ORBCOMM INC. 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 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 AIS data services to assist in vessel navigation and to improve
maritime safety for government and commercial customers worldwide. Through two
acquisitions in 2017, we added vehicle fleet management, as well as in-cab and
vehicle fleet solutions to 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 plc satellite
network to provide higher bandwidth, low-latency satellite products and
services, leveraging our IsatDataPro 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.
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
OnAugust 5, 2019 , our Board of Directors authorized a stock repurchase program under which we may repurchase up to$25.0 million of our outstanding shares of common stock through open market transactions and privately negotiated transactions, untilAugust 5, 2020 . In addition, open market repurchases of common stock may 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. 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
OnApril 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
OnApril 13, 2018 , we filed a shelf registration statement with theSEC , 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 onApril 14, 2015 , which was due to expire onApril 14, 2018 . 39 --------------------------------------------------------------------------------
2017 Strategic Transactions
During 2017, we completed the following strategic transactions that had an impact and will continue to have an impact on our results of operations:
Acquisition of
OnOctober 2, 2017 , we purchased all of the issued share capital of Blue Tree for an aggregate consideration of (i)$34.3 million in cash; (ii) issuance of 191,022 shares of our common stock, valued at$10.47 per share, which reflected our common stock closing price one business day prior to the closing date; and (iii) additional consideration of up to$5.8 million , subject to certain operational milestones. The Blue Tree Acquisition solidified our transportation product portfolio by adding truck in-cab and refrigerated fleet vehicle solutions to our cargo solution. For additional information regarding the Blue Tree Acquisition, refer to "Note 3 - Acquisitions" in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Acquisition of inthinc, Inc.
OnJune 9, 2017 , we completed the acquisition of substantially all of the assets of Inthinc for an aggregate consideration of (i)$34.2 million in cash; (ii) issuance of 76,796 shares of our common stock, valued at$9.95 per share; and (iii) additional consideration of up to$25.0 million , subject to certain operational milestones. The acquisition of Inthinc allows us to offer fleet management and driver safety solutions to enterprises and industrial companies worldwide, who operate large commercial vehicle fleets. For additional information regarding the Inthinc Acquisition, refer to "Note 3 - Acquisitions" in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Senior Secured Notes
OnApril 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 ofApril 10, 2017 , among us, theGuarantors andU.S. Bank National Association , as trustee and collateral agent. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by the Guarantors and are 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 is 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 revolving credit facility described below. Interest payments are due on the Senior Secured Notes semi-annually in arrears onApril 1 andOctober 1 , beginningOctober 1, 2017 . OnApril 10, 2017 , a portion of the proceeds of the issuance of the Senior Secured Notes was used to repay in full our outstanding obligations under, and to terminate our$150.0 million outstanding Secured Credit Facilities incurred pursuant to the credit agreement entered into onSeptember 30, 2014 , resulting in an early payment fee of$1.5 million and an additional expense associated with the remaining unamortized debt issuance cost of$2.4 million .
Revolving Credit Facility
OnDecember 18, 2017 , we and certain of our subsidiaries entered into a Revolving Credit Agreement with JPMorgan Chase, as administrative agent and collateral agent. The Revolving Credit Agreement provides for a Revolving Credit Facility in an aggregate principal amount of up to$25.0 million for working capital and general corporate purposes and matures onDecember 18, 2022 . The Revolving Credit Facility will bear interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin of 1.50% in the case of alternative base rate loans and 2.50% in the case of adjusted LIBOR loans. The Revolving Credit Facility is 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 Revolving Credit Facility has no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Revolving Credit Agreement, we may borrow, repay and reborrow amounts under the Revolving Credit Facility at any time prior to the maturity date. 40 --------------------------------------------------------------------------------
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 the time the service is provided. 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 gateway control centers. 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.
