our future results is uncertain.
Numerous governmental jurisdictions, including the States of New Jersey and Florida, where we maintain our principal and regional executive offices, respectively, and those in which many of our U.S. and international offices are based, imposed “shelter-in-place” orders, quarantines, executive orders and similar governmental orders and restrictions for their residents to control the spread of COVID-19. Most states and the federal government, including the States of New Jersey and Florida, together with foreign jurisdictions in which we have operation centers, declared a state of emergency related to the spread of COVID-19. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our customers, employees, and offices, among others. These challenges have been, and are anticipated to continue being, difficult to manage in foreign jurisdictions in which we have offices due to, among other things, a reduced ability to enable efficient and secure work-from-home environments.
Many of our customers, including heavy equipment manufacturers, transportation providers, and oil and gas customers have faced, and will continue to face, substantial challenges in operating in the current environment. For example, many of our heavy equipment and refrigerated OEMs temporarily closed factories due to employee health concerns from COVID-19. Based on industry data, loads for transportation of goods were also significantly down as a result of the economic shutdown caused by COVID-19. The strength of the U.S. dollar is also a concern for our foreign customers, especially for our large satellite value-added reseller customers in Brazil where the Real is weak. This has caused us to temporarily adjust service revenue billing rates to accommodate unfavorable exchange rates. Further, a recession or prolonged economic contraction as a result of the COVID-19 pandemic could also harm the business and results of operations of our enterprise customers, resulting in potential business closures, layoffs of employees and a significant increase in unemployment in the United States and elsewhere, which may continue even after the pandemic is contained. The occurrence of any such events may lead to a reduction in the capital and operating budgets our customers have available to invest in our industrial IoT solutions, which could reduce our revenue and harm our business, financial condition and results of operations.
The widespread COVID-19 pandemic has resulted in, and may continue to result in, significant volatility and uncertainty in U.S and international financial markets, restricting our ability to access capital markets in a manner that would not be significantly detrimental to our business or at all, which could negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. For example, the price of our common stock saw a 52-week low price of $1.24 per share as recently as on March 24, 2020.
The global outbreak of COVID-19 continues to rapidly evolve. We have taken steps intended to mitigate the effects of the pandemic and to protect our global workforce, including, but not limited to: moving a significant portion of our workforce to remote operations, enacting social distancing and hygiene guidelines at our offices, as set forth by the Centers for Disease Control and Prevention and World Health Organization, discontinuing company travel and events, among others. Although we believe we have taken the appropriate actions, we cannot guarantee that these measures will mitigate any or all negative effects of the pandemic. The ultimate impact of the COVID-19 pandemic or a similar health epidemic on the Company is highly uncertain and subject to change. The impact of the COVID-19 pandemic continues to evolve, and therefore, we cannot predict the full extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.
If our estimates in accounting are inaccurate and our financial assumptions are proven wrong, our reported results may be different than the guidance provided to the market.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). As part of the preparation of these statements, we make assumptions, estimates and judgments about various entries, such as capital expenditures, anticipated revenue collection and recognition, impairment of long-lived assets such as goodwill, warranty reserves, debt service, employee compensation, and contingent liabilities. These entries are based on our judgment and observations of similar historical circumstances and what we believe to be reasonable under the circumstances. If the underlying assumptions upon which we rely are incorrect, the actual results of our operations could differ and require us to revise our financial statements, which could adversely affect our stock price. In addition, new accounting rules that may be established from time to time by various
regulatory authorities, including the IRS and SEC, may require a revision to our financial statements that could adversely affect our reported financial results.
Risks Related to Our Technology
Satellites are subject to significant operating risks due to various types of potential anomalies, potential impacts of space debris or other spacecrafts, and limited life capacity.
Satellites utilize highly complex technology and operate in the harsh environment of space and, accordingly, are subject to significant operational risks while in orbit. These risks include malfunctions, or anomalies, that have occurred and may continue to occur in our satellites. In addition, satellites have a limited life capacity, they could become compromised over their designated operational life span and be more susceptible to anomalies and failures as they age. Some of the principal satellite anomalies include:
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Mechanical and electrical failures due to manufacturing error or defect, including:
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Mechanical failures that degrade the functionality of a satellite, such as the failure of solar array panel drive mechanisms, rate gyros or momentum wheels;
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Antenna failures and defects that degrade the communications capability of the satellite;
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Circuit failures that reduce the power output of the solar array panels on the satellites;
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Failure of the battery cells that power the payload and spacecraft operations during daily solar eclipse periods;
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Power system failures that result in a shutdown or loss of the satellite;
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Avionics system failures, including GPS, that degrade or cause loss of the satellite;
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Altitude control system failures that degrade or cause the inoperability of the satellite;
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Transmitter or receiver failures that degrade or cause the inability of the satellite to communicate with subscriber communicator units or GESs;
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Communications system failures that affect overall system capacity;
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Satellite computer or processor re-boots or failures that impair or cause the inoperability of the satellites; and
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Radio frequency interference emitted internally or externally from the spacecraft affecting the communication links.
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Equipment degradation during the satellite’s lifetime, including:
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Degradation of the batteries’ ability to accept a full charge;
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Degradation of solar array panels due to radiation;
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General degradation resulting from operating in the harsh space environment, such as from solar flares;
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Degradation or failure of reaction wheels;
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Degradation of the thermal control surfaces;
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Degradation and/or corruption of memory devices; and
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Propulsion system failures that degrade or cause the inability to reposition the satellite.
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Deficiencies of control or communications software, including:
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Failure of the charging algorithm that may damage the satellite’s batteries;
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Problems with the communications and messaging servicing functions of the satellite;
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Limitations on the satellite’s digital signal processing capability that limit satellite communications capacity; and
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Problems with the fault control mechanisms embedded in the satellite.
We have experienced, and may in the future experience, anomalies in some of the categories described above. The effects of these anomalies include, but are not limited to, failure of the satellite, degraded communications performance, reduced power available to the satellite in sunlight and/or eclipse, battery overcharging or undercharging and limitations on satellite communications capacity. Some of these effects may be increased during periods of greater message traffic and could result in our system requiring more than one attempt to send messages before they get through to our satellites. Although these multiple re-try effects do not result in lost messages, they could lead to increased messaging latencies for the end user and reduced throughput for our system. We consider a satellite “failed” only when it can no longer provide any communications service, and we do not intend to undertake further efforts to
return it to service. See “ORBCOMM Communications System - System Status - ORBCOMM Network Capacity” above for a description of our network capacity. While we have already implemented a number of system adjustments, we cannot provide assurance that these actions will succeed or adequately address the effects of any anomalies in a timely manner or at all.
Collisions with space debris or other spacecraft could materially affect system performance and our business. Our satellites operate at LEO altitudes, in a regime populated by other operational satellites, defunct satellites and other cataloged debris, and debris that is too small to be tracked, and do not have the ability to actively maneuver to avoid space debris or other satellites. Two major events have increased the LEO debris population: a deliberate Chinese ASAT test in 2007 and an accidental collision in 2009 between an operational Iridium satellite and a non-operational Russian satellite. While we coordinate with the Joint Space Operations Center as well as with other governmental and commercial spacecraft operators to limit the risk of collision, such risk cannot be fully eliminated.
While certain software deficiencies may be corrected remotely, most, if not all, of the satellite anomalies or debris collision damage cannot be corrected once the satellites are placed in orbit. See “ORBCOMM Communications System - System Status” above for a description of the operational status and anomalies that affect our satellites. We may experience additional anomalies in the future, whether of the types described above or arising from the failure of other systems or components, and operational redundancy may not be available upon the occurrence of such anomalies.
When one or more of our satellites fail, we record an impairment charge in our statement of operations, which would have the effect of fully reducing the net book value of that satellite listed in our statement of operations to a zero value. Any such impairment charge would depress our net income for the reporting period in which the failure occurs, which was most recently the case in 2017 when we wrote off the net book value of three OG2 satellites. If we are unable to regain operational control and restoration of AIS and/or messaging services on the additional OG2 satellite we last briefly connected with in February 2021, we would write off its net book value of $7.0 million as of December 31, 2020.
Our products and services could fail to perform or perform at reduced levels of service because of technological malfunctions, satellite failures or deficiencies or events outside of our control, which would seriously harm our business and reputation.
Our products and services are exposed to the risks inherent in a large-scale, complex telecommunications system employing advanced technology. Any disruption to our services, information systems or communication networks or those of third parties into which our network connects, could result in the inability of our customers to receive our services for an indeterminate period of time. Satellite anomalies and other technical and operational deficiencies of our communications system described in this Annual Report on Form 10-K, could result in system failures or reduced levels of service. In addition, certain components of our system are located in foreign countries, and as a result, are potentially subject to governmental, regulatory or other actions in such countries which could force us to limit the operations of, or completely shut down, components of our system, including GESs or subscriber communicators. Any disruption to our services or extended periods of reduced levels of service could cause, and increased latencies in our satellite network delivering messages have caused and could continue to cause us to lose customers or revenue, result in delays or cancellations of future implementations of our products and services, result in failure to attract customers or could result in litigation, customer service or repair work that would involve substantial costs and distract management from operating our business. The failure of any of the diverse and dispersed elements of the system, including satellites, network control center or backup control center, GESs, GCCs or subscriber communicators, to function and coordinate as required could render the system unable to perform at the quality and capacity levels required for success. If the satellite network can no longer provide commercially acceptable service, our satellite subscriber communicators would no longer generate monthly service revenue. Any system failures, repeated product failures, shortened product life or extended reduced levels of service could reduce our sales, increase costs or result in warranty or liability claims and seriously harm our business.
Some of the hardware and software we use in operating our GESs and our customers’ subscriber communicators were designed and manufactured over 15 years ago and could be more difficult and expensive to service, upgrade or replace.
Some of the hardware and software we use in operating our GESs and our customers’ subscriber communicators were designed and manufactured over 15 years ago and portions are becoming obsolete. As they continue to age, they may become less reliable and will be more difficult and expensive to service, upgrade or replace. Although we maintain inventories of some spare parts for our GESs, it nonetheless may be difficult or impossible to obtain all necessary replacement parts for the hardware. Our business plan contemplates updating or replacing some of the hardware and software in our network, however, the age of our existing gateway hardware and software may present us with technical and operational challenges that complicate or otherwise make it infeasible to carry out our planned upgrades and replacements, and the expenditure of resources, both from a monetary and human capital perspective, may exceed our estimates. In addition, some of our customers have a GPS device that may no longer accurately reflect the correct date, which may prevent the data messaging to be triggered. Without upgrading and replacing this equipment, obsolescence of the technologies that we use could have a material adverse effect on our revenues, profitability and liquidity.
Technical or other difficulties with our GESs could harm our business.
The ongoing operations of our satellite constellation rely on the functionality of our GESs, some of which are owned and maintained by third parties. While we believe that the overall health of the majority of our GESs remains stable, we have experienced, and may continue to experience, technical difficulties or parts obsolescence with our GESs, which negatively impact service in the region covered by that GES. Certain problems with these GESs have reduced, and may continue to reduce, their availability and negatively impact the performance of our system in that region. In addition, due to regulatory and licensing constraints in certain countries in which we operate, we are unable to wholly-own or majority-own some of the GESs in our system located outside the United States. As a result of these ownership restrictions, we rely on third parties to own and operate some of these GESs. If our relationship with these third parties deteriorates or where these third parties have been, and may continue to be, unable or unwilling to bear the cost of operating or maintaining the GESs, or if there are changes in the applicable domestic regulations that require us to give up any or all of our ownership interests in any of the GESs, our control over our satellites could be diminished and our business could be harmed.
The collection, storage, transmission, use and disclosure of user data and personal information could give rise to liabilities or additional costs as a result of laws, governmental regulations and evolving views of personal privacy rights.
We transmit, and in some cases store, end-user data, which may include personal information. In jurisdictions around the world, personal information is becoming increasingly subject to legislation and regulations intended to protect consumers’ privacy and security. For example, the California Consumer Privacy Act and the California Privacy Rights Act are now effective, and other privacy related regulations are pending in several other states such as New York and Nevada. Regulatory enforcement of the EU General Data Protection Regulation has begun resulting in significant fines for non-compliance. Other countries have implemented similar laws and regulations, including Brazil, Australia, Canada, and China. The interpretation of privacy and data protection laws and regulations regarding the collection, storage, transmission, use and disclosure of such information in some jurisdictions is unclear and evolving. These laws may be interpreted and applied in conflicting ways from each other and in a manner that is not consistent with our current data protection practices. Complying with these varying international requirements could cause us to incur additional costs and change our business practices. Because our services are accessible in many foreign jurisdictions, some of these jurisdictions may claim that we are required to comply with their laws, even where we have no local entity, employees or infrastructure. We could be forced to incur significant expenses if we were required to modify our products, our services or our existing security and privacy procedures in order to comply with new or expanded regulations. In addition, if end users allege that their personal information is not collected, stored, transmitted, used or disclosed appropriately or in accordance with our privacy policies or applicable laws, we could have liability to them, including claims and litigation resulting from such allegations. Any failure on our part to protect end users’ privacy and data could result in a loss of user confidence, hurt our reputation and ultimately result in the loss of users. In addition, in the event that we suffer a loss or adverse event to our data storage or it is determined that our policies and procedures have failed to comply with evolving laws and regulations, we may be subject to significant regulatory investigations and fines or penalties. These laws, rules and regulations may further limit our ability to develop additional products or services that incorporate the data related to our business, including data analytics.
The failure of our information technology systems could disrupt our business operations which could have a material adverse effect on our business, financial condition and results of operations.
The operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage, among other things, our subsidiaries’ customer interface as well as business data, communications, supply chain, inventory management, customer order entry and order fulfillment, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal or tax requirements and other processes and data necessary to manage our business. We use technology to provide secure transmission of confidential information, including our business data and customer information. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development, either internally or through independent consultants, of new proprietary software. Our inability to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, could make us less competitive, increase our costs and adversely affect our business. The failure of our information technology systems, whether ours or those of third parties with whom we contract to support the provision of our services, to perform as we anticipate could disrupt our business and could result in, among other things, transaction errors, processing inefficiencies, loss of data and the loss of sales and customers, which could cause our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, system failures, system conversions, security breaches, cyber-attacks, ransomware, viruses and/or human error. In any such event, we could be required to make a significant investment to fix or replace our information technology systems, and we have and could experience interruptions in its ability to service our customers. Any such damage or interruption could have a material adverse effect on our business, financial condition and results of operations. While we
have experienced, and expect to continue to experience, threats and attacks on our information technology systems seeking to gain unauthorized access to our systems or data or to cause disruptions in service, including through ransomware, based on information known to date, past threats and attacks have not had a material impact on our business, financial condition or results of operations.
Security problems with our networks, data processing systems, software products, and those systems or services of our third-party providers may be vulnerable to security risks, could cause increased cyber-security protection costs and general service costs, harm our reputation, and result in liability and increased expense for litigation, regulatory fines and diversion of management time.
We process and retain large amounts of customer information. Our software products also enable our customers to store and process data. We have included security features in our products and processes that are intended to protect the privacy and integrity of data, including confidential client data, and we expect the secure transmission of data over public networks. Security for our products and processes is critical given the confidential nature of the information contained in our systems. We also rely on employees in our network operations centers, data centers, and support operations to follow our procedures when handling such information. However, our network and those of our third-party service providers (including data storage facilities), banks, and our customers are vulnerable to unauthorized access, ransomware, computer viruses and other security problems. It is possible that our security controls, our selection and training of employees, and other practices we follow may not prevent the improper disclosure of information. Persons who circumvent security measures could wrongfully obtain or use information on the network or cause interruptions, delays or malfunctions in our operations, or misappropriation of assets, any of which could have a material adverse effect on our business, financial condition and results of operations. Unauthorized access, ransomware, computer viruses, accidental or intentional release of confidential or personal information or other disruptions has in the past resulted, and may in the future result, in increased costs, customer dissatisfaction leading to loss of customers and revenues, and fines and other liabilities. Also, such disclosure could harm our reputation and subject us to liability in regulatory proceedings and private litigation, resulting in increased costs or loss of revenue. Improper disclosure of corporate data could result in lawsuits or regulatory proceedings alleging damages and perceptions that our products and services do not adequately protect the privacy of customer data and could inhibit sales of our products and services. In addition, our customer and vendor contracts may not sufficiently protect us against third-party claims related to an incident. Defending these types of claims could result in increased expenses for litigation and claims settlement and a significant diversion of our management’s attention. Additionally, our software products, the systems on which the products are used, and our processes are not impervious to intentional break-ins (“hacking”), email spoofing, phishing, ransomware, cyber-attacks or other disruptive disclosures or problems, whether as a result of inadvertent third-party action, employee action, malfeasance, or otherwise. Hacking, email spoofing, phishing, ransomware, cyber-attacks or other disruptive problems have resulted, and could result, in the diversion of our development resources, damage to our reputation, increased cyber-security protection costs and general service costs. Cyber-security risks may be increased while many of our personnel and those of our third-party providers are working remotely due to the COVID-19 pandemic. While we have experienced, and expect to continue to experience, threats and attacks on our networks and data processing systems seeking to gain unauthorized access to our systems or data or to cause disruptions in service, including through ransomware, based on information known to date, past threats and attacks have not had a material impact on our business, financial condition or results of operations. Although we have implemented, and intend to continue to implement, security measures, these measures may prove to be inadequate and result in system failures and delays that could lower network operations center availability.