41
--------------------------------------------------------------------------------
Results of operations for the years ended
Revenue
The table below presents our revenues for the years endedDecember 31, 2019 and 2018, together with the percentage of total revenue represented by each revenue category (in thousands): Year Ended December 31, (In thousands) 2019 2018 Service revenues$ 160,594 59.0 %$ 153,589 55.6 % Product sales 111,419 41.0 % 122,551 44.4 %$ 272,013 100.0 %$ 276,140 100.0 %
Total revenues for the year ended
Service revenues
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
Recurring service revenues $ 155,284 $ 148,367 $ 6,917 4.7 %
Other service revenues 5,310 5,222 88 1.7 %
Total service revenues $ 160,594 $ 153,589 $ 7,005 4.6 %
The increase in service revenue 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
Lines, 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 Lines described below, we had
approximately 2,231,000 billable subscriber communicators. Separately, at
year-end 2019, we deactivated approximately 85,000 non-revenue generating device
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 Lines, through our
contract with AT&T Services, Inc. , 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 $0.5 million of other service revenues in the
year ended December 31, 2019 , related to device activations that had not been
previously recognized. The contract was assumed as part of the WAM Technologies,
LLC acquisition in 2015.
Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenue from these units.
Product sales
Year Ended
December 31 , Change(In thousands) 2019 2018 Dollars % Product sales$ 111,419 $ 122,551 $ (11,132 ) (9.1 )% The decrease in product sales for the year endedDecember 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 endedDecember 31, 2018 that did not recur at similar levels in 2019. 42 --------------------------------------------------------------------------------
Cost of revenues, exclusive of depreciation and amortization
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
Cost of services $ 52,264 $ 53,184 $ (920 ) (1.7 )%
Cost of product sales 78,377 93,444 (15,067 ) (16.1 )%
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
Year Ended
December 31, Change
(In thousands) 2019 2018
Dollars %
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 endedDecember 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
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
Product development $ 14,720 $ 13,405 $ 1,315 9.8 %
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
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
Depreciation and amortization $ 50,702 $ 49,684 $ 1,018 2.0 %
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.
43
--------------------------------------------------------------------------------Acquisition-related and integration costs
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
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 endedDecember 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
Year Ended
December 31, Change
(In thousands) 2019 2018 Dollars %
Interest income $ 1,957 $ 1,918 $ 39 2.0 %
Other income (expense) (129 ) 45 (174 ) (386.7 )%
Interest expense (21,149 ) (21,055 ) (94 ) 0.4 %
Total other expense $ (19,321 ) $ (19,092 ) $ (229 ) 1.2 %
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$0.7 million of income tax benefit related to amortization of tax goodwill generated from acquisitions.
Net loss
For the year ended
Noncontrolling interests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.
Net loss attributable to
For the year ended
For both of the years ended
44
--------------------------------------------------------------------------------
Results of operations for the years ended
Revenue
The table below presents our revenues for the years endedDecember 31, 2018 and 2017, together with the percentage of total revenue represented by each revenue category (in thousands): Year Ended December 31, (In thousands) 2018 2017 Service revenues$ 153,589 55.6 %$ 134,938 53.1 % Product sales 122,551 44.4 % 119,282 46.9 %$ 276,140 100.0 %$ 254,220 100.0 %
Total revenues for the year ended
Service revenues
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
Recurring service revenues $ 148,367 $ 126,540 $ 21,827 17.2 %
Other service revenues 5,222 8,398 (3,176 ) (37.8 )%
Total service revenues $ 153,589 $ 134,938 $ 18,651 13.8 %
The increase in service revenues for the year ended December 31, 2018 , compared
to the prior year period, was primarily due to revenue generated from growth in
billable subscriber communicators across our services and from inclusion of our
2017 acquisitions for a full year.
As of
Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenue from these units.
Product sales
Year Ended
December 31 , Change(In thousands) 2018 2017 Dollars % Product sales$ 122,551 $ 119,282 $ 3,269 2.7 %
The increase in product sales for the year ended
Costs of revenues, exclusive of depreciation and amortization
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
Cost of services $ 53,184 $ 50,548 $ 2,636 5.2 %
Cost of product sales 93,444 99,640 (6,196 ) (6.2 )%
45
-------------------------------------------------------------------------------- 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 excludes depreciation and amortization discussed below. The increase in cost of services for the year endedDecember 31, 2018 , compared to the prior year period, was primarily due to an increase in billable subscribers and inclusion of our 2017 acquisitions for a full year. 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 endedDecember 31, 2018 , compared to the prior year period, was primarily due to lower costs associated with the new product offerings, the mix of product shipments and the costs associated with the product sales in the year endedDecember 31, 2017 .
Selling, general and administrative expenses
Year Ended
December 31, Change
(In thousands) 2018 2017
Dollars %
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 endedDecember 31, 2018 , compared to the prior year period, reflects increases in employee-related costs and other operating expenses, mainly related to our 2017 acquisitions, offset, in part, by a reduction of the contingent earn-out liability related to the acquisitions of Inthinc and Blue Tree.
Product development expenses
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
Product development $ 13,405 $ 8,941 $ 4,464 49.9 %
Product development expenses consist primarily of the expenses associated with
our early stage engineering efforts to establish technical feasibility, and the
cost of third parties and internal staff to support our current applications.
The increase in product development expenses for the year ended December 31,
2018 , compared to the prior year period, reflects increases in employee costs
and other operating expenses, mainly related to our 2017 acquisitions.
Impairment charges - satellite network
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
Impairment charges - satellite network $ -
NM Impairment charges relate to the impairment or loss of satellites on our proprietary network. The decrease for the year endedDecember 31, 2018 , compared to the prior year period, was primarily due to the loss of three OG2 satellites during 2017. No impairment was recorded during 2018.
Depreciation and amortization
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
Depreciation and amortization
46
-------------------------------------------------------------------------------- The increase in depreciation and amortization for the year endedDecember 31, 2018 , compared to the prior year period, was primarily due to 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 offset, in part, by lower depreciation associated with our satellite network as a result of impairments incurred in 2017.
Acquisition-related and integration costs
Year Ended
December 31, Change
(In thousands) 2018 2017 Dollars %
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 in the 2018 period compared to the prior year period. Other income (expense) Other income (expense) is comprised primarily of interest expense, foreign exchange gains and losses, interest income from our cash and cash equivalents, which can consist ofU.S. Treasuries, interest bearing instruments, and our previously held investments in marketable securities consisting ofU.S. government and agency obligations, corporate obligations andFDIC -insured certificates of deposit classified as held to maturity and interest income related to capital leases. Year Ended December 31, Change (In thousands) 2018 2017 Dollars % Interest income$ 1,918 $ 959 $ 959 100.0 % Other income (expense) 45 (160 ) 205 (128.1 )% Interest expense (21,055 ) (17,653 ) (3,402 ) 19.3 % Loss on debt extinguishment - (3,868 ) 3,868 NM Total other expense$ (19,092 ) $ (20,722 ) $ 1,630 (7.9 )% The decrease in other expense for the year endedDecember 31, 2018 , compared to the prior year, was primarily due to the loss on extinguishment of our Secured Credit Facilities withMacquarie CAF LLC incurred in the quarter endedJune 30, 2017 and an increase in interest income mainly attributable to our lease receivable associated with customer product financing arrangements, offset, in part, by increased interest expense as a result of higher outstanding principal balances and higher interest rates associated with our Senior Secured Notes issued onApril 10, 2017 . We believe our foreign exchange exposure is limited as a majority of our revenue is collected inU.S. dollars.
Income taxes
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$0.7 million of income tax benefit related to amortization of tax goodwill generated from acquisitions. In 2017, we recorded income taxes of$(0.4) million , which primarily included foreign income taxes of$1.7 million from income generated by our international operations and$(2.1) million of income tax benefit related to the impact of the Tax Cuts and Jobs Act of 2017 on the amortization of tax goodwill generated from our acquisitions. Net loss For the year endedDecember 31, 2018 , we had a net loss of$25.9 million compared to a net loss of$61.2 million for the year endedDecember 31, 2017 . The 2018 period included a full year of increased interest expense arising from our Senior Secured Notes issued inApril 2017 and increased SG&A and product development costs, while the 2017 period included the$31.2 million satellite impairment loss and the$3.9 million loss on extinguishment of debt related to our Secured Credit Facilities.
Noncontrolling interests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.
47
--------------------------------------------------------------------------------
Net loss attributable to
For the year ended
For both of the years ended
Liquidity and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs, our obligations to make scheduled payments of interest on our indebtedness and our need to fund 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, sales of our common stock through public offerings and private placements of debt. AtDecember 31, 2019 , we had an accumulated deficit of$210.9 million . Our primary sources of liquidity consist of cash and cash equivalents totaling$54.3 million and an unused Revolving Credit Facility under the Revolving Credit Agreement, as described below, 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. Operating activities 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 . Cash used in our operating activities in 2017 was$5.0 million resulting from a net loss of$61.2 million and cash used by working capital of$26.9 million , offset by non-cash items including$45.7 million for depreciation and amortization,$31.2 million for an impairment loss on our satellite network,$5.7 million for stock-based compensation and$3.1 million for amortization and write-off of deferred financing fees. Working capital activities primarily consisted of net uses of cash of$16.9 million in inventories as a result of our increased business activities, increases in accounts receivable of$10.0 million relating to timing of collections and an increase in prepaid expenses and other assets of$10.5 million , offset, in part, by increases in accounts payable and accrued liabilities of$12.2 million as a result of timing of invoices.