Risks Related to Our Debt
Our Credit Agreement could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance.
On December 2, 2020, we entered into the Credit Agreement in connection with the refinancing of our Senior Secured Notes. The Credit Agreement provides a Revolving Facility in an aggregate amount of up to $50.0 million and a Term Facility in the aggregate amount of $200.0 million that both mature on December 2, 2025. The Revolving Facility has no scheduled principal amortization until the maturity date. The Term Facility has quarterly installments of principal amortization in an aggregate amount specified for each 12-month period following the closing date as set forth in the Credit Agreement.
The Credit Agreement and related security agreement contain covenants that may restrict our business activities or our ability to execute our strategic objectives, and our failure to comply with these covenants could result in a default under our indebtedness. Our inability to generate sufficient cash flow to satisfy interest payments and principal repayment at maturity, could adversely affect our financial condition, operating results and cash flows. The covenants in the Credit Agreement and related security agreement limit our ability to, among other things, incur additional indebtedness and liens, sell, transfer, lease or otherwise dispose of our subsidiaries’ assets, or merge or consolidate with other companies. We must also comply with an incurrence covenant of not exceeding a specific leverage ratio and a specific fixed coverage ratio. Failure to comply with the covenants, or pay the quarterly installments of principal amortization when due, could result in an event of default, which, if not cured or waived, would allow the lenders to require repayment in full of all principal and interest outstanding. If we fail to repay such amounts, the lenders may foreclose on substantially
all of our assets which we have pledged. If we are unable to cure the default, we may need to repay the debt and find other sources of financing and there can be no assurance that we would have access to other sources of financing on acceptable terms, or at all.
Our substantial indebtedness may adversely affect our business, financial condition and operating results.
As of December 31, 2020, we have $220.0 million in aggregate principal amount of total debt under the Credit Agreement. Our level of indebtedness may have material adverse effects on our business, financial condition and operating results, including to:
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make it more difficult for us to satisfy our debt service obligations or refinance our indebtedness;
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require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general operating requirements;
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limit our ability to obtain additional financing to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general corporate requirements;
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restrict us from making strategic acquisitions, taking advantage of favorable business opportunities or executing our strategic priorities;
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place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt;
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limit our flexibility to plan for, or react to, changes in our business and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations;
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increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions; and
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limit our ability, or increase the cost, to refinance our indebtedness.
As a result of our indebtedness, we may be restricted in pursuing desirable business activities, and as a result, our business and ability to repay the indebtedness may be adversely affected. Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face. While we have sufficient cash flow to pay the quarterly principal amortization under the Term Facility, we currently do not generate sufficient cash flow to repay the aggregate principal amount of our outstanding indebtedness which will require us to refinance our Facilities on or prior to their maturity date of December 2, 2025.
Risks Related to an Investment in Our Common Stock
The price of our common stock has been, and may continue to be, volatile and investments in our common stock may decline in value.
The trading price of our common stock has been, and may continue to be, volatile and purchasers of our common stock could incur substantial losses. Factors that could affect the trading price of our common stock include:
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liquidity of the market in, and demand for, our common stock;
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changes in expectations from securities analysts or investors as to our future financial performance or subscriber growth estimates, if any;
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actual or anticipated fluctuations in our or our competitors’ operating and financial results and overall market valuation;
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our financial or subscriber growth performance failing to meet the expectations of market analysts, investors or the guidance we provide to investors;
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investor perception of and confidence in capital markets and equity investments;
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our ability to raise additional funds to meet our capital needs;
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conditions and trends in the end markets we serve and changes in the estimation of the size and growth rate of these markets;
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announcements relating to our business or the business of our competitors, customers or suppliers;
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investor perception of our prospects, our industry and the markets in which we operate;
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changes in our pricing policies or the pricing policies of our competitors;
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loss of one or more of our significant customers;
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changes in key management personnel;
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failure of our satellites or any issues related to our products to perform as expected;
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changes in our credit rating or future prospects by rating agencies;
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the outcome of any litigation by or against us, including any judgments favorable or adverse to us;
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changes in governmental regulation, including the imposition of tariffs or other trade barriers; and
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general economic, political and other market conditions.
In addition, the stock market in general, and The Nasdaq Global Market and the market for telecommunications companies in particular, have experienced and may continue to experience extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation has previously been instituted against us and could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, future results and cash flow.
Our quarterly operating results have fluctuated in the past and may fluctuate in the future, which could cause volatility in the price of our common stock.
Our quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors, many of which are outside of our control, including the cyclical nature of the transportation and other markets we serve, and sales cycle lead time for large customers to evaluate, purchase and deploy IoT products and services. If our quarterly operating results fall below the expectations of securities analysts, investors or our guidance, the price of our stock could decline substantially. The following factors, among others, could cause fluctuations in our quarterly operating results:
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our ability to attract new customers and retain existing customers;
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our ability to accurately forecast business cycles in our target markets, customer sales cycles, and revenues and appropriately plan our expenses;
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the mix of our products and services sold, including any pricing changes passed on to customers or received from suppliers;
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our ability to introduce new features, including integration of our existing solutions with third-party software and devices;
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the cost and availability of components, including any changes to our sourcing or manufacturing partners;
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the actions of our competitors, including consolidation within the industry, pricing changes or the introduction of new products or services;
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our ability to effectively manage our growth;
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our ability to successfully manage any future acquisitions of businesses, solutions, or technologies;
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the timing and cost of developing or acquiring technologies, services, or businesses;
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service outages or security breaches and any related occurrences which could impact our reputation;
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trade protection measures, such as tariffs and duties, and import or export licensing requirements;
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fluctuations in foreign currency exchange rates;
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changes in government regulation affecting our business; and
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provision of solutions from an OEM-controlled channel, from which ORBCOMM may be excluded.
We believe that our quarterly operating results may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter are not an indication of future performance.
We are subject to anti-takeover provisions which could affect the price of our common stock.
Our amended and restated certificate of incorporation and our bylaws contain provisions that could make it difficult for a third party to acquire us without the consent of our Board of Directors. These provisions do not permit actions by our stockholders by written consent and require the approval of the holders of at least 66 2/3% of our outstanding common stock entitled to vote to amend certain provisions of our amended and restated certificate of incorporation and bylaws. In addition, these provisions include procedural requirements relating to stockholder meetings and stockholder proposals that could make stockholder actions more difficult. Our Board of Directors is classified into three classes of directors serving staggered, three-year terms and may be removed only for cause. Any vacancy on the Board of Directors may be filled only by the vote of the majority of directors then in office. Our Board of Directors has the right to issue preferred stock with rights senior to those of the common stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders and may delay or prevent an acquisition of our Company.
We have issued, and may in the future issue, additional shares of preferred stock or other securities with greater rights than our common stock.
Subject to the rules of NASDAQ, our certificate of incorporation authorizes our Board of Directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our common stock. Currently, there are 50 million shares of preferred stock authorized and approximately 41,000 shares of Series A convertible preferred stock were issued and outstanding as of December 31, 2020. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than holders of our common stock.
We do not expect to pay dividends on our common stock in the foreseeable future.
We do not currently pay cash dividends on our common stock and, because we currently intend to retain all cash we generate to fund the growth of our business, we do not expect to pay dividends on our common stock in the foreseeable future. Any future dividend payments would be within the discretion of our board of directors and would depend on a variety of factors, including our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, debt covenants, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our Board of Directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. Our intent not to pay dividends in the foreseeable future may make our common stock less attractive as an investment.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
We currently lease the following properties for operations and administrative functions:
Location
Real Property Owned or Leased
Lease Expiration
Rochelle Park, New Jersey
Leased
March 2027
Sterling, Virginia
Leased
November 2025
Ottawa, Canada
Leased
February 2031
Kowloon, Hong Kong
Leased
January 2023
San Jose, California
Leased
January 2022
Hyderabad, India
Leased
June 2022
Pune, India
Leased
June 2022
Utica, New York
Leased
May 2024
Hoensbroek, The Netherlands
Leased
May 2022
Bonn, Germany
Leased
December 2024
Galway, Ireland
Leased
December 2024
Salt Lake City, Utah
Leased
July 2021
Boca Raton, Florida
Leased
December 2027
Tokyo, Japan
Leased
September 2021
In addition, we currently own eleven GESs at the following locations, four situated on owned real property and seven on real property subject to leases:
Gateway
Real Property Owned or Leased
Lease Expiration
St. John’s, Arizona
Owned
n/a
Arcade, New York
Owned
n/a
Curaçao
Owned
n/a
Rutherglen Vic, Australia
Owned
n/a
East Wenatchee, Washington
Leased
Month-to-Month
Ocilla, Georgia
Leased
May 2033
Kijal, Malaysia
Leased
August 2022
Hartebeesthoek, South Africa
Leased
December 2030
Kitaura-town, Japan
Leased
March 2023
Zona Franca de Justo Daract, Argentina
Leased
May 2022
Itaborai, Brazil
Leased
June 2024
We currently own or lease real property sufficient for our business operations, although we may need to purchase or lease additional real property in the future.
Item 3.
Item 3.
Legal Proceedings
We are involved in various litigation matters involving claims incidental to our business and acquisitions, including employment and employment related defamation matters, acquisition-related claims, patent infringement and contractual matters, among other issues. Management currently believes that the outcome of these proceedings, either individually or in the aggregate, will not have a material adverse effect on our business, results of operations or financial condition. We record reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
See “Note 14 - Commitments and Contingencies” in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Trading Market and Symbol of Our Common Stock
Our common stock trades on The Nasdaq Global Market under the symbol “ORBC.”
As of February 12, 2021, there were 189 holders of record of our common stock.
Dividend Payments and Policy
Common stock: We have never declared or paid cash dividends on shares of our common stock. Our Board of Directors currently intends to retain all available funds and future earnings to support operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Our Board of Directors may, from time to time, examine our dividend policy and may, in its absolute discretion, change such policy. In addition, dividends are restricted by the covenants in our Credit Agreement.
Series A convertible preferred stock: Pursuant to the terms of our Series A convertible preferred stock, the holders are entitled to receive a cumulative 4% annual dividend payable quarterly in additional shares of Series A convertible preferred stock. In 2020, we did not issue dividends on the preferred shares.
Stock Performance Graph
The graph set forth below compares the cumulative total shareholder return on our common stock between December 31, 2015 and December 31, 2020, with the cumulative total result of (i) the Russell 2000 Index and (ii) the NASDAQ Telecommunications Index, over the same period. This graph assumes the investment of $100 on December 31, 2015 in our common stock, the Russell 2000 Index and the NASDAQ Telecommunications Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on December 31, 2015 was the closing sales price of $7.24 per share.
The comparisons shown in the graph below are based on historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
(Amounts in dollars)
Item 6.
Item 6.
Selected Consolidated Financial Data
Omitted at the Company’s option pursuant to amendments to Item 301 of Regulation S-K effective February 10, 2021.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a global provider of industrial IoT solutions, including network connectivity, devices, device management and web reporting applications. These solutions enable optimal business efficiencies, increased asset utilization and reduced asset write-offs, helping customers realize benefits on a worldwide basis. Our industrial IoT products and services are designed to track, monitor, control and enhance security for a variety of assets, such as trailers, trucks, rail cars, sea containers, power generators, fluid tanks, marine vessels, diesel or gensets, oil and gas wells, pipeline monitoring equipment, irrigation control systems, and utility meters, in the transportation and supply chain, heavy equipment, fixed asset monitoring and maritime industries, as well as for governments. Additionally, we provide satellite AIS data services to assist in vessel navigation and to improve maritime safety for government and commercial customers worldwide. We also have vehicle fleet management, as well as in-cab and vehicle fleet solutions in our transportation solution portfolio. We provide our services using multiple network platforms, including our own constellation of low-Earth orbit satellites and our accompanying ground infrastructure, as well as terrestrial-based cellular communication services obtained through reseller agreements with major cellular (Tier One) wireless providers. We also offer customer solutions utilizing additional satellite network service options that we obtain through service agreements we have entered into with third-party mobile satellite providers. Our satellite-based customer solution offerings use small, low power, mobile satellite subscriber communicators for remote asset connectivity, and our terrestrial-based solutions utilize cellular data modems with SIMs. We also resell service using the two-way Inmarsat satellite network to provide higher bandwidth, low-latency satellite products and services, leveraging our IDP technology. Our customer solutions provide access to data gathered over these systems through connections to other public or private networks, including the Internet. We are dedicated to providing what we believe are the most versatile, leading-edge industrial IoT solutions in our markets that enable our customers to run their businesses more efficiently.
2020 Strategic Transactions
During 2020, we completed the following strategic transactions that had an impact and will continue to have an impact on our results of operations:
Credit Agreement
On December 2, 2020, we and certain of our subsidiaries entered into the Credit Agreement with JPMorgan Chase, as administrative agent and collateral agent, and with the other Lenders thereto, in connection with the refinancing of our Senior Secured Notes. Pursuant to the Credit Agreement, the Lenders provided a Revolving Facility in an aggregate amount of up to $50.0 million and a Term Facility in the aggregate amount of $200.0 million. The proceeds of the Facilities, along with cash on hand, were used to redeem all $220.0 million outstanding principal amount of our 8.0% Senior Secured Notes due 2024, at a price equal to (a) 104% of the principal amount of Securities being redeemed plus (b) accrued and unpaid interest, resulting in a call premium payment of $8.8 million and an additional expense associated with the remaining unamortized debt issuance cost of $2.9 million.
Shelf Registration
We have an effective shelf registration statement filed with the SEC, registering up to $100.0 million of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement is due to expire on March 23, 2023 and replaces our previous shelf registration statement described below under “2018 Strategic Transactions - Shelf Registration.”
2019 Strategic Transactions
During 2019, we completed the following strategic transactions that had an impact and will continue to have an impact on our results of operations:
Stock Repurchase Program
On August 5, 2019, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $25.0 million of our outstanding shares of common stock through open market transactions and privately negotiated transactions, until August 5, 2020. In addition, open market repurchases of common stock could be made pursuant to applicable securities laws and
regulations, including Rule 10b-18, as well as Rule 10b5-1 under the Exchange Act. In mid-March 2020, the Company suspended purchases under the repurchase program given the economic uncertainty arising from the COVID-19 pandemic.
2018 Strategic Transactions
During 2018, we completed the following strategic transactions that had an impact and will continue to have an impact on our results of operations:
Public Offering
On April 10, 2018, we completed a public offering of 3,450,000 shares of our common stock, including 450,000 shares sold upon exercise in full of the underwriters’ option to purchase additional shares, at a price of $8.60 per share. We received net proceeds of approximately $28.0 million after deducting underwriters’ discounts and commissions and offering costs.
Shelf Registration
On April 13, 2018, we filed a shelf registration statement with the SEC, registering an unspecified amount of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement was automatically effective upon filing and superseded and replaced our previous shelf registration statement declared effective on April 14, 2015, which was due to expire on April 14, 2018.
Revenues
We derive service revenues primarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on our satellite network, as well as other satellite networks and cellular wireless networks that we resell to our customers (i.e., our MCPs, MCAs and direct customers). Usage fees are generally based upon the data transmitted by a customer and the overall number of subscriber communicators and/or SIMs activated by each customer and whether we provide services through our value-added portal. Service revenues are recognized on an accrual basis, as services are rendered, or on a cash basis, if collection from the customer is not reasonably assured at the time the service is provided. We also generate recurring AIS service revenues from subscription-based services supplying recurring AIS data services to customers and resellers, as well as data analytic service revenues from monthly subscription-based services supplying analytical data to our customers. In addition, we earn service revenues from optional, separately-priced extended warranty service agreements extending beyond the initial warranty period of typically one year; installation services; royalty fees from third parties for the use of our proprietary communications protocol, recognized at a point in time when the third party notifies us of the units it has manufactured and a unique serial number is assigned to each unit; and fees from providing engineering, technical and management support services to customers.
We derive product sales primarily from sales of industrial IoT telematics devices, modems and cellular wireless SIMs (for our terrestrial-communication services) to our resellers (i.e., our MCPs and MCAs) and direct customers. Revenues generated from product sales are either recognized when the products are shipped or when customers accept the product, depending on the specific contractual terms. Shipping costs billed to customers are included in product sales and the related costs are included as cost of product sales.
Revenues generated from leasing arrangements of subscriber communicators are recognized using the estimated selling price for each deliverable in the arrangement. Product and installation revenues associated with these arrangements are recognized upon shipment or installation of the subscriber communicator, depending on the specific contractual terms. Service and warranty revenues are recognized on an accrual basis, as services are rendered, or on a cash basis, if collection from the customer is not reasonably assured at contract initiation.
Amounts received prior to the performance of services under customer contracts are recognized as deferred revenues and revenue recognition is deferred until such time that all revenue recognition criteria have been met.