Investing activities
Cash used in our investing activities in 2019 was
Cash used in our investing activities in 2018 was
Cash used in our investing activities in 2017 was$95.9 million , resulting from$67.9 million in cash consideration paid in connection with the Inthinc and Blue Tree Acquisitions and capital expenditures of$27.4 million , including approximately$4.0 million related to final payments for the OG2 program.
Financing activities
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
48
--------------------------------------------------------------------------------
Cash provided by our financing activities in 2017 was $110.3 million , primarily
due to proceeds received from the issuance of our Senior Secured Notes of $250.0
million , proceeds from the issuance of common stock in a private offering of
$15.0 million and proceeds from our employee stock purchase plan of $1.0
million , offset, in part, by payment of $5.4 million of debt issuance costs
related to our Senior Secured Notes and the $150.0 million repayment of our
Secured Credit Facilities, as well as payments of contingent consideration of
$0.3 million in connection with a previous acquisition.
Future Liquidity and Capital Resource Requirements
We believe that our existing cash and cash equivalents along with expected cash flows from operating activities and additional funds available under our Revolving Credit Facility, will be sufficient over the next 12 months to provide working capital, cover interest payments on our debt facilities and fund growth initiatives and capital expenditures. OnApril 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 ofApril 10, 2017 , among us, theGuarantors andU.S. Bank National Association , as trustee and collateral agent. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by the Guarantors, and are 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 is 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 Revolving Credit Facility described below. Interest payments are due on the Senior Secured Notes semi-annually in arrears onApril 1 andOctober 1 , beginningOctober 1, 2017 . We have the option to redeem some or all of the Senior Secured Notes at any time on or afterApril 1, 2020 , at redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption. We also have the option to redeem some or all of the Senior Secured Notes at any time beforeApril 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 beforeApril 1, 2020 , we may 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, limit 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 have 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 . OnApril 10, 2017 , a portion of the proceeds of the issuance of the Senior Secured Notes was used to repay in full our outstanding obligations under, and to terminate, our$150.0 million outstanding Secured Credit Facilities incurred pursuant to the secured credit facilities credit agreement, resulting in an early payment fee of$1.5 million and an additional expense associated with the remaining unamortized debt issuance cost of$2.4 million . OnDecember 18, 2017 , we and certain of our subsidiaries entered into the Revolving Credit Agreement with JPMorgan Chase, as administrative agent and collateral agent. The Revolving Credit Agreement provides for a Revolving Credit Facility in an aggregate principal amount of up to$25.0 million for working capital and general corporate purposes and matures onDecember 18, 2022 . The Revolving Credit Facility bears interest at an alternative base rate or an adjusted LIBOR, plus an applicable margin of 1.50% in the case of alternative base rate loans and 2.50% in the case of adjusted LIBOR loans. The Revolving Credit Facility is 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 Revolving Credit Facility has no scheduled principal amortization until the maturity date. Subject to the terms set forth in the Revolving Credit Agreement, we may borrow, repay and reborrow amounts under the Revolving Credit Facility at any time prior to the maturity date. 49 -------------------------------------------------------------------------------- The Revolving Credit Agreement contains covenants that, among other things, limit 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 have various baskets as set forth in the Revolving Credit Agreement.