Costs and expenses
Direct costs
We operate a proprietary LEO satellite network and accompanying ground equipment, including fifteen GESs, three AIS data reception earth stations, and three regional GCCs. Our proprietary satellite-based communications system is typically characterized by high initial capital expenditures and relatively low marginal costs for providing service. We use as part of our solution, as well as resell, network connectivity for two other satellite networks and seven terrestrial network partners. Reselling network connectivity
typically involves a cost for each device connected to the network system and the amount paid to each provider will vary. In addition, we incur costs associated with the installation services provided to our customers.
We primarily sell industrial IoT telematics devices and modems that we design and build using contract manufacturers. For each industrial IoT device and modem, we incur engineering costs, manufacturing costs, warehousing and shipping costs and inventory management costs.
Operating expenses
We incur expenses associated with sales, marketing and administrative expenses related to the operation of our business, including significant charges for depreciation and amortization of our satellite communications system and other acquired intellectual property and intangible assets we acquired or developed. We also incur engineering expenses developing and supporting the operation of our communications system and the early stage engineering work on new products and services that are not yet determined to be technologically feasible.
Acquisition-related and integration costs
Acquisition-related and integration costs include professional services expenses and identifiable integration costs directly attributable to our acquisitions. These costs were expensed as incurred and are reflected in acquisition-related and integration costs on our consolidated statements of operations.
Results of operations for the years ended December 31, 2020 and 2019
Revenues
The table below presents our revenues for the years ended December 31, 2020 and 2019, together with the percentage of total revenue represented by each revenue category, respectively:
Total revenues for the year ended December 31, 2020 decreased $23.5 million, or 8.7%, to $248.5 million in 2020 from $272.0 million in 2019.
Service revenues
The decrease in recurring service revenues for the year ended December 31, 2020, compared to the prior year period, was primarily due to the expiration at the end of 2019 of our contract with AT&T Services, Inc. (“AT&T”), providing our services to Maersk Lines (“Maersk”), as described below, and decreases in usage mainly due to the economic downturn in the oil and gas industry and heavy equipment customers.
As of December 31, 2020, we had approximately 2,225,000 billable subscriber communicators compared to approximately 2,657,000 billable subscriber communicators as of December 31, 2019, a decrease of 16.3%. As of December 31, 2019, excluding the billable subscriber communicators issued by Maersk described below, we had approximately 2,231,000 billable subscriber communicators. Separately, at year-end 2019, we deactivated approximately 85,000 non-revenue generating communicators that were not actively transmitting data or were in a suspend/test mode. This action was performed in connection with our platform convergence project. Subsequent to these adjustments, we had approximately 2,144,000 billable subscriber communicators as of December 31, 2019. From December 31, 2019 through December 31, 2020, we added approximately 171,000 billable subscriber communicators,
offset, partially, by deactivations of approximately 90,000 units related in part to decreases in active subscriber devices of oil and gas and heavy equipment customers and our platform convergence project.
Our program with Maersk, through our contract with AT&T, expired on December 31, 2019. The remaining deferred revenue of approximately $1.9 million associated with this contract was recognized during the year ended December 31, 2020 as an immaterial prior period adjustment. The contract was assumed as part of the WAM Technologies, LLC acquisition in 2015.
Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenues from these units.
Product sales
The decrease in product sales for the year ended December 31, 2020, compared to the prior year period, was primarily due to timing of shipments impacted by the COVID-19 pandemic and the downturn in the oil and gas industry.
Cost of revenues, exclusive of depreciation and amortization
Cost of services is comprised of expenses to operate our network, such as payroll and related costs, including stock-based compensation, installation costs, and usage fees to third-party networks, but exclude depreciation and amortization discussed below. The decrease in cost of services for the year ended December 31, 2020, compared to the prior year period, was primarily due to our cost reduction initiatives implemented throughout the Company.
Cost of product sales includes the purchase price of subscriber communicators and SIMs sold, costs of warranty obligations, shipping charges and operational costs to fulfill customer orders, including costs for employees and inventory management. The decrease in cost of product sales for the year ended December 31, 2020, compared to the prior year period, was primarily due to the decreases in product sales and the lower costs associated with new product offerings and the mix of product shipments, as well as other non-recurring benefits related to warranties and purchase price variances.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) relate primarily to expenses for general management, sales and marketing, finance, audit and legal fees and general operating expenses. The increase in SG&A expenses for the year ended December 31, 2020, compared to the prior year period, was primarily due to reductions in contingent liabilities in 2019 which did not recur in 2020 and an increase in bad debt expense in 2020, offset by cost reductions in salary and wages, travel and entertainment, and professional services.
Product development expenses
Product development expenses consist primarily of the expenses associated with our engineering efforts to establish technical feasibility, and the cost of third parties and internal staff to support our current applications. Product development expenses for the year ended December 31, 2020, compared to the prior year period, reflects lower employee costs, reduced consulting services, as well as reduced travel and entertainment costs, as a result of travel restrictions due to the COVID-19 pandemic.
Depreciation and amortization
The increase in depreciation and amortization for the year ended December 31, 2020, compared to the prior year period, was primarily due to higher depreciation associated with our capitalized costs attributable to the design, development and enhancements of our products and services sold to our customers and our internally developed software.
Acquisition-related and integration costs
Acquisition-related and integration costs include professional services expenses and identifiable integration costs directly attributable to our acquisitions. The decrease in acquisition-related and integration costs reflected lower acquisition and integration activity for the year ended December 31, 2020, compared to the prior year period.
Other income (expense)
Other income (expense) is comprised primarily of interest expense, foreign exchange gains and losses and interest income related to capital leases and from our cash and cash equivalents, which can consist of U.S. Treasuries and interest-bearing instruments.
The increase in other expense for the year ended December 31, 2020, compared to the prior year, was primarily due to a loss on debt call premium and debt extinguishment related to the redemption of our Senior Secured Notes, as well as an increase in other expense in 2020, related to foreign currency losses, offset, in part, by lower interest expense due to the lower debt balance for the fourth quarter of 2020. We believe our foreign exchange exposure is limited as a majority of our revenue is collected in U.S. dollars.
Income taxes
In 2020, we recorded income taxes of $1.7 million, which primarily included foreign income taxes of $1.4 million from income generated by our international operations and $0.3 million of state income taxes and income tax expense related to amortization of tax goodwill generated from acquisitions.
In 2019, we recorded income taxes of $4.4 million, which primarily included foreign income taxes of $4.1 million from income generated by our international operations and $0.3 million of income tax benefit related to amortization of tax goodwill generated from acquisitions.
Net loss
For the year ended December 31, 2020, we had a net loss of $33.8 million compared to a net loss of $18.1 million for the year ended December 31, 2019, primarily due to a loss on debt call premium and debt extinguishment associated with the redemption of our Senior Secured Notes.
Noncontrolling interests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.
Net loss attributable to ORBCOMM Inc.
For the year ended December 31, 2020, we had a net loss attributable to our Company of $33.9 million, compared to a net loss attributable to our Company of $18.4 million for the year ended December 31, 2019.
For the year ended December 31, 2019, the net loss attributable to our common stockholders considers dividends of less than $0.1 million paid in shares of the Series A convertible preferred stock.
Results of operations for the years ended December 31, 2019 and 2018
Revenues
The table below presents our revenues for the years ended December 31, 2019 and 2018, together with the percentage of total revenue represented by each revenue category, respectively:
Total revenues for the year ended December 31, 2019 decreased $4.1 million, or 1.5%, to $272.0 million in 2019 from $276.1 million in 2018.
Service revenues
The increase in service revenues for the year ended December 31, 2019, compared to the prior year period, was primarily due to revenue generated from growth in billable subscriber communicators across our services.
As of December 31, 2019, including the communicator devices issued by Maersk, we had approximately 2,657,000 billable subscriber communicators compared to approximately 2,374,000 billable subscriber communicators as of December 31, 2018, an increase of 11.9%. As of December 31, 2019, excluding the billable subscriber communicators issued by Maersk described below, we had approximately 2,231,000 billable subscriber communicators. Separately, at year-end 2019, we deactivated approximately 85,000 non-revenue generating communicators that were not actively transmitting data or were in a suspend/test mode. This action was performed in connection with our platform convergence project. Subsequent to these adjustments, we had approximately 2,144,000 billable subscriber communicators at December 31, 2019.
During 2019, we were notified that our program with Maersk, through our contract with AT&T, would expire on December 31, 2019. This program provided us with total recurring service revenues of approximately $3.0 million annually for engineering support services, with additional deferred revenues of approximately $1.5 million recognized during the year ended December 31, 2019. In addition, we recorded $0.5 million of other service revenues in the year ended December 31, 2019, related to device activations that had not been previously recognized. The contract was assumed as part of the WAM Technologies, LLC acquisition in 2015.
Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenues from these units.
Product sales
The decrease in product sales for the year ended December 31, 2019, compared to the prior year period, was primarily due to a slowdown in the North American transportation market and timing of shipments associated with our existing and new customers during the 2019 period and the inclusion of significant product deployments during the year ended December 31, 2018 that did not recur at similar levels in 2019.
Cost of revenues, exclusive of depreciation and amortization
Cost of services is comprised of expenses to operate our network, such as payroll and related costs, including stock-based compensation, installation costs, and usage fees to third-party networks, but exclude depreciation and amortization discussed below. The decrease in cost of services for the year ended December 31, 2019, compared to the prior year period, was primarily due to the inclusion of non-recurring installation costs associated with significant product deployments during the year ended December 31, 2018 that did not recur at similar levels in 2019.
Cost of product sales includes the purchase price of subscriber communicators and SIMs sold, costs of warranty obligations, shipping charges, as well as operational costs to fulfill customer orders, including costs for employees and inventory management. The decrease in cost of product sales for the year ended December 31, 2019, compared to the prior year period, was primarily due to the decrease in product sales and the lower costs associated with new product offerings and the mix of product shipments.
Selling, general and administrative expenses
SG&A expenses relate primarily to expenses for general management, sales and marketing, finance, audit and legal fees and general operating expenses. The increase in SG&A expenses for the year ended December 31, 2019, compared to the prior year period, was primarily due to reductions in contingent liabilities in 2018 to a larger extent than in the 2019 period.
Product development expenses
Product development expenses consist primarily of the expenses associated with our engineering efforts to establish technical feasibility, and the cost of third parties and internal staff to support our current applications. Product development expenses for the
year ended December 31, 2019, compared to the prior year period, reflects increases in employee-related and outside labor costs, as well as other expenses as we continue to research new solutions and services for our customers.
Depreciation and amortization
The increase in depreciation and amortization for the year ended December 31, 2019, compared to the prior year period, was primarily due to higher depreciation associated with our capitalized costs attributable to the design, development and enhancements of our products and services sold to our customers and our internally developed software.
Acquisition-related and integration costs
Acquisition-related and integration costs include professional services expenses and identifiable integration costs directly attributable to our acquisitions. The decrease in acquisition-related and integration costs reflected lower acquisition and integration activity for the year ended December 31, 2019, compared to the prior year period.
Other income (expense)
Other income (expense) is comprised primarily of interest expense, foreign exchange gains and losses and interest income related to capital leases and from our cash and cash equivalents, which can consist of U.S. Treasuries and interest-bearing instruments.
The increase in other expense for the year ended December 31, 2019, compared to the prior year, was primarily due to an increase in other income (expense) in 2019 related to foreign currency losses. We believe our foreign exchange exposure is limited as a majority of our revenue is collected in U.S. dollars.
Income taxes
In 2019, we recorded income taxes of $4.4 million, which primarily included foreign income taxes of $4.1 million from income generated by our international operations and $0.3 million of income tax benefit related to amortization of tax goodwill generated from acquisitions.
In 2018, we recorded income taxes of $4.7 million, which primarily included foreign income taxes of $4.0 million from income generated by our international operations and $0.7 million of income tax benefit related to amortization of tax goodwill generated from acquisitions.
Net loss
For the year ended December 31, 2019, we had a net loss of $18.1 million compared to a net loss of $25.9 million for the year ended December 31, 2018, primarily due to decreased costs associated with our products and services.
Noncontrolling interests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.
Net loss attributable to ORBCOMM Inc.
For the year ended December 31, 2019, we had a net loss attributable to our Company of $18.4 million, compared to a net loss attributable to our Company of $26.2 million for the year ended December 31, 2018.
For both of the years ended December 31, 2019 and 2018, the net loss attributable to our common stockholders considers dividends of less than $0.1 million, paid in shares of the Series A convertible preferred stock.
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs, our obligation to make scheduled payments of interest on our indebtedness and our need to fund growth initiatives and make capital expenditures to support our current operations and to facilitate growth and expansion. We have financed our operations and expansion with cash flows from operating activities, bank debt, sales of our common stock through public offerings and private placements of debt. At December 31, 2020, we had an accumulated deficit of $244.9 million. Our primary sources of liquidity consist of cash and cash equivalents totaling $40.4 million and $30.0 million remaining under our Revolving Facility under the Credit Agreement, available for use for working capital and general business purposes, which we believe will be sufficient to provide working capital, make interest payments and make capital expenditures to support operations and facilitate growth and expansion for the next twelve months.
As previously reported, during the quarter ended June 30, 2020, we received proceeds from a loan in the amount of $7.6 million (the “PPP Loan”) from JPMorgan Chase, as lender, pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We believe that we qualified to apply for and receive the PPP Loan pursuant to the PPP under the provisions of the CARES Act and the Small Business Administration (“SBA”) guidance in effect at that time. In light of our entering into the amendment to our revolving credit facility described below under “-Future Liquidity and Capital Resource Requirements” to provide us with access to additional liquidity, our improved outlook on our ability to generate cash from operations in the quarter ended June 30, 2020, and the evolving requirements and new guidance issued by the SBA subsequent to our receipt of the PPP Loan, we repaid the full amount of the PPP Loan received and any accrued interest on June 25, 2020. The PPP Loan was prepayable at any time prior to the maturity date without any prepayment penalties.
Operating activities
Cash provided by our operating activities in 2020 was $48.4 million resulting from a net loss of $33.8 million, offset by non-cash items including $50.7 million for depreciation and amortization and $5.3 million for stock-based compensation. Working capital activities provided cash of $6.7 million, primarily due to a decrease in accounts receivable of $4.5 million related to timing of collections, a decrease of $10.0 million in inventories and a decrease of $3.8 million in prepaid expenses and other assets, offset, in part by a decrease of $8.3 million in accounts payable and accrued liabilities, a decrease of $1.3 million in deferred revenue and a decrease of $2.1 million in other liabilities.
Cash provided by our operating activities in 2019 was $30.1 million resulting from a net loss of $18.1 million and cash used by working capital of $10.3 million, offset by non-cash items including $50.7 million for depreciation and amortization and $6.2 million for stock-based compensation. Working capital activities primarily consisted of an increase in accounts receivable of $5.2 million related to timing of collections and an increase of $5.6 million in inventories.
Cash provided by our operating activities in 2018 was $11.5 million resulting from a net loss of $25.9 million and cash used by working capital of $14.9 million, offset by non-cash items including $49.7 million for depreciation and amortization and $7.9 million for stock-based compensation. Working capital activities primarily consisted of a decrease of $14.9 million in accounts payable and accrued liabilities primarily related to timing of payments and an increase in accounts receivable of $14.0 million related to timing of collections, offset, in part, by a decrease of $8.3 million in inventories and a decrease in prepaid expenses and other assets of $4.0 million.
Investing activities
Cash used in our investing activities in 2020 was $19.5 million, resulting from capital expenditures and, to a lesser degree, to our subscription model during the period.
Cash used in our investing activities in 2019 was $21.1 million, resulting from capital expenditures during the period.
Cash used in our investing activities in 2018 was $21.5 million, resulting primarily from capital expenditures during the period.
Financing activities
Cash used in our financing activities in 2020 was $43.7 million, primarily due to the redemption of our Senior Secured Notes of $250.0 million, payment of a call premium associated with the redemption of our Senior Secured Notes of $8.8 million, payment of debt issuance costs related to our Credit Agreement of $3.2 million, as well as payments of $2.5 million in purchases of common stock under our stock repurchase program, offset, in part, by proceeds received under the Credit Agreement of $200.0 million, net proceeds received under the Revolving Facility of $20.0 million and $0.8 million in proceeds received from the sale of common stock under our employee stock purchase plan.
Cash used in our financing activities in 2019 was $8.4 million, due to payments of $9.4 million in purchases of common stock under our share repurchase program, offset, in part, by $1.1 million in proceeds from the sale of common stock under the employee stock purchase plan.
Cash provided by our financing activities in 2018 was $29.2 million, due to proceeds of $28.0 million received from our April 2018 Public Offering and $1.2 million in proceeds from the sale of common stock under the employee stock purchase plan.
Future Liquidity and Capital Resource Requirements
We believe that our existing cash and cash equivalents, along with expected cash flows from operating activities and funds available under our Revolving Facility described below (subject to applicable covenant limitations), will be sufficient to provide working capital, make interest payments and fund growth initiatives and make capital expenditures to support operations and facilitate growth and expansion for the next twelve months. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness or common stock, issue new equity or debt securities or enter into new lending arrangements if conditions warrant. Any repurchases or exchanges, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Credit Agreement and Security Agreement
On December 2, 2020, we and certain of our subsidiaries entered into the Credit Agreement with JPMorgan Chase, as administrative agent and collateral agent, and with the other Lenders thereto, in connection with the refinancing of our Senior Secured Notes. The Credit Agreement superseded and replaced our prior credit agreement providing for a $25.0 million revolving credit facility described below under “Prior Revolving Credit Facility.” Pursuant to the Credit Agreement, the Lenders provided the Revolving Facility in an aggregate amount of up to $50.0 million and the Term Facility in the aggregate amount of $200.0 million. The proceeds of the Facilities, along with cash on hand, were used to redeem all $220.0 million outstanding principal amount of the Senior Secured Notes and pay certain related fees, expenses and accrued interest.
The Facilities mature on December 2, 2025. At our election, loans under the Facilities will bear interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin subject to a set pricing grid, with respect to the Revolving Facility and the Term Facility.
The Facilities are secured by a first-priority security interest in substantially all our and our subsidiaries’ assets under an Amended and Restated Security Agreement among us, our subsidiaries and JPMorgan Chase (the “Security Agreement”). The Revolving Facility has no scheduled principal amortization until the maturity date. The Term Facility has quarterly installments of principal amortization in an aggregate amount specified for each 12-month period following the closing date as set forth in the Credit Agreement.
Subject to the terms set forth in the Credit Agreement, we may borrow, repay and reborrow the Revolving Facility at any time prior to the maturity date and may prepay the Term Facility at any time without penalty or premium, subject to limitations as to minimum amounts of prepayments and customary indemnification for breakage costs in the case of prepayment of Eurodollar Loans other than on the last day of a related interest period.
The Credit Agreement contains customary representations and warranties, conditions to funding, covenants and events of default. The Credit Agreement contains covenants that, among other things, limit us and our subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the
Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various baskets as set forth in the Credit Agreement.
On December 2, 2020, the $200.0 million proceeds of the Term Facility, the $20.0 million of borrowings under the Revolving Facility and cash on hand were used to redeem our $220.0 million outstanding Senior Secured Notes at a price equal to (a) 104% of the principal amount of the Senior Secured Notes being redeemed plus (b) accrued and unpaid interest, resulting in a call premium fee of $8.8 million and an additional expense associated with the remaining unamortized debt issuance cost of $2.9 million.
At December 31, 2020, we had $20.0 million outstanding under the Revolving Facility. As of December 31, 2020, we were in compliance with all financial covenants under the Credit Agreement.
8.0% Senior Secured Notes
On April 10, 2017, we issued $250.0 million aggregate principal amount of 8.0% Senior Secured Notes due 2024. The Senior Secured Notes were issued pursuant to an Indenture, dated as of April 10, 2017, among us, the Guarantors and U.S. Bank National Association, as trustee and collateral agent. The Senior Secured Notes were unconditionally guaranteed on a senior secured basis by the Guarantors, and were secured on a first priority basis by (i) pledges of capital stock of certain of our directly- and indirectly-owned subsidiaries; and (ii) substantially all of our and our Guarantors’ other property and assets, to the extent a first priority security interest was able to be granted or perfected therein, and subject, in all cases, to certain specified exceptions, and an intercreditor agreement with the collateral agent for our Prior Revolving Credit Facility described below. Interest payments were due on the Senior Secured Notes semi-annually in arrears on April 1 and October 1, beginning October 1, 2017.
We had the option to redeem some or all of the Senior Secured Notes at any time on or after April 1, 2020, at redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption. We also had the option to redeem some or all of the Senior Secured Notes at any time before April 1, 2020 at a redemption price of 100% of the principal amount of the Senior Secured Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before April 1, 2020, we had the right to redeem up to 35% of the aggregate principal amount of the Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption, with the proceeds from certain equity issuances.
The Indenture contained covenants that, among other things, limited us and our restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting our subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations had various exceptions and baskets as set forth in the Indenture, including the incurrence by us and our restricted subsidiaries of indebtedness under potential new credit facilities in the aggregate principal amount at any one time outstanding not to exceed $50.0 million.
Prior Revolving Credit Facility
On December 18, 2017, we and certain of our subsidiaries entered into the revolving credit agreement with JPMorgan Chase, as administrative agent and collateral agent, as amended on June 25, 2020 (the “Prior Revolving Credit Agreement”). The Prior Revolving Credit Agreement provided for a revolving credit facility in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes and would mature on December 18, 2022 (the “Prior Revolving Credit Facility”). The Prior Revolving Credit Facility bore interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin of 2.50% in the case of alternative base rate loans and 3.50% in the case of adjusted LIBOR loans. The Prior Revolving Credit Facility was secured by a first priority security interest in substantially all of our and our subsidiaries’ assets under a security agreement among the Company, the applicable subsidiaries and JPMorgan Chase, subject to an intercreditor agreement with the indenture trustee for the Senior Secured Notes. The Prior Revolving Credit Facility had no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Prior Revolving Credit Agreement, we could borrow, repay and reborrow amounts under the Prior Revolving Credit Facility at any time prior to the maturity date.
The Prior Revolving Credit Agreement contained covenants that, among other things, limited our ability and our restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting our subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations had various baskets as set forth in the Prior Revolving Credit Agreement. The Prior Revolving Credit Agreement was superseded and replaced by the Credit Agreement.
Public Offering and Shelf Registration
On April 10, 2018, we completed a public offering of 3,450,000 shares of our common stock, including 450,000 shares sold upon exercise in full of the underwriters’ option to purchase additional shares, at a price of $8.60 per share. We received net proceeds of approximately $28.0 million after deducting underwriters’ discounts and commissions and offering costs.
We have an effective shelf registration statement filed with the SEC, registering up to $100 million of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement is due to expire on March 23, 2023 and replaces our previous shelf registration statement for an unspecified amount of debt and/or equity securities filed in 2018.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA is defined as earnings attributable to ORBCOMM Inc. before interest income (expense), provision for income taxes, depreciation and amortization, and loss on debt extinguishment. We believe EBITDA is useful to our management and investors in evaluating our operating performance because it is one of the primary measures we use to evaluate the economic productivity of our operations, including our ability to obtain and maintain our customers, our ability to operate our business effectively, the efficiency of our employees and the profitability associated with their performance. It also helps our management and investors to meaningfully evaluate and compare the results of our operations from period to period on a consistent basis by removing the impact of our financing transactions and the depreciation and amortization impact of capital investments from our operating results. In addition, our management uses EBITDA in presentations to our Board of Directors to enable it to have the same measurement of operating performance used by management and for planning purposes, including the preparation of our annual operating budget. We also believe Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, noncontrolling interests, impairment loss, non-capitalized satellite launch and in-orbit insurance, loss on debt call premium, and acquisition-related and integration costs, is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations.
EBITDA and Adjusted EBITDA are not performance measures calculated in accordance with U.S. GAAP. While we consider EBITDA and Adjusted EBITDA to be important measures of operating performance, they should be considered in addition to, and not as substitutes for, or superior to, net loss or other measures of financial performance prepared in accordance with U.S. GAAP and may be different than EBITDA and Adjusted EBITDA measures presented by other companies.
The following table reconciles our net loss attributable to ORBCOMM Inc. to EBITDA and Adjusted EBITDA for the periods shown:
For the year ended December 31, 2020 compared to the year ended December 31, 2019, EBITDA decreased $15.7 million, while net loss attributable to ORBCOMM Inc. increased $15.5 million and Adjusted EBITDA decreased $8.3 million.
For the year ended December 31, 2019 compared to the year ended December 31, 2018, EBITDA increased $8.6 million, while net loss attributable to ORBCOMM Inc. improved $7.8 million and Adjusted EBITDA increased $6.0 million.
Non-GAAP Gross Margin
Non-GAAP Service Gross Margin is defined as Non-GAAP Service gross profit divided by service revenues. Non-GAAP Service gross profit is defined as service revenues, minus cost of services (including depreciation and amortization expense) plus depreciation and amortization expense. Non-GAAP Product Gross Margin is defined as Non-GAAP Product gross profit divided by product sales. Non-GAAP Product gross profit is defined as product sales, minus cost of product sales (including depreciation and amortization expense) plus depreciation and amortization expense. We believe that Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are useful to evaluate and compare the results of our operations from period to period on a consistent basis by removing the depreciation and amortization impact of capital investments from our operating results.
Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are not performance measures calculated in accordance with U.S. GAAP. While we consider Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin to be important measures of operating performance, they should be considered in addition to, and not as substitutes for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP and may be different than Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin measures presented by other companies.
The following tables reconcile GAAP Service Gross Margin to Non-GAAP Service Gross Margin and GAAP Product Gross Margin to Non-GAAP Product Gross Margin for the periods shown:
GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 56.9% in each of the years ended December 31, 2020 and 2019. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.5% in each of the years ended December 31, 2020 and 2019. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.5% in the year ended December 31, 2019, compared to 65.4% in the prior year. These improvements in 2019 were due to bringing onboard new subscribers at higher margins and limiting product installations at negative margins, compared to the prior year period.
GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 27.7% in the year ended December 31, 2020, compared to 27.3% in the prior year. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 30.0% in the year ended December 31, 2020, compared to 29.7% in the prior year period. These improvements were primarily due to a better mix of higher-margin products shipped. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 29.7% in the year ended December 31, 2019, compared to 23.8% in the prior year. These improvements were primarily due to a better mix of higher-margin products shipped in greater volumes compared to the prior year period.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2020 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:
(1)
Amounts represent future minimum payments under operating leases for our office spaces and other facilities.
(2)
Amounts represent repayment of the principal of our Facilities based on our outstanding long-term debt as of December 31, 2020.
(3)
Interest payments reflect expected borrowing rates for our outstanding long-term debt as of December 31, 2020 and mandatory future reductions of long-term debt.
(4)
Future amounts are based on assumed growth. We do not have a contractual commitment for our carriers, however there is no current expectation that we will stop using these carriers.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make certain 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, accounting for business combinations, goodwill, intangible assets, capitalized development costs, income taxes and loss contingencies. 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. We believe the following critical accounting policies affect our more significant estimates and judgments in the preparation of our consolidated financial statements.
Revenue recognition
We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Our revenue recognition policy requires us to make significant judgments regarding the probability of collection of the resulting accounts receivable balance based on prior history and the creditworthiness of our customers. In instances where collection is not reasonably assured, revenue is recognized when we receive cash from the customer.
We derive recurring service revenues primarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on our satellite network, as well as other satellite networks and cellular wireless networks that we resell to our resellers, MCPs and MCAs, and direct customers. In addition, we earn recurring service revenues from providing AIS data services to government and commercial customers worldwide. AIS service revenues are generated over time from monthly subscription-based services supplying AIS data to our customers and resellers using the output method. We also earn recurring service revenues from activations of subscriber communicators and SIMs and optional separately-priced extended warranty service agreements extending beyond the initial warranty period of typically one year, which are billed to the customer upon shipment of a subscriber communicator.
Service revenues derived from usage fees are generally based upon the data transmitted by a customer, the overall number of subscriber communicators and/or SIMs activated by each customer, and whether we provide services through our value-added portal. Using the output method, these service revenues are recognized over time, as services are rendered, based on the contract terms. Revenues from the activation of both subscriber communicators and SIMs are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over three years, the estimated life of the subscriber communicator. Revenues from separately-priced extended warranty service agreements extending beyond the initial warranty period of typically one year, are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over two to five years.
We earn other service revenues from installation services and engineering, technical and management support services. Revenues generated from installation services are recognized at a point in time using the output method when the services are completed. Revenues generated from engineering, technical and management support services are recognized over time as the service is provided. We also generate other service revenues through the sale of software licenses to our customers, which is recognized at a point in time using the output method when the license is provided to the customer.
Product sales are derived from sales of complete industrial IoT telematics devices, modems or cellular wireless SIMs (for our terrestrial-communication services) to our resellers (i.e., MCPs and MCAs) and direct customers. Product sales are recognized at a point in time when title transfers, when the products are shipped or when customers accept the products, depending on the specific contractual terms. Sales of subscriber communicators and SIMs are not subject to return, and title and risk of loss pass to the customer generally at the time of shipment.
Shipping costs billed to customers are included in product sales and the related costs are included as cost of product sales on our consolidated statements of operations.
We generate revenue from leasing arrangements of subscriber communicators, under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, using the estimated selling prices for each of the deliverables recognized. Product and installation revenues associated with these arrangements are recognized upon shipment or installation of the subscriber communicator, depending on the specific contractual terms. Service and warranty revenues are recognized on an accrual basis, as services are rendered, or on a cash basis, if collection from the customer is not reasonably assured at contract initiation.
Revenue recognition for arrangements with multiple performance obligations
We enter into contracts with our customers that include multiple performance obligations, which typically include subscriber communicators, monthly usage fees and optional extended warranty service agreements. We evaluate each item to determine whether it represents a promise to transfer a distinct good or service to the customer and is therefore a separate performance obligation under FASB Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers.” If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative stand-alone selling prices of each performance obligation. We use an observable price to determine the stand-alone selling price for each separate performance obligation when sold on its own or a cost-plus margin approach when one is not available.
If an arrangement provided to a customer has a significant and incremental discount on future revenue, such right is considered a performance obligation and a proportionate amount of the discount should be allocated to each element based on the relative stand-alone selling price of each element, regardless of the discount. We have determined that arrangements provided to our customers do not include significant and incremental discounts.
Accounting for business combinations
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded to goodwill. Intangible assets are amortized over the expected life of the asset. We make significant assumptions and estimates in determining the preliminary estimated purchase price and the preliminary allocation of the estimated purchase in the consolidated financial statements. These preliminary estimates and assumptions are subject to change as we finalize the valuations. The final valuations may change significantly from the preliminary estimates. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows from revenues of the intangible assets acquired, estimates of appropriate discount rates used to calculate the present value of expected future cash flows, estimated useful lives of the intangible assets acquired and other factors. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based, in part, on historical experience, information obtained from the management of the acquired companies and future expectations. For these and other reasons, actual results may vary significantly from estimated results.
Contingent consideration
We determine the acquisition date fair value of contingent consideration obligations based on a probability-weighted income approach derived from milestone estimates and a probability assessment with respect to the likelihood of achieving contingent obligations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in FASB ASC Topic 820 “Fair Value Measurement.” At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value will be reflected as income or expense on our consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Adverse changes in assumptions utilized in our contingent consideration fair value estimates could result in an increase in our contingent consideration obligation and a corresponding charge to operating income.
Goodwill
Goodwill is not amortized, but is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment, or one level below the operating segment. We operate in one operating segment, which is our only reporting unit.
We test for an indication of goodwill impairment on November 30 of each year or when indicators of impairment exist, by comparing the fair value of our reporting unit to its carrying value. If there is an indication of impairment, we perform a “step two” test to measure the impairment. Impairments, if any, are recorded to the statement of operations in the period the impairment is recognized.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include a sustained and significant decline in our stock price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate and unanticipated competition. During the first quarter of 2020, there was a significant amount of uncertainty about how the COVID-19 pandemic would affect our business. We considered the current economic conditions, as well as the stock price decrease during the second quarter of 2020, as a triggering event to test for goodwill impairment and, as a result, we performed a Step 1 analysis to determine if the carrying value of the reporting unit exceeded our fair value. Based on our assessment, which included estimating the fair value of the reporting unit using a discounted cash flow model, we determined the fair value of the reporting unit was significantly in excess of the carrying value and no impairment was necessary as of March 31, 2020.
There was no goodwill impairment for the years ended December 31, 2020, 2019 and 2018.
Long-lived assets, including finite-lived intangible assets
Management reviews long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. In connection with this review, we reevaluate the periods of depreciation and amortization. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value, which is determined using projected discounted future net cash flows, using the appropriate discount rate. Our satellite constellation and related assets, including satellites under construction, are evaluated as a single asset group whenever facts or circumstances indicate that the carrying value may not be recoverable. If indicators of impairment are identified, recoverability of long-lived assets is measured by comparing their carrying amount to the projected cash flows the assets are expected to generate. Considerable judgment by us is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the allocation of cash flows to assets or asset groups and, if required, an estimate of fair value for those assets or asset groups, the timing and amount of projected future cash flows and the discount rate selected to measure the risks inherent in future cash flows.
There was no impairment charge recorded relating to intangible assets for the years ended December 31, 2020, 2019 and 2018.
If a satellite were to fail during launch or while in orbit, the resulting loss would be charged to expense in the period it is determined that the satellite is not recoverable. The amount of any such loss would be reduced by the insurance proceeds, if any, estimated to be received. There was no impairment charge recorded in the years ended December 31, 2020, 2019, and 2018.
Capitalized development costs
Judgments and estimates occur in the calculation of capitalized development costs. We evaluate and estimate when a preliminary project stage is completed and the point when the project is substantially complete and ready for use. We base our estimates and evaluations on engineering data. We capitalize the costs of acquiring, developing and testing software and hardware to meet our internal needs and for products and services that have not yet been placed into service. Capitalization of costs associated with software obtained or developed for internal use commences when both the preliminary project stage is completed and management has authorized further funding for the project, based on a determination that it is probable that the project will be completed and used to perform the function intended. Capitalized costs include only (1) the external direct cost of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with, and devote time to, a qualifying project, and (3) certain external software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of either a detailed program design or a working model. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Internal use software costs are amortized once the software is placed in service using the straight-line method over periods ranging from three to seven years. Product and service development costs are amortized over the estimated life of the product once it has been released for commercial sale.