At
OnJune 9, 2017 , we completed the Inthinc Acquisition for cash consideration of$34.2 million , issuance of 76,796 shares of our common stock, valued at$9.95 per share, and additional contingent consideration of up to$25.0 million , subject to meeting certain operational milestones, payable in stock or a combination of cash and stock at our election. OnJune 15, 2017 , we completed a private placement of 1,552,795 shares of our common stock at a price of$9.66 per share, calculated as 95% of the volume-weighted average trading price of our common stock for the 30 trading days ending onJune 14, 2017 , for which we received net proceeds of$15.0 million . OnOctober 2, 2017 , we purchased all of the shares of Blue Tree for an aggregate consideration of (i)$34.3 million in cash; (ii) issuance of 191,022 shares of the Company's common stock, valued at$10.47 per share, which reflected our common stock closing price one business day prior to the closing date; and (iii) additional consideration up to$5.8 million based on Blue Tree achieving certain thresholds, payable in stock or a combination of cash and stock at our election. OnApril 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. OnApril 13, 2018 , we filed a shelf registration statement with theSEC , 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 onApril 14, 2015 , which was due to expire onApril 14, 2018 .
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA is defined as earnings attributable toORBCOMM 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, 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 withU.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 withU.S. GAAP and may be different than EBITDA and Adjusted EBITDA measures presented by other companies. 50 --------------------------------------------------------------------------------
The following table reconciles our net loss attributable to
Year Ended December 31,
2019 2018 2017
(In thousands)
Net loss attributable to ORBCOMM Inc. $ (18,423 ) $ (26,244 ) $ (61,284 )
Income tax expense 4,383 4,658 (409 )
Interest income (1,957 ) (1,918 ) (959 )
Interest expense 21,149 21,055 17,653
Loss on debt extinguishment - - 3,868
Depreciation and amortization 50,702 49,684 45,681
EBITDA 55,854 47,235 4,550
Stock-based compensation 6,180 7,910 5,673
Net income attributable to the noncontrolling
interests 291 305 89
Acquisition-related and integration costs 788 1,624 3,315 Impairment charges - - 31,224 Adjusted EBITDA$ 63,113 $ 57,074 $ 44,851 For the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , EBITDA increased$8.6 million , while net loss attributable toORBCOMM Inc. improved$7.8 million and Adjusted EBITDA increased$6.0 million . For the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 , EBITDA increased$42.7 million , while net loss attributable toORBCOMM Inc. improved$35.0 million and Adjusted EBITDA increased$12.2 million .
Non-GAAP Gross Margin
Non-GAAP Service Gross Margin is defined as Non-GAAP Service gross profit divided by service revenues. Non-GAAP Service gross profit is defined as service revenues, minus cost of services (including depreciation and amortization expense) plus depreciation and amortization expense. Non-GAAP Product Gross Margin is defined as Non-GAAP Product gross profit divided by product sales. Non-GAAP Product gross profit is defined as product sales, minus cost of product sales (including depreciation and amortization expense) plus depreciation and amortization expense. We believe that Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are useful to evaluate and compare the results of our operations from period to period on a consistent basis by removing the depreciation and amortization impact of capital investments from our operating results. Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are not performance measures calculated in accordance withU.S. GAAP. While we consider Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin to be important measures of operating performance, they should be considered in addition to, and not as substitutes for, or superior to, measures of financial performance prepared in accordance withU.S. GAAP and may be different than Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin measures presented by other companies. The following tables reconcile GAAP Service Gross Margin to Non-GAAP Service Gross Margin and GAAP Product Gross Margin to Non-GAAP Product Gross Margin for the periods shown: Year Ended December 31, 2019 2018 2017 (In thousands, except margin data) Service revenues$ 160,594 $ 153,589 $ 134,938 Minus - Cost of services, including depreciation and amortization expense 69,250 70,312 71,151 GAAP Service gross profit$ 91,344 $ 83,277 $ 63,787 Plus - Depreciation and amortization expense 16,986 17,128 20,603 Non-GAAP Service gross profit$ 108,330 $ 100,405 $ 84,390 GAAP Service Gross Margin 56.9 % 54.2 % 47.3 % Non-GAAP Service Gross Margin 67.5 % 65.4 % 62.5 % 51
--------------------------------------------------------------------------------
Year Ended December 31,
2019 2018 2017
(In thousands, except margin data)
Product sales $ 111,419 $ 122,551 $ 119,282
Minus - Cost of product sales, including
depreciation
and amortization expense 81,006 96,686 102,381
GAAP Product gross profit $ 30,413 $ 25,865 $ 16,901
Plus - Depreciation and amortization expense 2,629 3,242 2,741
Non-GAAP Product gross profit $ 33,042 $ 29,107 $ 19,642
GAAP Product Gross Margin 27.3 % 21.1 % 14.2 %
Non-GAAP Product Gross Margin 29.7 % 23.8 % 16.5 %
GAAP Service Gross Margin, inclusive of depreciation and amortization expense,
was 56.9% in the year ended December 31, 2019 , compared to 54.2% in the prior
year. 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 were due to bringing onboard new subscribers at
higher margins and limiting product installations at negative margins compared
to the prior year. GAAP Service Gross Margin, inclusive of depreciation and
amortization expense, was 54.2% in the year ended December 31, 2018 , compared to
47.3% in the prior year. Non-GAAP Service Gross Margin, excluding depreciation
and amortization expense, was 65.4% in the year ended December 31, 2018 ,
compared to 62.5% in the prior year. These improvements were due to bringing
onboard new subscribers at higher margins compared to the prior year.