Income taxes
We estimate our income taxes separately for each tax jurisdiction in which we conduct operations. This process involves estimating actual current tax expense and assessing temporary differences resulting from different treatment of items between book and tax, which results in deferred tax assets and liabilities. We recognize a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. In determining the net deferred tax assets and valuation allowances, we are required to make judgments and estimates in assessing the realizability of the deferred tax assets. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
We recognize the effect of tax law changes in the period of enactment. Changes in existing tax laws and rates, their related interpretations, and the uncertainty generated by the current economic environment may affect the amounts of our deferred tax liabilities or the valuations of our deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.
We account for uncertainty in income tax positions using a two-step approach. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure the tax position at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Accounting for uncertainties in income tax positions involves significant judgments by management.
Loss contingencies
We accrue for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made. There is significant uncertainty relating to the outcome of any potential legal actions and other claims and the difficulty of predicting the likelihood and range of the potential liability involved, coupled with the material impact on our results of operations that could result from legal actions or other claims and assessments.
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which will be effective for fiscal years beginning after December 15, 2019. ASU 2016-13 introduces the current expected credit loss (CECL) model, which requires an entity to measure credit losses for certain financial instruments and financial assets. Upon initial recognition, an entity is required to estimate a credit loss expected over the life of an exposure. The adoption of this standard did not have a material impact on our consolidated financial statements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
Effects of Inflation Risk
Overall, we believe that the impact of inflation risk on our business will not be significant.
Foreign Currency Risk
The majority of our revenues and expenses are transacted in U.S. dollars. Due to operations in Japan, Europe and Africa, we have foreign exchange exposures to non-U.S. dollar revenues. Due to operations in Canada, we have foreign exchange exposures to non-U.S. dollar expenses. For the years ended December 31, 2020 and 2019, revenues denominated in foreign currencies were approximately 10.0% and 9.9% of total revenues, respectively. For the year ended December 31, 2020, our revenues would have decreased by approximately 1.5% if the U.S. dollar would have strengthened by 10%.
We have assets and liabilities denominated in foreign currencies. At December 31, 2020, a hypothetical change in the fair value of these assets and liabilities from an increase (decrease) of 10% of the U.S. dollar would be an increase (decrease) of approximately $1.9 million.
Concentration of Credit Risk
For the year ended December 31, 2020, Carrier Corporation comprised 10.2% of our consolidated total revenues. There were no customers who generated revenues greater than 10% of our consolidated total revenues for the years ended December 31, 2019 or 2018.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The consolidated financial statements of ORBCOMM Inc. and its subsidiaries, including the notes thereto and the report thereon, are presented beginning at page of this Annual Report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
(a)
Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
(b)
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based upon criteria established in Internal Control - Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in its attestation report which is included below.
(c)
Changes in Internal Control over Financial Reporting
We reviewed our internal control over financial reporting at December 31, 2020. As a result of the acquisitions of inthinc Technology Solutions, Inc. and Blue Tree Systems Limited, we continue to integrate certain business processes and systems. Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as these integrations are complete.
There have been no other changes in our internal control over financial reporting identified in an evaluation thereof that occurred during the last fiscal quarter of 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
ORBCOMM Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of ORBCOMM Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 25, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
New York, New York
February 25, 2021
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant and Corporate Governance
Identification of Directors
Reference is made to the information regarding directors under the heading “Election of Directors (Proposal 1)” in the Proxy Statement for our 2021 Annual Meeting of stockholders to be held on April 21, 2021 (our “2021 Proxy Statement”), which information is hereby incorporated by reference.
Identification of Executive Officers
Reference is made to the information regarding executive officers under the heading “Information About Our Executive Officers” in Part I, Item 1 of this Annual Report on Form 10-K.
Identification of Audit Committee and Audit Committee Financial Expert
Reference is made to the information regarding directors under the heading “Board of Directors and Committees - Audit Committee” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Material Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors under the heading “Board of Directors and Committees - Nominating and Corporate Governance Committee” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Code of Ethics
We have adopted a code of ethics, or Code of Business Conduct, to comply with the rules of the SEC and NASDAQ. Our Code of Business Conduct applies to our directors, officers and employees, including our principal executive officer and senior financial officers. A copy of our Code of Business Conduct is maintained on our website at www.orbcomm.com.
Item 11.
Item 11.
Executive Compensation
Reference is made to the information under the headings “Board of Directors and Committees - Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Compensation of Executive Officers” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Beneficial Ownership
Reference is made to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Equity Compensation Plan Information
Reference is made to the information under the heading “Equity Compensation Plan Information” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Reference is made to the information under the heading “Certain Relationships and Transactions with Related Persons” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
Item 14.
Item 14.
Principal Accountant Fees and Services
Reference is made to the information under the heading “Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm (Proposal 2) - Principal Accountant Fees” in our 2021 Proxy Statement, which information is hereby incorporated by reference.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statements Schedules
(a)(1) Financial Statements
See Index to Consolidated Financial Statements appearing on page.
(a)(2) Financial Statement Schedules
Schedule II- See Index to Consolidated Financial Statements appearing on page.
Financial statement schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the financial statements or the notes thereto.
(a)(3) Exhibits
Exhibit
No.
Description
3.1
Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, is incorporated herein by reference.
3.2
Amended Bylaws of the Company, filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, is incorporated herein by reference.
3.3
Certificate of Designation of Series A Convertible Preferred Stock of ORBCOMM, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 20, 2011, is incorporated herein by reference.
4.1
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, filed as Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference.
*10.1
Non-Employee Director Deferred Compensation Plan, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
10.2
Form of Indemnification Agreement between the Company and the executive officers and directors of the Company, filed as Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (Registration No. 333-134088), is incorporated herein by reference.
10.3
Schedule identifying agreements substantially identical to the form of Indemnification Agreement, filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference.
*10.4
2016 Long-Term Incentives Plan, filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 26, 2016, is incorporated herein by reference.
*10.4.1
Form of Restricted Stock Unit Award Agreement (including Restricted Stock Unit Award Agreement Terms and Conditions) under the Company’s 2016 Long-Term Incentives Plan for awards made prior to December 1, 2018, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, is incorporated herein by reference.
*10.4.2
Form of Performance Unit Award Agreement under the Company’s 2016 Long-Term Incentives Plan for awards made prior to December 1, 2018, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, is incorporated herein by reference.
*10.4.3
Form of Restricted Stock Unit Award Agreement (including Restricted Stock Unit Award Agreement Terms and Conditions) under the Company’s 2016 Long-Term Incentives Plan for awards made on or after December 1, 2018, filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, is incorporated herein by reference.
*10.4.4
Form of Performance Unit Award Agreement under the Company’s 2016 Long-Term Incentives Plan for awards made on or after December 1, 2018, filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, is incorporated herein by reference.
Exhibit
No.
Description
*10.4.5
Form of Stock Appreciation Right Award Agreement (including Stock Appreciation Right Award Agreement Terms and Conditions) under the Company’s 2016 Long-Term Incentives Plan for awards made on or after December 1, 2018, filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, is incorporated herein by reference.
*10.5
2006 Long-Term Incentives Plan, as amended, filed as Exhibit 99 to the Company’s Current Report on Form 8-K filed on May 3, 2011, is incorporated herein by reference.
*10.5.1
Form of Stock Appreciation Rights Award Agreement under the 2006 Long-Term Incentives Plan, filed as Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (Registration No. 333-134088), is incorporated herein by reference.
*10.6
Summary of Non-Employee Director Compensation, effective as of March 1, 2019, filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is incorporated herein by reference.
*10.7
Amended and Restated Employment Agreement between Marc J. Eisenberg and the Company, effective as of March 1, 2019, filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is incorporated herein by reference.
*10.8
Amended and Restated Employment Agreement between John J. Stolte, Jr. and the Company, effective as of March 1, 2019, filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is incorporated herein by reference.
*10.9
Amended and Restated Employment Agreement between Christian G. Le Brun and the Company, effective as of March 1, 2019, filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is incorporated herein by reference.
*10.10
Amended and Restated Employment Agreement between Craig Malone and the Company, effective as of March 1, 2019, filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, is incorporated herein by reference.
*10.11
Employment Agreement between Constantine Milcos and the Company, effective as of November 1, 2019, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, is incorporated herein by reference.
10.12
Asset Purchase Agreement, dated June 9, 2017, among the Company, the sellers party thereto and inthinc Investors, L.P., in its capacity as stockholder representative, filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on June 12, 2017, is incorporated herein by reference.
10.13
Amended and Restated Senior Secured Credit Agreement, dated as of December 2, 2020, among the Company, the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 2, 2020, is incorporated herein by reference.
10.14
Amended and Restated Security Agreement, dated as of December 2, 2020, among the Company, the subsidiaries party thereto and JPMorgan Chase Bank, N.A., as collateral agent, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 2, 2020, is incorporated herein by reference.
Subsidiaries of the Company.
23.1
Consent of Grant Thornton LLP, an independent registered public accounting firm.
Power of Attorney authorizing certain persons to sign this Annual Report on behalf of certain directors and executive officers of the Company.
31.1
Certification of the Chief Executive Officer and President required by Rule 13a-14(a).
31.2
Certification of the Executive Vice President and Chief Financial Officer required by Rule 13a-14(a).
Certification of the Chief Executive Officer and President and Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
**†99.1
Agreement Relating to IDP and OGX dated October 22, 2020 between the Company and Inmarsat Global Limited., filed as Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, is incorporated herein by reference.
Exhibit
No.
Description
101.INS
Inline XBRL Instance Document - The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Inline Cover Page Interactive Data File - The Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*
Management contract or compensatory plan or arrangement.
**
Certain schedules and similar attachments to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K.
†
Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ORBCOMM Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Rochelle Park, State of New Jersey, on February 25, 2021.
ORBCOMM Inc.
By:
/s/ Marc J. Eisenberg
Marc J. Eisenberg
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 25, 2021 by the following persons in the capacities indicated:
Signature
Title
/s/ Marc J. Eisenberg
Chief Executive Officer and President and Director
Marc J. Eisenberg
(principal executive officer)
/s/ Jerome B. Eisenberg*
Chairman of the Board
Jerome B. Eisenberg
/s/ Marco Fuchs*
Director
Marco Fuchs
/s/ Timothy Kelleher*
Director
Timothy Kelleher
/s/ John Major*
Director
John Major
/s/ Karen Gould*
Director
Karen Gould
/s/ Denise Gibson*
Director
Denise Gibson
/s/ Constantine Milcos
Executive Vice President and Chief Financial Officer
Constantine Milcos
(principal financial officer and principal accounting officer)
*By:
/s/ Christian G. Le Brun
Christian G. Le Brun, Attorney-in-Fact**
**
By authority of the Power of Attorney filed as Exhibit 24 hereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (Grant Thornton LLP)
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Equity for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
ORBCOMM Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of ORBCOMM Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Capitalization of software development costs
As discussed in Notes 2 and 6 to the consolidated financial statements, the Company capitalizes certain internal costs related to the design, development and enhancement of the Company’s products and services as well as internal-use software. The Company capitalized $14 million of internal development costs during the year ended December 31, 2020. We identified that capitalization of software development costs to be a critical audit matter.
The principal consideration for our determination that capitalized internal cost of software development is a critical audit matter is the degree of subjectivity involved in assessing which projects meet the capitalization criteria, based on the development stage of the project and the costs being capitalized.
Our audit procedures related to the capitalization of software development internal costs included the following, among others:
•
We evaluated the design and tested the operating effectiveness of internal controls over the Company’s process to capitalize internal costs of software development, including controls that address the determination that a software development project has reached the application development stage and results in additional functionality and the approval of time charged to the projects.
•
We evaluated and corroborated the Company’s current year project capitalization conclusions based on an understanding of a sample of development projects and the associated software development activities through
discussions with management and direct inquiry with the Company’s technology developers responsible for performing the software development activities.
•
We tested the accuracy for capitalized amounts by agreeing a sample of such items to supporting documentation, including time sheets and third-party invoices and through confirmations from a sample of individual developers regarding the nature of their development activities.
Goodwill impairment assessment
As described in Note 2 to the consolidated financial statements, the Company performs a test for goodwill impairment annually, or more frequently, if events or changes in circumstances indicate it is more likely than not that a reduction in the fair value of goodwill below its carrying value has occurred. As a result of the economic conditions in part caused by the COVID-19 pandemic, the Company determined that a triggering event occurred and completed an interim goodwill impairment assessment of its reporting unit during the first quarter of 2020. The results of the quantitative impairment tests indicated that the Company’s reporting unit had a fair value that exceeded its carrying value. The determination of the fair value of the reporting unit was a critical audit matter due to the significant judgments required by management when determining the fair value of the reporting unit. In estimating fair value, management utilized an income approach and a market approach. The income approach determines fair value based on discounted cash flow models derived from the reporting unit’s long-term forecasts. The market approach determines fair value based on the quoted market price of the Company’s stock.
We identified the goodwill impairment assessment of its reporting unit as a critical audit matter. The principal considerations for our determination that the goodwill impairment assessment are the significant judgments by management when developing the fair value measurement and the related auditor judgment that was required to evaluate certain management assumptions used in the Company’s estimate of the fair value of the reporting unit. Specifically, the growth rate used in financial projections extending several years, the related discount rate and the terminal value were all assumptions with a high level of estimation uncertainty in the discounted cash flow model. The market value model includes key assumptions such as the control premium which should be applied to the quoted price of a share of the Company’s stock.
Our audit procedures related to the goodwill impairment assessment included the following procedures, among others:
•
We evaluated the design and operating effectiveness of the key controls relating to management’s goodwill impairment assessment process, including controls over the valuation of the Company’s reporting unit, development of the forecast used in the discounted cash flow model, selection of the appropriate discount rate, and selection of the control premium used in the market assessment.
•
We evaluated the reasonableness of a triggering event by considering the current market conditions as well as the economic uncertainty surrounding the COVID-19 pandemic.
•
We recomputed the mathematical accuracy of the prospective financial information and evaluated the reasonableness of management’s projections by comparing forecasted amounts to actual historical results to identify material changes, corroborating the basis for increases or decreases in forecasted revenues and gross margins, as applicable.
•
We assessed the reasonableness of management’s forecast of future projected results and the underlying timing of recovery in comparison to relevant industry data and other supporting evidence obtained.
•
We performed sensitivity analyses to evaluate the change in the fair value estimates that would result from changes in those price assumptions, and recalculated management’s estimates.
•
We utilized a valuation specialist to assist in evaluating the reporting unit’s discounted cash flow model and certain significant assumptions, including the discount rate and control premium.
•
We evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit.
We have served as the Company’s auditor since 2015.
/s/ GRANT THORNTON LLP
New York, New York
February 25, 2021
ORBCOMM Inc.
Consolidated Balance Sheets
(in thousands, except par value and share data)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ORBCOMM Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ORBCOMM Inc.
Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ORBCOMM Inc.
Consolidated Statements of Cash Flows
(in thousands)
ORBCOMM Inc.
Consolidated Statements of Cash Flows
(in thousands)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ORBCOMM Inc.
Consolidated Statements of Changes in Equity
Years Ended December 31, 2020, 2019 and 2018
(in thousands, except share data)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Note 1. Organization and Business
ORBCOMM Inc. (“ORBCOMM” or the “Company”), a Delaware corporation, is a global provider of industrial Internet of Things (“IoT”) solutions, including network connectivity, devices, device management and web reporting applications. The Company’s industrial IoT products and services are designed to track, monitor, control and enhance security for a variety of assets, such as trailers, trucks, rail cars, sea containers, power generators, fluid tanks, marine vessels, diesel or electric powered generators (“gensets”), oil and gas wells, pipeline monitoring equipment, irrigation control systems and utility meters, in the transportation and supply chain, heavy equipment, fixed asset monitoring and maritime industries, as well as for governments. Additionally, the Company provides satellite Automatic Identification Service (“AIS”) data services to assist in vessel navigation and to improve maritime safety for government and commercial customers worldwide. The Company also has vehicle fleet management, as well as in-cab and vehicle fleet solutions in our transportation solution portfolio. The Company provides its services using multiple network platforms, including its own constellation of low-Earth orbit (“LEO”) satellites and accompanying ground infrastructure, as well as terrestrial-based cellular communication services obtained through reseller agreements with major cellular (Tier One) wireless providers. The Company also offers customer solutions utilizing additional satellite network service options that the Company obtains through service agreements entered into with multiple mobile satellite providers. The Company’s satellite-based customer solution offerings use small, low-power, mobile satellite subscriber communicators for remote asset connectivity, and the Company’s terrestrial-based solutions utilize cellular data modems with subscriber identity modules (“SIMs”). The Company also resells service using the two-way Inmarsat plc satellite network to provide higher bandwidth, low-latency satellite products and services, leveraging the Company’s IsatDataPro technology. The Company’s customer solutions provide access to data gathered over these systems via connections to other public or private networks, including the Internet. The Company is dedicated to providing what it believes are the most versatile, leading-edge industrial IoT solutions in its markets to enable its customers to run their businesses more efficiently.