GAAP Product Gross Margin, inclusive of depreciation and amortization expense,
was 27.3% in the year ended December 31, 2019 , compared to 21.1% in the prior
year. 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.
GAAP Product Gross Margin, inclusive of depreciation and amortization expense,
was 21.1% in the year ended December 31, 2018 , compared to 14.2% in the prior
year. Non-GAAP Product Gross Margin, excluding depreciation and amortization
expense, was 23.8% in the year ended December 31, 2018 , compared to 16.5% 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.
Contractual Obligations
The following table summarizes our contractual obligations atDecember 31, 2019 and the effect those obligations are expected to have on our liquidity and cash flows in future periods: Payment Due by Period Less Than 1 to 3 3 to 5 After 5 Total 1 Year Years Years Years Operating leases (1)$ 25,020 $ 3,972 $ 7,312 $ 6,438 $ 7,298 Senior Secured Notes (2) 250,000 - - 250,000 - Interest payments on Senior Secured Notes (3) 86,667 20,000 40,000 26,667 - Carrier providers (4) 106,980 8,091 12,037 12,646 74,206$ 468,667 $ 32,063 $ 59,349 $ 295,751 $ 81,504
(1) Amounts represent future minimum payments under operating leases for our
office spaces and other facilities.
(2) Amounts represent repayment of the principal of the Senior Secured Notes in
(3) Interest payments reflect borrowing rates for our outstanding long-term debt
as of
(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.
52
--------------------------------------------------------------------------------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, accounts receivable, accounting for business combinations, goodwill, intangible assets, satellite network and other equipment, long-lived assets, capitalized development costs, income taxes, warranty costs, loss contingencies and the value of securities underlying stock-based compensation. 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, 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, or at a point in time, 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, 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
FASB ASC 842, using the estimated selling prices for each of the deliverables
recognized. Product and installation revenues associated with these arrangements
are recognized upon shipment or installation of the subscriber communicator,
depending on the specific contractual terms. Service and warranty revenues are
recognized on an accrual basis, as services are rendered, or on a cash basis, if
collection from the customer is not reasonably assured at the time the service
is provided.
53
--------------------------------------------------------------------------------
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 separate performance obligations when sold on
its own or a cost-plus margin approach when one is not available.
If an arrangement provided to a customer has a significant and incremental
discount on future revenue, such right is considered a performance obligation
and a proportionate amount of the discount should be allocated to each element
based on the relative stand-alone selling price of each element, regardless of
the discount. We have determined that arrangements provided to our customers do
not include significant and incremental discounts.
Accounts receivable
Accounts receivable are due in accordance with payment terms included in our negotiated contracts. Amounts due are stated net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. We make ongoing assumptions and judgments relating to the collectability of our accounts receivable to determine our required allowances based on a number of factors such as the age of the receivable, credit history of the customer, historical experience and current economic conditions that may affect a customer's ability to pay. Past experience may not be indicative of future collections; as a result, allowances for doubtful accounts may deviate from our estimates as a percentage of accounts receivable and sales.
Satellite network and other equipment, net
Satellite network and other equipment, net are stated at cost, less accumulated depreciation and amortization. We use judgment to determine the useful life of our satellite network based on the estimated operational lives of the satellites and periodic reviews of engineering data relating to the operation and performance of our satellite network. Satellite network includes the costs of our constellation of satellites and the ground and control facilities, which consists of GESs, gateway control centers and the network control center. As ofDecember 31, 2019 and 2018, 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.
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.
54
--------------------------------------------------------------------------------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 in 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 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 onNovember 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. There was no goodwill impairment for the years endedDecember 31, 2019 , 2018 and 2017.
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
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. An impairment loss of$31.2 million related to the loss of three OG2 satellites was recorded in the year endedDecember 31, 2017 . There were no insurance proceeds associated with this loss because of the deductible under our in-orbit insurance coverage. There was no impairment charge recorded in the years endedDecember 31, 2019 and 2018. 55 --------------------------------------------------------------------------------
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, and (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 taxes positions involves significant judgments by management.
Warranty costs
Warranty coverage is accrued upon product sales and provides for costs to replace or fix defective products. Our analysis of the warranty liabilities associated with the warranty coverage estimates them based on historical costs of the acquired companies to replace or fix products for customers, and may require additional liability for warranty coverage for other specific claims that are expected to be incurred within the warranty period, for which it is estimated that customers may have a warranty claim. Accrual estimates may differ from actual results and adjustments to the estimated warranty liability would be required. Separately-priced extended warranty coverage is recorded as warranty revenue over the term of the extended warranty coverage and the related warranty costs during the coverage period are recorded as incurred.
Warranty coverage that includes additional services such as repairs or maintenance of the product is treated as a separate deliverable and the related warranty and repairs or maintenance costs are recorded as incurred.
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.
56
--------------------------------------------------------------------------------Stock-based compensation
Our share-based compensation plans consist of the 2016 Long-Term Incentives Plan (the "2016 LTIP") and the 2006 Long-Term Incentives Plan (the "2006 LTIP"), under which no further awards may be made. The 2016 LTIP, approved by our stockholders inApril 2016 , and the 2006 LTIP approved by our stockholders inApril 2006 , provide for the grants of non-qualified stock options, stock appreciation rights ("SARs"), common stock, restricted stock, restricted stock units ("RSUs"), performance units and performance shares to our employees and non-employee directors. We did not grant any stock options in 2019, 2018 and 2017. We measure and recognize stock-based compensation expense for share-based payment awards to employees and directors based on estimated fair values on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. For awards with 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 in future periods for subsequent changes in the performance condition until the vesting date. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
For the years ended
We expect that our planned use of share-based payment arrangements will continue to be a significant expense for us in future periods. We have not recognized, and do not expect to recognize in the near future, any significant tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our net deferred tax assets and net operating loss carryforwards generated in theU.S. 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 periods indicated. Depending how long our common stock has been publicly traded at the grant date, the expected volatility was based either on (i) an average of our historical volatility over the expected terms of the SAR awards and comparable publicly traded companies' historical volatility or (ii) our historical volatility over the expected terms of the SAR awards. We used the "simplified" method to determine the expected terms of SARs due to a limited history of exercises. 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 theU.S. Treasury yield curve at the time of the grant over the expected term of the SAR grants. We did not grant time-based or performance-based SARs during the years endedDecember 31, 2019 and 2018. Year Ended December 31, 2019 2018 2017
Risk-free interest rate None None 2.10% Expected life (years) None None 6.0 Estimated volatility factor None None 59.85% Expected dividends
None None None
The grant date fair values of RSU awards granted in 2019, 2018 and 2017 were based upon the closing stock price of our common stock on the date of grant.
Recent accounting pronouncements
InFebruary 2016 , the FASB issued ASU No. 2016-02 "Leases (Topic 842)" ("ASU 2016-02"), which is effective for fiscal years beginning afterDecember 15, 2018 . ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. We adopted ASU 2016-02 prospectively as ofJanuary 1, 2019 , the date of initial application. As part of the adoption, we elected the package of practical expedients, the short-term lease exemption and the practical expedient to not separate lease and non-lease components. We completed our comprehensive review of our lease portfolio for all lease types and embedded leases throughout each region. See also "Note 15 - Leases" in our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. InJanuary 2017 , the FASB issued ASU No. 2017-04 "Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"), which is effective for fiscal years beginning afterDecember 15, 2019 . ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The adoption of this standard, which will be applied prospectively, is not expected to have a material impact on our consolidated financial statements. 57
--------------------------------------------------------------------------------
InJune 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 afterDecember 15, 2019 . ASU 2016-13 introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets. Upon initial recognition, an entity will be required to estimate a credit loss expected over the life of an exposure. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
© Edgar Online, source