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In the opinion of management, the financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 include all adjustments (including normal recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations, comprehensive income and cash flows for the periods presented. The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries and investments in immaterial variable interest entities in which the Company is determined to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The portions of majority-owned subsidiaries that the Company does not own are reflected as noncontrolling interests on the consolidated balance sheets.
Investments
Investments in entities over which the Company has the ability to exercise significant influence but does not have a controlling interest are accounted for under the equity method of accounting. The Company considers several factors in determining whether it has the ability to exercise significant influence with respect to investments, including, but not limited to, its direct and indirect ownership level in the voting securities, active participation on the board of directors, approval of operating and budgeting decisions and other participatory and protective rights. Under the equity method, the Company’s proportionate share of the net income or loss of such investees is reflected in the Company’s consolidated results of operations. When the Company does not exercise significant influence over the investee, the investment is accounted for under the cost method.
Although the Company owns interests in companies that it accounts for pursuant to the equity method, the investments in those entities had no carrying value as of December 31, 2020 and 2019. The Company has no guarantees or other funding obligations to those entities, and the Company had no equity in the earnings or losses of those investees for the years ended December 31, 2020, 2019 and 2018.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses at the date of the consolidated financial statements and during the reporting periods, respectively, and to disclose contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates. The most significant
estimates relate to recognition of revenue, allowances over accounts receivable, reserves over inventory balances, the recognition and measurement of assets acquired and liabilities assumed in business combinations at fair value, assessment of indicators of goodwill impairment, determination of useful lives of the Company’s satellite network and other equipment and intangible assets, the assessment of expected cash flows used in evaluating long-lived assets, including intangible assets, for impairment, the calculation of capitalized development costs, the assessment of the Company’s incremental borrowing rate used to determine its right-of-use assets and lease liabilities, accounting for uncertainties in income tax positions, estimates associated with warranty costs and loss contingencies, estimates related to the recognition and subsequent valuation of contingent considerations and the value of securities underlying stock-based compensation.
Business combinations
The Company accounts for business combinations pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations,” which requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is allocated to goodwill. The purchase price allocation process requires the Company to make significant assumptions and estimates in determining the purchase price and the fair value of assets acquired and liabilities assumed at the acquisition date. The Company’s assumptions and estimates are subject to refinement and, as a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. The Company’s consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition.
The Company has evaluated pre-acquisition contingencies that existed as of the acquisition dates of the businesses acquired. If any pre-acquisition contingencies acquired as part of an acquisition become probable and estimable, the Company will record such amounts at fair market value in the measurement period, or in the Company’s results of operations after the measurement period, as applicable.
Contingent consideration
The Company determines the acquisition date fair value of contingent consideration obligations based on a probability-weighted income approach derived from milestone estimates and a probability assessment with respect to the likelihood of achieving performance metrics. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in FASB ASC Topic 820 “Fair Value Measurement.” At each reporting date, the contingent consideration obligation is revalued to estimated fair value and any changes in fair value are reflected as income or expense on the Company’s consolidated statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Adverse changes in assumptions utilized in the Company’s contingent consideration fair value estimates could result in an increase in the Company’s contingent consideration obligation and a corresponding charge to operating income.
Acquisition-related and integration costs
Acquisition-related and integration costs include professional services expenses and identifiable integration costs directly attributable to acquisitions. For the years ended December 31, 2020, 2019 and 2018, the Company incurred acquisition-related and integration costs of $448, $788 and $1,624, respectively. These costs were expensed as incurred and are reflected in acquisition-related and integration costs on the Company’s consolidated statements of operations.
Revenue recognition
The Company derives recurring service revenues primarily from monthly fees for industrial IoT connectivity services that consist of subscriber-based and recurring monthly usage fees for each subscriber communicator or SIM activated for use on its satellite network, other satellite networks and cellular wireless networks that the Company resells to its resellers, Market Channel Partners (“MCPs”) and Market Channel Affiliates (“MCAs”), and direct customers. In addition, the Company earns recurring service revenues from subscription-based services providing recurring AIS data services to government and commercial customers worldwide. The Company also earns recurring service revenues from activations of subscriber communicators and SIMs, optional separately-priced extended warranty service agreements extending beyond the initial warranty period of typically one year, which are billed to the customer upon shipment of a subscriber communicator, and royalty fees relating to the manufacture of subscriber communicators under a manufacturing agreement.
Service revenues derived from usage fees are generally based upon the data transmitted by a customer, the overall number of subscriber communicators and/or SIMs activated by each customer, and whether the Company provides services through its value-added portal. Using the output method, these service revenues are recognized over time, as services are rendered, or at a point in time, based on the contract terms. AIS service revenues are generated over time from monthly subscription-based services supplying AIS data services to government and commercial customers worldwide, using the output method. Revenues from the activation of both subscriber communicators and SIMs are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over three years, the estimated life of the subscriber communicator. Revenues from separately-priced extended warranty service agreements extending beyond the initial warranty period of typically one year, are initially recorded as deferred revenues and are, thereafter, recognized on a ratable basis using a time-based output method, generally over two to five years. The Company earns other service revenues from installation services and engineering, technical and management support services. Revenues generated from installation services are recognized at a point in time when the services are completed. Revenues generated from engineering, technical and management support services to customers are recognized over time as the service is provided. The Company also generates other service revenues through the sale of software licenses to its customers, which are recognized at a point in time when the license is provided to the customer.
Product sales are derived from sales of complete industrial IoT subscriber communicators, including telematics devices, modems, or cellular wireless SIMs (for the Company’s terrestrial-communication services) to the Company’s resellers (i.e., MCPs and MCAs) and direct customers. Product sales are recognized at a point in time when title transfers, when the products are shipped, or when customers accept the products, depending on the specific contractual terms. Sales of subscriber communicators and SIMs are not subject to return and title and risk of loss pass to the customer generally at the time of shipment.
Amounts received prior to the performance of services under customer contracts are recognized as deferred revenues and revenue recognition is deferred until such time that all revenue recognition criteria have been met. Deferred revenue as of December 31, 2020 and 2019 consisted of the following:
During the years ended December 31, 2020 and 2019, the Company recognized revenue of $6,156 and $5,896, respectively, which was included as deferred revenue as of December 31, 2019 and 2018.
The Company’s program with Maersk Lines, through its contract with AT&T Services, Inc., expired on December 31, 2019. The remaining deferred revenue of approximately $1,900 associated with this contract was recognized as recurring service revenues during the year ended December 31, 2020 as an immaterial prior period adjustment. The contract was assumed as part of the WAM Technologies, LLC acquisition in 2015.
Shipping costs billed to customers are included in product sales and the related costs are included as cost of product sales on the Company’s consolidated statements of operations.
The Company generates revenue from leasing arrangements of subscriber communicators, under FASB ASC Topic 842 “Leases” (“ASC 842”), using the estimated selling prices for each of the deliverables recognized. Product and installation revenues associated with these arrangements are recognized upon shipment or installation of the subscriber communicator, depending on the specific contractual terms. Service and warranty revenues are recognized on an accrual basis, as services are rendered, or on a cash basis, if collection from the customer is not reasonably assured at contract initiation.
The following table summarizes the components of revenue from contracts with customers, as well as revenue recognized under ASC 842:
Revenue recognition for arrangements with multiple performance obligations
The Company enters into contracts with its customers that include multiple performance obligations, which typically include subscriber communicators, monthly usage fees and optional extended warranty service agreements. The Company evaluates each item to determine whether it represents a promise to transfer a distinct good or service to the customer and therefore is a separate performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative stand-alone selling price of each performance obligation. The Company uses an observable price to determine the stand-alone selling price for each separate performance obligation when sold on its own or a cost-plus margin approach when an observable price is not available.
If an arrangement provided to a customer has a significant and incremental discount on future revenue, such discount is considered a performance obligation and a proportionate amount of the discount would be allocated to each element based on the relative stand-alone selling price of each element, regardless of the discount. The Company has determined that arrangements provided to its customers do not include significant and incremental discounts.
Cost of revenues
The Company operates its own LEO satellite network and accompanying ground equipment, including fifteen gateway earth stations (“GESs”), three AIS data reception earth stations, and three regional gateway control centers. The Company’s proprietary satellite-based communications system is typically characterized by high initial capital expenditures and relatively low marginal costs for providing service. The Company resells network connectivity for two other satellite networks and seven terrestrial network partners. Reselling network connectivity typically involves a cost for each device connected to the network system and the amount paid to each provider will vary. Cost of services is comprised of expenses to operate the Company’s network, such as payroll and related costs, including stock-based compensation, installation costs, and usage fees to third-party networks.
The Company primarily sells industrial IoT telematics devices and modems that the Company designs and builds with contract manufacturers. Cost of product sales includes the purchase price of subscriber communicators and SIMs sold, costs of warranty obligations, shipping charges, as well as operational costs of the Company’s employees and inventory management to fulfill customer orders.
Foreign currency translation
The Company has foreign operations where the functional currency is the local currency. For these operations, assets and liabilities are translated using the end-of-period exchange rates and revenues, expenses and cash flows are translated using average rates of exchange for the period. Equity is translated at the rate of exchange at the date of the equity transaction. Translation adjustments are recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses related to assets and liabilities that are denominated in a currency other than the functional currency are included in other income (expense) on the consolidated statements of operations. Foreign currency translation gains and losses related to operational expenses denominated in a currency other than the functional currency are included in selling, general and administrative (“SG&A”) expenses on the consolidated statements of operations. For the years ended December 31, 2020, 2019 and 2018, the Company recorded a loss on foreign currency of $1,741, $84, and $76, respectively.
Fair value of financial instruments
The Company has no financial assets or liabilities that are measured at fair value on a recurring basis. However, if certain triggering events occur, the Company is required to evaluate the non-financial assets for impairment and any resulting asset impairment would require that a non-financial asset be recorded at fair value. FASB ASC Topic 820 “Fair Value Measurement Disclosure” prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1- unadjusted quoted prices for identical assets or liabilities traded in active markets; Level 2- inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3- unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable and accounts payable approximated their fair values due to the short-term nature of these items. The carrying value of the Company’s Term Facility, as defined below, approximated its fair value as the debt is at variable interest rates. The fair value of the Senior Secured Notes, as defined below, was based on observable relevant market information. Fluctuation between the carrying amount and the fair value of the Senior Secured Notes for the period presented was associated with changes in market interest rates. On December 2, 2020, the Company redeemed all $220,000 outstanding principal amount of its Senior Secured Notes. Refer to “Note 10 - Notes Payable” for more information.
The carrying amounts and fair values of the Company’s Senior Secured Notes are shown in the following table:
The fair value of the note payable-related party, $1,400 book value at December 31, 2020, has a de minimis value.
Cash and cash equivalents
The Company considers all liquid investments with original maturities of three months or less, at the time of purchase, to be cash equivalents. At December 31, 2020 and 2019, the Company had a cash and cash equivalents balance of $40,384 and $54,258, respectively.
Concentration of risk
The Company’s customers are primarily commercial organizations. Accounts receivable are generally unsecured.
Accounts receivable are due in accordance with payment terms set forth in contracts negotiated with customers. Amounts due from customers are stated net of an allowance for doubtful accounts. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts are past due, the customer’s current ability to pay its obligations to the Company and the condition of the general economy and the industry as a whole. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The Company writes off accounts receivable when they are deemed uncollectible.
For the year ended December 31, 2020, Carrier Corporation comprised 10.2% of the Company’s consolidated total revenues. There were no customers who generated revenues greater than 10% of the Company’s consolidated total revenues for the years ended December 31, 2019 and 2018.
One customer, Carrier Corporation, generated 10.8% of the Company’s consolidated accounts receivable as of December 31, 2020. There were no customers who generated accounts receivable greater than 10% of the Company’s consolidated accounts receivable as of December 31, 2019.
The Company is dependent on one vendor, Sanmina Corporation (“Sanmina”), a contract manufacturer with significant operations in Mexico, for the manufacture of subscriber communicators that the Company designs and sells. For the years ended December 31, 2020 and 2019, approximately $76,505, or 84.4%, and $75,068, or 67.4%, respectively, of the Company’s product sales was generated from the sale of the Company’s core products produced by Sanmina.
As of December 31, 2020, the Company did not maintain in-orbit insurance coverage for its ORBCOMM Generation 1 or ORBCOMM Generation 2 satellites to address the risk of potential systemic anomalies, failures or catastrophic events affecting its satellite constellation.
Inventories
Inventories are stated at the lower of cost or net realizable value, determined on a weighted average cost basis. At December 31, 2020 and 2019, inventory, net of inventory obsolescence, consisted primarily of finished goods and purchased parts to be utilized by its contract manufacturer totaling $23,529 and $33,379, respectively, and raw materials totaling $6,458 and $6,502, respectively. The Company reviews inventory quantities on hand, evaluates the realizability of inventories and adjusts the carrying value, as necessary, based on forecasted product demand. A provision, recorded in cost of product sales on the Company’s consolidated statements of operations, is made for potential losses on slow-moving and obsolete inventories when identified.
Satellite network and other equipment, net
Satellite network and other equipment, net are stated at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while maintenance and repairs are charged to operations as incurred.
Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their useful life or their respective lease term. The following table provides the range of estimated useful lives used for each asset type:
Satellite network includes costs of the constellation of satellites, and the ground and control facilities, consisting of GESs, gateway control centers and the network control center.
As of December 31, 2020 and 2019, assets under construction primarily consist of costs associated with acquiring, developing, enhancing and testing software and hardware for internal and external use that have not yet been placed into service.
Valuation of long-lived assets
Property and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The Company measures recoverability by comparing the carrying amounts of the assets to the projected undiscounted cash flows the assets are expected to generate. An impairment loss is recognized to the extent the carrying values exceed the fair values.
The Company’s satellite constellation and related assets are evaluated as a single asset group whenever facts or circumstances indicate that the carrying values may not be recoverable. If indicators of impairment are identified, recoverability of long-lived assets is measured by comparing their carrying amounts to the projected cash flows the assets are expected to generate.
Determining whether an impairment has occurred typically requires the use of significant estimates and assumptions, including in the forecasting of future cash flows, determination of the asset group, determination of the remaining useful life of the primary asset, the allocation of cash flows to assets or asset groups, and, if required, estimates of fair values for those assets or asset groups.
If a satellite were to fail while in orbit, the resulting loss would be charged to expense in the period it is determined that the satellite is not recoverable. The amount of any such loss would be reduced to the extent of insurance proceeds, if any, estimated to be received. There was no impairment loss recorded for the years ended December 31, 2020, 2019 and 2018. See “Note 6 - Satellite Network and Other Equipment, Net” for additional details relating to the impairment of these satellites.
Capitalized development costs for internal and external use
The Company capitalizes the costs of acquiring, developing and testing software and hardware to meet the Company’s internal needs and for products and services that have not yet been placed into service. Capitalization of costs associated with software obtained or developed for internal use commences when both the preliminary project stage is completed and management has authorized further funding for the project, based on a determination that it is probable that the project will be completed and used to perform the function intended. Capitalized costs include only (1) the external direct cost of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with, and devote time to, a qualifying project, and (3) certain external software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of either a detailed program design or a working model. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Internal-use software costs are amortized once the software is placed in service using the straight-line method over periods ranging from three to seven years. Product and service development costs are amortized over the estimated life of the product once it has been released for commercial sale.
Goodwill
Goodwill represents the excess of the purchase price over the underlying net tangible and intangible assets of the Company’s acquisitions. Goodwill is not amortized, but is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company operates in one reportable segment which is its only reporting unit.
The Company tests for an indication of goodwill impairment annually on November 30 or when an indicator of impairment exists, by comparing the fair value of the reporting unit to its carrying value. If there is an indication of impairment, the Company performs a “step two” test to measure the impairment. There was no impairment of goodwill for the years ended December 31, 2020, 2019 and 2018.
Intangible assets
Intangible assets that are not considered to have an indefinite life are amortized over their useful lives. Intangible assets include patents and technology, customer lists and trademarks. Intangible assets are amortized using the straight-line method over the estimated useful lives of the assets.
Impairment of long-lived assets
The Company reviews its long-lived assets and amortizable intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In connection with this review, the Company also re-evaluates the periods of depreciation and amortization for these assets. The Company recognizes an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value, which is determined using the projected discounted future net cash flows, using the appropriate discount rate.
Warranty costs
The Company accrues for warranty coverage on product sales estimated at the time of sale based on historical costs to repair or replace products for customers compared to historical product sales. The warranty accrual is included in accrued liabilities on the Company’s consolidated balance sheets.
Separately-priced extended warranty coverage is recorded as warranty revenue over the term of the extended warranty coverage and the related warranty costs are recorded as incurred during the coverage period.
Warranty coverage that includes additional services, such as repairs and maintenance of the product, is treated as a separate performance obligation and the related warranty and repairs/maintenance costs are recorded as incurred.
Income taxes
The Company estimates its income taxes separately for each tax jurisdiction in which it conducts operations. This process involves estimating actual current tax expense and assessing temporary differences resulting from the different treatment of items between book and tax which results in deferred tax assets and liabilities. The Company recognizes in income a change in tax rates on
deferred tax assets and liabilities in the period that includes the enactment date. Valuation allowances are established when realization of deferred tax assets is not considered more likely than not.
The Company recognizes the effect of tax law changes in the period of enactment. Changes in existing tax laws and rates, their related interpretations, and the uncertainty generated by the current economic environment may affect the amounts of the Company’s deferred tax liabilities or the valuations of the Company’s deferred tax assets over time. The Company’s accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.
In determining whether the realization of deferred tax assets is considered to be more likely than not, the Company assesses the realizability of the deferred tax assets on a jurisdiction-by-jurisdiction basis. This assessment is dependent upon past operating results and projected profitability. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence is objectively verified.
The Company accounts for uncertainty in income tax positions using a two-step approach. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure the tax position at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Loss contingencies
The Company accrues for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made.
Stock-based compensation
The Company measures and recognizes stock-based compensation expense for equity-based payment awards made to employees and directors based on estimated fair values on the date of grant. For equity-based payment awards, the Company recognizes compensation expense over the service period, net of estimated forfeitures using the straight-line method. For awards with non-market performance conditions, an evaluation is made at the grant date and future periods as to the likelihood of the performance criteria being met. Compensation expense is adjusted for changes in the likelihood of achieving the performance condition until the vesting date. For liability-based awards with market performance conditions, compensation expense is revalued at the end of each quarter based on the awards’ fair values using the graded vesting attribution method over the vesting periods.
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which is effective for fiscal years beginning after December 15, 2019. ASU 2016-13 introduces the current expected credit loss (CECL) model, which requires an entity to measure credit losses for certain financial instruments and financial assets. Upon initial recognition, an entity is required to estimate a credit loss expected over the life of an exposure. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Note 3. Acquisitions
2017 Business Development
Blue Tree Systems Limited
On October 2, 2017, pursuant to a Share Purchase Agreement entered into by ORBCOMM Technology Ireland Limited, a wholly-owned subsidiary of the Company, and Blue Tree Systems Investment Limited, Investec Ventures Ireland Limited and certain individual sellers (collectively, the “Sellers”), the Company completed the acquisition of 100% of the outstanding shares of Blue Tree Systems Limited, for an aggregate consideration of (i) $34,331 in cash; (ii) issuance of 191,022 shares of the Company’s common stock, valued at $10.47 per share, which reflected the Company’s common stock closing price one business day prior to the closing date; and (iii) additional consideration up to $5,750 based on Blue Tree Systems Limited achieving certain operational objections.
Contingent Consideration
Additional consideration was conditionally due to the Sellers upon achievement of certain financial milestones through December 2018. The fair value measurement of the contingent consideration obligation is determined using Level 3 unobservable inputs supported by little or no market activity based on the Company’s own assumptions. The estimated fair value of the contingent consideration was determined based on the Company’s preliminary estimates using the probability-weighted discounted cash flow approach. The financial milestone for this contingent consideration has not been met, and therefore, the Company recorded a reduction of the contingent liability of $776 in SG&A expenses on the consolidated statement of operations for the year ended December 31, 2018.
inthinc Technology Solutions, Inc.
On June 9, 2017, pursuant to the asset purchase agreement (the “Asset Purchase Agreement”) entered into by the Company and inthinc, Inc., inthinc Technology Solutions, Inc., tiwi, Inc., inthinc Telematics, Inc., DriveAware, Inc., inthinc Chile, SP and inthinc Investors, L.P. (collectively, “Inthinc”), the Company completed the acquisition of Inthinc for an aggregate consideration of (i) $34,236 in cash on a debt-free, cash-free basis; (ii) issuance of 76,796 shares of the Company’s common stock, valued at $9.95 per share, which reflected a 20-trading day average price of the Company’s stock ending June 8, 2017; and (iii) additional contingent consideration of up to $25,000, subject to certain operational milestones, payable in stock or a combination of cash and stock at the Company’s election.
Contingent Consideration
Additional consideration was conditionally due to the Inthinc sellers upon achievement of certain financial milestones through June 2019. The fair value measurement of the contingent consideration obligation was determined using Level 3 unobservable inputs supported by little or no market activity and based on the Company’s own assumptions. The estimated fair value of the contingent consideration was determined based on the Company’s estimates using the probability-weighted discounted cash flow approach. All four financial milestones for this additional consideration were not met. Therefore, the Company recorded a reduction of the contingent liability of $2,063 and $7,250 in SG&A expenses on the consolidated statements of operations for the years ended December 31, 2019 and 2018, respectively.
Note 4. Stock-Based Compensation
On April 20, 2016, the stockholders of the Company approved the ORBCOMM Inc. 2016 Long-Term Incentives Plan (the “2016 LTIP”). The 2016 LTIP replaces the Company’s 2006 Long-Term Incentive Plan (the “2006 LTIP”). The number of shares authorized for delivery under the 2016 LTIP is 6,949,400 shares, including 1,949,400 shares that remained available under the 2006 LTIP as of February 17, 2016, plus any shares previously subject to awards under the 2006 LTIP that are cancelled, forfeited or lapse unexercised after that date. As of December 31, 2020, there were 216,658 shares available for grant under the 2016 LTIP.
For the years ended December 31, 2020, 2019 and 2018, the Company recognized stock-based compensation expense of $5,331, $6,180, and $7,910, respectively. For the years ended December 31, 2020, 2019 and 2018, the Company capitalized stock-based compensation of $476, $650, and $503, respectively. The Company has not recognized, and currently does not expect to recognize in the foreseeable future, any tax benefit related to stock-based compensation as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards generated in the U.S.
The following table summarizes the components of stock-based compensation expense on the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018:
As of December 31, 2020, the Company had unrecognized compensation costs for all share-based payment arrangements totaling $6,841.
Time-Based Stock Appreciation Rights
A summary of the Company’s time-based stock appreciation rights (“SARs”) for the year ended December 31, 2020 is as follows:
For the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense of $0, $146 and $187 related to these time-based SARs, respectively. As of December 31, 2020, there was no unrecognized compensation cost related to these SARs expected to be recognized.
There were no time-based SARs granted during the years ended December 31, 2020, 2019 and 2018.
The intrinsic value of the time-based SARs exercised during the year ended December 31, 2020 was $287.
Performance-Based Stock Appreciation Rights
A summary of the Company’s performance-based SARs for the year ended December 31, 2020 is as follows:
For the years ended December 31, 2020, 2019 and 2018, the Company did not record stock-based compensation expense related to these performance-based SARs. As of December 31, 2020, there was no unrecognized compensation cost related to these SARs expected to be recognized.
There were no performance-based SARs granted during the years ended December 31, 2020, 2019 and 2018.
The intrinsic value of the performance-based SARs exercised during the year ended December 31, 2020 was $268.
The fair value of each time-based and performance-based SAR award is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions described below. For the period indicated, the expected volatility was based on the Company’s historical volatility over the expected terms of the SAR awards. Estimated forfeitures were based on voluntary and involuntary termination behavior, as well as an analysis of actual 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. The Company did not grant time-based or performance-based SARs during the years ended December 31, 2020, 2019 and 2018.
Time-Based Restricted Stock Units
A summary of the Company’s time-based restricted stock units (“RSUs”) for the year ended December 31, 2020 is as follows:
For the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense related to these time-based RSUs of $3,331, $3,972 and $4,627, respectively. As of December 31, 2020, $3,854 of total unrecognized compensation cost related to these RSUs is expected to be recognized through September 2023.
Performance-Based Restricted Stock Units
A summary of the Company’s performance-based RSUs for the year ended December 31, 2020 is as follows:
For the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense of $1,342, $1,769 and $2,478 related to these performance-based RSUs, respectively. As of December 31, 2020, $2,987 of total unrecognized compensation cost related to these RSUs is expected to be recognized through March 2022.
The fair values of the time-based and performance-based RSU awards are based upon the closing stock price of the Company’s common stock on the date of grant.
Market Performance Units
The Company grants Market Performance Units (“MPUs”) to its senior executives based on stock price performance over a three-year period measured on December 31 of each year in the performance period. The MPUs will vest in equal installments at the end of each year in the performance period only if the Company satisfies the stock price performance targets and the senior executives continue their employment through the dates the Compensation Committee has determined that the targets have been achieved. The value of the MPUs that will be earned each year ranges up to 15% of each of the senior executive’s base salaries in the year of the grant depending on the Company’s stock price performance target for that year. The value of the MPUs can be paid in either cash, common stock or a combination of cash and common stock, at the Company’s discretion. The MPUs are classified as a liability on the consolidated balance sheets and are revalued at the end of each reporting period based on the awards’ fair value over a three-year period.
As of December 31, 2020, the Compensation Committee determined that the fiscal year 2020 stock price performance targets were not achieved for the 2020, 2019 and 2018 MPUs with respect to the 2020 performance year.
As the MPUs contain both performance and service conditions, they have been treated as a series of three separate awards, or tranches, for purposes of recognizing stock-based compensation expense. The Company recognizes stock-based compensation expense on a tranche-by-tranche basis over the requisite service period for that specific tranche. The Company estimated the fair values of the MPUs using a Monte Carlo simulation model that used the following assumptions:
For the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense related to these MPUs of $424, $9 and $346, respectively.
As of December 31, 2020, the Company recorded $352 and $72 in accrued liabilities and other non-current liabilities related to the MPUs, respectively, on the consolidated balance sheet. As of December 31, 2019, the Company recorded $0 and $28 in accrued liabilities and other non-current liabilities related to these MPUs, respectively, on the consolidated balance sheet.
In January 2019, the Company issued 60,885 shares of common stock as payment in connection with MPUs for achieving the fiscal year 2018, 2017 and 2016 MPU awards’ stock performance targets with respect to the 2018 performance year.
Employee Stock Purchase Plan
On February 16, 2016, the Company’s Board of Directors adopted the ORBCOMM Inc. Employee Stock Purchase Plan (“ESPP”), which was approved by the Company’s shareholders on April 20, 2016. Under the terms of the ESPP, 5,000,000 shares of the Company’s common stock are available for issuance and eligible employees may have up to 10% of their gross pay deducted from their payroll, up to a maximum of $25 per year, to purchase shares of ORBCOMM common stock at a discount of up to 15% of its fair market value, subject to certain conditions and limitations. Purchases of shares of ORBCOMM common stock under the ESPP are made twice a year at six-month intervals. For the years ended December 31, 2020, 2019 and 2018, the Company recorded stock-based compensation expense of $234, $284 and $272, respectively, related to the ESPP. For the year ended December 31, 2020, 166,580 shares and 143,203 shares of the Company’s common stock were purchased under the ESPP at a price of $2.58 per share, respectively. For the year ended December 31, 2019, 136,729 shares and 113,703 shares of the Company’s common stock were purchased under the ESPP at a price of $3.45 and $5.68 per share, respectively.
Note 5. Net Income (Loss) Attributable to ORBCOMM Inc. Common Stockholders
The Company accounts for earnings per share (“EPS”) in accordance with ASC Topic 260 “Earnings Per Share” (“ASC 260”) and related guidance, which requires two calculations of EPS to be disclosed: basic and diluted. The numerator in calculating basic and diluted EPS is an amount equal to the net income (loss) attributable to ORBCOMM Inc. common stockholders for the periods presented. The denominator in calculating basic EPS is the weighted average shares outstanding for the respective periods. The denominator in calculating diluted EPS is the weighted average shares outstanding, plus the dilutive effect of stock option grants, unvested SAR and RSU grants and shares of Series A convertible preferred stock for the respective periods. The following table sets forth the basic and diluted EPS calculations for the years ended December 31, 2020, 2019 and 2018:
The computation of net loss attributable to ORBCOMM Inc. common stockholders for the years ended December 31, 2020, 2019 and 2018 is as follows:
Note 6. Satellite Network and Other Equipment, Net
Satellite network and other equipment, net consisted of the following:
During the years ended December 31, 2020, 2019 and 2018, the Company capitalized internal costs attributable to the design, development and enhancement of the Company’s products and services that have not yet been placed into service and internal-use software in the amounts of $14,393, $13,945 and $12,817, respectively.
Depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 was $38,015, $37,717 and $36,609, respectively, including amortization of internal-use software of $3,307, $3,117 and $3,433 for the years ended December 31, 2020, 2019 and 2018, respectively.
For the years ended December 31, 2020, 2019 and 2018, 44%, 45% and 47% of depreciation and amortization expense, respectively, relate to cost of services and 6%, 7% and 9%, respectively, relate to cost of product sales, as these assets support the Company’s revenue generating activities.
As of December 31, 2020 and 2019, assets under construction primarily consisted of costs associated with acquiring, developing, enhancing and testing software and hardware for internal and external use that have not yet been placed into service.
In October 2018, the Company experienced a communication issue with one ORBCOMM Generation 2 (“OG2”) satellite. The Company remained in operational control of this satellite up until November 2020. In February 2021, the Company briefly regained operational control of this OG2 satellite. The Company’s engineering and operations teams continue efforts to re-establish operational control of this OG2 satellite and are developing new software in an attempt to restore AIS and/or messaging services. If the Company is unable to regain operational control and restoration of AIS and/or messaging services on this OG2 satellite, the Company would write off its net book value of approximately $6,979 as of December 31, 2020.
Note 7. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair values of the underlying net tangible and intangible assets. Goodwill is allocated to the Company’s one reportable segment which is its only reporting unit.
During the years ended December 31, 2020 and 2019, there were no changes to goodwill.
Intangible assets, net consisted of the following:
At December 31, 2020, the weighted-average amortization period for the intangible assets was 10.5 years. At December 31, 2020, the weighted-average amortization periods for customer lists, patents and technology and trade names and trademarks were 10.9, 9.3 and 1.2 years, respectively.
Amortization expense for the years ended December 31, 2020, 2019 and 2018 was $12,721, $12,985 and $13,075, respectively.
Estimated future amortization expense for intangible assets is as follows:
Note 8. Accrued Liabilities
Accrued liabilities consisted of the following:
Changes in accrued warranty obligations consisted of the following:
Note 9. Note Payable - Related Party
In connection with the acquisition of a majority interest in Satcom International Group plc in 2005, the Company recorded an indebtedness to OHB Technology A.G. (formerly known as OHB Teledata A.G.), a stockholder of the Company. At December 31, 2020 and 2019, the principal balance of the note payable was €1,138, with a carrying value of $1,400 and $1,275, respectively. The carrying value was based on the note’s estimated fair value at the time of acquisition. The difference between the carrying value and principal balance was amortized to interest expense over the six-year estimated life, which ended on September 30, 2011. This note does not bear interest and has no fixed repayment term. Repayment of the note will be made from the distribution profits (as defined in the note agreement) of ORBCOMM Europe LLC, a wholly-owned subsidiary of the Company. The note has been classified as long-term, as the Company does not expect any repayments to be required prior to December 31, 2021.
Note 10. Notes Payable
Credit Agreement
On December 2, 2020, the Company and certain of its subsidiaries entered into a restated and amended credit agreement (the “Credit Agreement”) with JPMorgan Chase, N.A. (“JPMorgan Chase”), as administrative agent and collateral agent, and with the other lenders thereto (the “Lenders”), in connection with the refinancing of the Company’s Senior Secured Notes (as defined below). The Credit Agreement superseded and replaced the Company’s prior credit agreement providing for a $25,000 revolving credit facility described under “Prior Revolving Credit Facility” below. Pursuant to the Credit Agreement, the Lenders provided a senior revolving credit facility (the “Credit Facility”) in an aggregate amount of up to $50,000 and a senior term loan facility (the “Term Facility”) in the aggregate amount of $200,000 (the “Term Facility” and together with the Revolving Facility, collectively the “Facilities”). The proceeds of the Facilities, along with cash on hand, were used to redeem all $220,000 outstanding principal amount of the Senior Secured Notes and pay certain related fees, expenses and accrued interest.
The Facilities mature on December 2, 2025 (the “Maturity Date”). At the Company’s election, loans under the Facilities will bear interest at an alternative base rate or an adjusted London Interbank Offered Rate (“LIBOR”), plus an applicable margin subject to a set pricing grid, with respect to the Revolving Facility and the Term Facility.
The Facilities are secured by a first-priority security interest in substantially all the Company’s and its subsidiaries’ assets under an Amended and Restated Security Agreement among the Company, its subsidiaries and JPMorgan Chase (the “Security Agreement”). The Revolving Facility has no scheduled principal amortization until the Maturity Date. The Term Facility has quarterly installments of principal amortization in an aggregate amount specified for each 12-month period following December 2, 2020, as set forth in the Credit Agreement.
Subject to the terms set forth in the Credit Agreement, the Company may borrow, repay and reborrow the Revolving Facility at any time prior to the Maturity Date and may prepay the Term Facility at any time without penalty or premium, subject to limitations as to minimum amounts of prepayments and customary indemnification for breakage costs in the case of prepayment of Eurodollar Loans other than on the last day of a related interest period.
The Credit Agreement contains customary representations and warranties, conditions to funding, covenants and events of default. The Credit Agreement contains covenants that, among other things, limit the Company and its subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations have various baskets as set forth in the Credit Agreement.
On December 2, 2020, the $200,000 proceeds of the Term Facility, the $20,000 borrowings under the Revolving Facility and cash on hand were used to redeem all $220,000 outstanding principal amount of the Senior Secured Notes due 2024, as defined below, at a price equal to (a) 104% of the principal amount of Securities being redeemed plus (b) accrued and unpaid interest, resulting in a call premium fee of $8,800 and an additional expense associated with the remaining unamortized debt issuance cost of $2,942.
In connection with entering into the Credit Agreement, the Company incurred debt issuance costs of approximately $3,155. For the year ended December 31, 2020, amortization of the debt issuance costs was $53. The Company recorded charges of $717 to interest expense on its consolidated statements of operations for the year ended December 31, 2020, related to interest expense and amortization of debt issuance costs associated with the Facilities.
At December 31, 2020, the Company had $200,000 outstanding under the Term Facility and $20,000 outstanding under the Revolving Facility. As of December 31, 2020, the Company was in compliance with all financial covenants under the Credit Agreement.
Paycheck Protection Program
As previously reported, during the quarter ended June 30, 2020, the Company received proceeds from a loan in the amount of $7,588 (the “PPP Loan”) from JPMorgan Chase, as lender, pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company believes that it qualified to apply for and receive the PPP Loan pursuant to the PPP under the provisions of the CARES Act and the Small Business Administration (“SBA”) guidance in effect at that time. In light of the Company entering into the amendment to its Prior Revolving Credit Facility, defined below, to provide it with access to additional liquidity, its improved outlook on its ability to generate cash from operations in the quarter ended June 30, 2020, and the evolving requirements and new guidance issued by the SBA subsequent to its receipt of the PPP Loan, the Company repaid the full amount of the PPP Loan received and any accrued interest on June 25, 2020. The PPP Loan was prepayable at any time prior to the maturity date without any prepayment penalties.
Senior Secured Notes
On April 10, 2017, the Company issued $250,000 aggregate principal amount of 8.0% senior secured notes due 2024 (the “Senior Secured Notes”). The Senior Secured Notes were issued pursuant to an indenture, dated as of April 10, 2017, among the Company, certain of its domestic subsidiaries party thereto (the “Guarantors”) and U.S. Bank National Association, as trustee and collateral agent (the “Indenture”). The Senior Secured Notes were unconditionally guaranteed on a senior secured basis by the Guarantors, and were secured on a first priority basis by (i) pledges of capital stock of certain of the Company’s directly and indirectly owned subsidiaries; and (ii) substantially all of the other property and assets of the Company and the Guarantors, to the extent a first priority security interest was able to be granted or perfected therein, and subject, in all cases, to certain specified exceptions, and an intercreditor agreement with the collateral agent for the Company’s revolving credit facility described below. Interest payments were due on the Senior Secured Notes semi-annually in arrears on April 1 and October 1, beginning October 1, 2017.
The Company had the option to redeem some or all of the Senior Secured Notes at any time on or after April 1, 2020, at redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption. The Company also had the option to redeem some or all of the Senior Secured Notes at any time before April 1, 2020 at a redemption price of 100% of the principal amount of the Senior Secured Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. In addition, at any time before April 1, 2020, the Company had the right to redeem up to 35% of the aggregate principal amount of the Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption, with the proceeds from certain equity issuances.
The Indenture contains covenants that, among other things, limited the Company’s and its restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations had various exceptions and baskets as set forth in the Indenture, including the incurrence by the Company and its restricted subsidiaries of indebtedness under potential new credit facilities in the aggregate principal amount at any one time outstanding not to exceed $50,000.
In connection with the issuance of the Senior Secured Notes, the Company incurred debt issuance costs of approximately $5,431. For the years ended December 31, 2020 and 2019, amortization of the debt issuance costs was $711 and $776, respectively. The Company recorded charges of $18,959 and $20,776 to interest expense on its consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively, related to interest expense and amortization of debt issuance costs associated with the Senior Secured Notes.
Prior Revolving Credit Facility
On December 18, 2017, the Company and certain of its subsidiaries entered into a senior secured revolving credit agreement, as amended on June 25, 2020 (the “Prior Revolving Credit Agreement”) with JPMorgan Chase as administrative agent and collateral agent. The Prior Revolving Credit Agreement provided for a revolving credit facility (the “Prior Revolving Credit Facility”) in an aggregate principal amount of up to $25,000 for working capital and general corporate purposes and would mature on December 18, 2022. The Prior Revolving Credit Facility bore interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin of 2.50% in the case of alternative base rate loans and 3.50% in the case of adjusted LIBOR loans. The Prior Revolving Credit Facility was secured by a first priority security interest in substantially all of the Company’s and its subsidiaries’ assets under a security agreement among the Company, its subsidiaries and JPMorgan Chase, subject to an intercreditor agreement with the indenture trustee
for the Senior Secured Notes. The Prior Revolving Credit Facility had no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Prior Revolving Credit Agreement, the Company could borrow, repay and reborrow amounts under the Prior Revolving Credit Facility at any time prior to the maturity date.
The Prior Revolving Credit Agreement contained customary representations and warranties, conditions to funding, covenants and events of default. The Prior Revolving Credit Agreement contained covenants that, among other things, limited the Company’s and its restricted subsidiaries’ ability to: (i) incur or guarantee additional indebtedness; (ii) pay dividends, make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain indebtedness; (iv) make loans and investments; (v) sell, transfer or otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into certain types of transactions with affiliates; (viii) enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all of their assets; subject, in all cases, to certain specified exceptions. Such limitations had various baskets as set forth in the Prior Revolving Credit Agreement.
As of December 31, 2020, scheduled mandatory principal repayments of long-term debt in each of the five years ending December 31, 2021 through 2025 were as follows:
Note 11. Stockholders’ Equity
Preferred Stock
The Company currently has 50,000,000 shares of preferred stock authorized.
Series A Convertible Preferred Stock
The Company currently has 1,000,000 shares of Series A convertible preferred stock authorized. As part of the purchase price for the acquisition of StarTrak Systems LLC in 2011, the Company issued 183,550 shares of Series A convertible preferred stock, of which 40,624 shares remain outstanding as of December 31, 2020.
Key terms of the Series A convertible preferred stock are as follows:
Dividends
Holders of the Series A convertible preferred stock are entitled to receive a cumulative 4% dividend annually (calculated on the basis of the redemption price of $10.00 per share) payable quarterly in additional shares of the Series A convertible preferred stock. During the years ended December 31, 2020 and 2019, the Company issued dividends in the amounts of 0 and 1,182 shares to the holders of the Series A convertible preferred stock, respectively. As of December 31, 2020, dividends in arrears were $24.
Conversion
Shares of the Series A convertible preferred stock are convertible into 1.66611 shares of common stock: (i) at the option of the holder at any time or (ii) at the option of the Company beginning six months from the issuance date and if the average closing market price for the Company’s common stock for the preceding twenty consecutive trading days equals or exceeds $11.20 per share.
Voting
Each share of the Series A convertible preferred stock is entitled to one vote for each share of common stock into which the preferred stock is convertible.
Liquidation
In the event of any liquidation, sale or merger of the Company, the holders of the Series A convertible preferred stock are entitled to receive prior to and in preference over the holders of the common stock an amount equal to $10.00 per share plus unpaid dividends.
Redemption
The Series A convertible preferred stock may be redeemed by the Company for an amount equal to the issuance price of $10.00 per share plus all unpaid dividends at any time after two years from the issuance date.
Common Stock
As of December 31, 2020, the Company has reserved 14,002,136 shares of common stock for future issuances related to employee stock compensation plans.
On August 5, 2019, the Company’s Board of Directors authorized a stock repurchase program under which the Company could repurchase up to $25,000 of the Company’s outstanding shares of common stock through open market transactions and privately negotiated transactions, until August 5, 2020. In addition, open market repurchases of common stock could be made pursuant to applicable securities laws and regulations, including Rule 10b-18, as well as Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the years ended December 31, 2020 and 2019, the Company repurchased 836,904 shares and 1,930,414 shares at an average share price of $2.98 and $4.86, respectively. In mid-March 2020, the Company suspended further purchases given the economic uncertainty arising from the novel strain of coronavirus (“COVID-19”) pandemic.
On April 10, 2018, the Company completed a public offering of 3,450,000 shares of its common stock, including 450,000 shares sold upon exercise in full of the underwriters’ option to purchase additional shares, at a price of $8.60 per share. The Company received net proceeds of approximately $28,000 after deducting underwriters’ discounts and commissions and offering costs.
The Company has an effective shelf registration statement filed with the Securities and Exchange Commission, registering up to $100,000 of debt and/or equity securities that the Company may offer in one or more offerings on terms to be determined at the time of sale. The shelf registration statement is due to expire on March 23, 2023 and replaces the Company’s previous shelf registration statement for an unspecified amount of debt and/or equity securities filed in 2018.
Note 12. Segment Information
The Company operates in one reportable segment, industrial IoT services. Other than satellites in orbit, goodwill and intangible assets, long-lived assets outside of the United States are not significant. The Company’s foreign exchange exposure is limited as approximately 79% of the Company’s consolidated revenue is collected in U.S. dollars. The following table summarizes revenues on a percentage basis by geographic region, based on the region in which the customer is located.
Note 13. Income Taxes
The following is a summary of the Company’s provision for income taxes for the years ended December 31, 2020, 2019 and 2018:
United States and foreign income (loss) before income taxes for the years ended December 31, 2020, 2019 and 2018 is as follows:
The components of net deferred tax assets (liabilities) are as follows:
Income taxes differ from the amount computed by applying the statutory U.S. federal income tax rate because of the effect of the following items:
As part of the Company’s accounting for its acquisitions, a portion of the purchase price was allocated to goodwill. The acquired goodwill is deductible for tax purposes and amortized over fifteen years for income tax purposes. Under GAAP, the acquired goodwill is not amortized in the Company’s financial statements. As such, a deferred income tax expense and a deferred tax liability arise as a result of the tax deductibility for this amount for tax purposes but not for financial statement purposes. The resulting deferred tax liability, which is expected to continue to increase over time, will remain on the Company’s balance sheet indefinitely unless there is an impairment of the asset. As a result of the U.S. Tax Cuts and Jobs Act of 2017 and the changes it made to net operating loss carryforward rules, the Company is now able to use the above deferred tax liability as a source of future taxable income in evaluating the need for a valuation allowance.
As of December 31, 2020 and 2019, the Company maintained a valuation allowance against all of its net deferred tax assets, excluding goodwill, attributable to operations in the United States as the realization was not considered more likely than not.
The net change in the total valuation allowance for the years ended December 31, 2020, 2019 and 2018 was $11,198, $2,499 and $6,124, respectively.
As of December 31, 2020 and 2019, the Company had potentially utilizable federal net operating loss carryforwards of $181,169 and $125,870, respectively. As of December 31, 2020 and 2019, the Company had potentially utilizable state net operating loss carryforwards of $197,647 and $159,083, respectively. The federal net operating loss carryforwards expire at various times through 2037 for losses incurred prior to January 1, 2018. All federal net operating losses incurred after January 1, 2018 have an indefinite life. The state net operating loss carryforwards expire at various times through 2040 for states that do not follow the federal rule having an indefinite life for losses incurred after 2018. As of December 31, 2020 and 2019, the Company had potentially utilizable foreign net operating loss carryforwards of $12,928 and $14,035, respectively. The foreign net operating loss carryforwards expire on various dates through 2040.
The utilization of the Company’s net operating losses may be subject to a substantial limitation due to the “change of ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss carryforwards before their utilization.
As of December 31, 2020, the Company has not provided deferred income taxes on the undistributed earnings of its foreign subsidiaries. The amount of such earnings was $18,964. These earnings have been permanently reinvested and the Company does not plan to initiate action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on these undistributed earnings.
The following table is a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
No interest and penalties related to unrecognized tax benefits were accrued during the years ended December 31, 2020, 2019, and 2018. Interest and penalties are not reflected in the table above and are included in income tax expense.
As of December 31, 2020, $775 of the unrecognized tax benefits have been recorded as a reduction to the Company’s federal and state net operating loss carryforwards in deferred tax assets. Due to the existence of the Company’s valuation allowance, these unrecognized tax benefits, if recognized, would not impact the Company’s effective income tax rate. The Company is also subject to examinations in its material non-U.S. jurisdictions for 2016 and later years. The Company does not expect any significant changes to its unrecognized tax positions during the next twelve months.
Note 14. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in various litigation matters involving claims incidental to its business and acquisitions, including employment matters, acquisition-related claims, patent infringement and contractual matters, among other issues. While the outcome of any such litigation matters cannot be predicted with certainty, management currently believes that the outcome of these proceedings, including the matters described below, either individually or in the aggregate, will not have a material
adverse effect on its business, results of operations or financial condition. The Company records reserves related to legal matters when losses related to such litigation or contingencies are both probable and reasonably estimable.
Sanmina Commitment
The Company is dependent on Sanmina, a contract manufacturer with significant operations in Mexico, for the manufacture of subscriber communicators that the Company designs and sells. If Sanmina has excess components on hand with no demand for a 90-day period following the end of each calendar quarter, the Company is obligated to purchase these components. The value of these components would be included in the Company’s inventory balances during the period purchased.
COVID-19
COVID-19 surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. The effects of the COVID-19 pandemic are expected to adversely affect the Company’s business, financial condition and results of operations. The magnitude of the impact of COVID-19 is unpredictable; consequently, the impact it will have on the Company’s future results is uncertain.
Airtime credits
In 2001, in connection with the organization of ORBCOMM Europe 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 each of the years ended December 31, 2020, 2019 and 2018, airtime credits used totaled approximately $30. As of December 31, 2020 and 2019, unused credits granted by the Company were approximately $1,888 and $1,918, respectively.
Agreements with carrier data providers
The Company has contractual minimum payments under the terms of its agreements with certain carrier data providers. Based on the number of subscribers as of December 31, 2020, future minimum payments for the years ending December 31, 2021, 2022, 2023, and 2024 are $8,602, $5,712, $5,855 and $6,001, respectively.
Note 15. Leases
In February 2016, the FASB issued ASU 2016-02, which is effective for fiscal years beginning after December 15, 2018. The Company adopted ASU 2016-02 prospectively as of January 1, 2019, the date of initial application, and therefore prior comparative periods were not adjusted. Rent expense for the year ended December 31, 2018 was approximately $4,020 and was recognized on a straight-line basis over the lease term under ASC Topic 840 “Leases.”
Lessee
The Company determines whether an arrangement is a lease at inception. The Company has operating leases for land, office space, data centers and storage facilities, as well as office equipment and vehicles. The Company’s leases have remaining lease terms of less than one year to 12 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish the Company’s right-of use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The operating lease ROU assets also include any lease payments made in advance of lease commencements and exclude lease incentives. The lease terms used in the calculations of the operating ROU assets and operating lease liabilities include options to extend or terminate the lease when the Company is reasonably certain that it will exercise those options. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company has lease agreements with lease and non-lease components, which are generally not accounted for separately.
Components of lease expense are as follows:
The Company has lease arrangements which are classified as short-term in nature. These leases meet the criteria for operating lease classification. In addition, the Company has variable lease costs associated with certain leases. Lease costs associated with the short-term leases and variable lease components, included in SG&A expenses on the Company’s consolidated statements of operations for the years ended December 31, 2020 and 2019, are not material.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
Supplemental balance sheet information related to the Company’s operating leases is as follows:
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:
Lessor
Although most of the Company’s revenue from its product sales comes from the sale of subscriber communicators, the Company also leases some subscriber communicators to certain customers. The Company determines the existence of a lease when the customer controls the use of the identified product for a period of time defined in the lease agreement. The Company’s leases range in duration between three to five years, with payment generally collected in monthly installments. Refer to “Note 2 - Summary of Significant Accounting Policies” for more information.
The Company classifies these leases as sales-type leases and recognizes revenue and cost of product sales upon delivery or installation, depending on the specific contractual terms. The Company’s leases include certain termination fees, as defined in the lease agreements, and do not typically include purchase rights at the end of the lease.
Note 16. Employee Incentive Plan
The Company maintains a 401(k) plan. All employees who have been employed for three months or longer are eligible to participate in the plan. Employees may contribute up to 15% of eligible compensation to the plan, subject to certain limitations. The Company has the option of matching up to 50% of the amount contributed by each employee, up to 6% of the employee’s compensation. In addition, the plan contains a discretionary contribution component pursuant to which the Company may make an additional annual contribution. Contributions vest over a five-year period from the employee’s date of employment. For the years ended December 31, 2020, 2019 and 2018, the Company made contributions of $1,169, $1,189 and $1,104, respectively.
Note 17. Supplemental Disclosure of Noncash Investing and Financing Activities
Schedule II - Valuation and Qualifying Accounts
(1)
Amounts relate to write-offs net of recoveries.
(2)
Amounts relate to deferred tax assets acquired in acquisitions.