ORBCOMM INC. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements discussed in this Part I, Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Quarterly Report on Form 10-Q constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally relate to our plans, estimates, objectives
and expectations for future events, as well as projections, business trends, and
other statements that are not historical facts. Such forward-looking statements
are subject to known and unknown risks and uncertainties, some of which are
beyond our control, which may cause our actual results, performance or
achievements, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These risks and uncertainties include but are not
limited to: the impact of the novel coronavirus ("COVID-19") pandemic; demand
for and market acceptance of our products and services and our ability to
successfully implement our business plan; our dependence on our subsidiary
companies (Market Channel Affiliates ("MCAs")) and third-party product and
service developers and providers, distributors and resellers (Market Channel
Partners ("MCPs")) to develop, market and sell our products and services,
especially in markets outside the United States ; substantial losses we have
incurred and may continue to incur; substantial competition in the
telecommunications, Automatic Identification Service ("AIS") data and industrial
Internet of Things ("IoT") industries; the inability to effect suitable
investments, alliances and acquisitions or the inability to successfully
integrate acquired businesses and systems; defects, errors or other
insufficiencies in our products or services; failure to meet minimum service
level commitments to certain of our customers; our dependence on significant
customers for a substantial portion of our revenues, including key customers
such as JB Hunt Transport Services, Inc. , Caterpillar Inc., Komatsu Ltd.,
Carrier Corporation and Satlink S.L .; our ability to expand our business outside
the United States and risks related to the economic, political and other
conditions in foreign countries in which we do business; fluctuations in foreign
currency exchange rates; unanticipated domestic or foreign tax or fee
liabilities; the possibility we will be required to collect certain taxes in
jurisdictions where we have not historically done so; economic, political and
other conditions; extreme events such as man-made or natural disasters,
earthquakes, severe weather or other climate change-related events; our
dependence on a limited number of manufacturers for many of our products and
services; interruptions, discontinuations, slowdown or loss of the supply of
subscriber communicators from our vendor Sanmina Corporation; legal proceedings;
our reliance on intellectual property; increased regulatory restrictions and
oversight; lack of in-orbit or other insurance for our ORBCOMM Generation 1 or
ORBCOMM Generation 2 satellites; our reliance on third-party wireless network
service providers to deliver existing and developing services in certain areas
of our business; significant interruptions, discontinuation or loss of services
provided by Inmarsat plc ; failure to maintain proper and effective internal
controls; inaccurate estimates in accounting or incorrect financial assumptions;
significant operating risks related to our satellites due to various types of
potential anomalies and potential impacts of space debris or other
spacecrafts; the failure of our systems or reductions in levels of service due
to technological malfunctions or deficiencies or other events outside of our
control; difficulty upgrading or replacing aging hardware and software we use in
operating our gateway earth stations and our customers' subscriber
communicators; technical or other difficulties with our gateway earth stations;
security risks related to our networks, data processing systems and software
systems and those of our third-party service providers; liabilities or
additional costs as a result of laws, governmental regulations and evolving
views of personal privacy rights; failure of our information technology systems;
cybersecurity risks; the level of our indebtedness and the terms of our $250.0
million 8.0% senior secured note indenture and our revolving credit agreement,
under which we may borrow up to $25.0 million , that could restrict our business
activities or our ability to execute our strategic objectives or adversely
affect our financial performance; and the other risks described in our filings
with the Securities and Exchange Commission ("SEC"). For more detail on these
and other risks, please see our Annual Report on Form 10-K for the year ended
December 31, 2019 ("Annual Report"), and other documents we file with the SEC .
We undertake no obligation to publicly revise any forward-looking statements or
cautionary factors, except as required by law.
Unless otherwise noted or the context otherwise requires, references in this
Form 10-Q to "ORBCOMM ," "the Company," "our company," "we," "us" or "our" refer
to ORBCOMM Inc. and its direct and indirect subsidiaries.
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
fleet vehicle 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
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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 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 return
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. , KLLM Transport Services , Marten Transport, Prime Inc. , Swift
Transportation, Target, Tropicana, Tyson Foods, Walmart and Werner Enterprises.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations, liquidity and capital resources are based on our condensed consolidated financial statements which have been prepared in conformity with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, 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. For a discussion of our critical accounting policies and estimates, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report. There have been no material changes to our critical accounting policies during 2020.
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 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 AIS service revenues from
subscription-based services supplying recurring AIS data 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: optional,
separately-priced extended warranty service agreements extending beyond the
initial warranty period of typically one year; installation services; royalty
fees relating to the manufacture of subscriber communicators under a
manufacturing agreement; and fees from providing engineering, technical and
management support services to 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.
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.
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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.
The table below presents our revenues for the quarters and six months ended
Quarters Ended June 30,
(In thousands) 2020 2019
Service revenues $ 38,429 67.7 % $ 39,738 59.2 %
Product sales 18,303 32.3 % 27,365 40.8 %
$ 56,732 100.0 % $ 67,103 100.0 %
Six Months Ended June 30,
(In thousands) 2020 2019
Service revenues $ 78,953 64.2 % $ 78,745 59.1 %
Product sales 43,958 35.8 % 54,393 40.9 %
$ 122,911 100.0 % $ 133,138 100.0 %
Total revenues for the quarters ended June 30, 2020 and 2019 were $56.7 million
and $67.1 million , respectively, a decrease of 15.5%. Total revenues for the six
months ended June 30, 2020 and 2019 were $122.9 million and $133.1 million ,
respectively, a decrease of 7.7%.
Service Revenues
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Recurring service revenues
(3.9 )% Other service revenues 1,423 1,232 191 15.5 % Total service revenues$ 38,429 $ 39,738 $ (1,309 ) (3.3 )% Six Months Ended June 30, Change (In thousands) 2020 2019 Dollars % Recurring service revenues$ 76,859 $ 76,035 $ 824 1.1 % Other service revenues 2,094 2,710 (616 ) (22.7 )% Total service revenues$ 78,953 $ 78,745 $ 208 0.3 % We derive recurring service revenues from monthly fees from industrial IoT connectivity services that consist of subscriber-based, recurring monthly usage fees for each subscriber communicator or SIM activated for use on our satellite network, other satellite networks, and cellular wireless networks that we resell to our customers and AIS service revenues from subscription-based services supplying AIS data to customers and resellers. In addition, we derive recurring service revenues from extended warranty service agreements extending beyond the initial warranty period of typically one year, 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 activations of subscriber communicators and SIMs. We derive other service revenues from installation services, fees from providing engineering, technical and management support services to customers and the sale of software licenses to our customers. The decrease in service revenues for the quarter endedJune 30, 2020 , compared to the prior year period, was primarily due to the expiration of our contract withAT&T Services, Inc. ("AT&T"), providing our services to Maersk Lines ("Maersk"), as described below. As ofJune 30, 2020 , we had approximately 2,220,000 billable subscriber communicators compared to approximately 2,512,000 billable subscriber communicators as ofJune 30, 2019 , a decrease of 11.6%. As ofDecember 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 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 as ofDecember 31, 2019 . FromDecember 31, 2019 throughJune 30, 2020 , we added 76,000 billable subscriber communicators. 27
-------------------------------------------------------------------------------- Our program with Maersk, through our contract with AT&T, expired onDecember 31, 2019 . The remaining deferred revenue of approximately$1.9 million associated with this contract was recognized during the six months endedJune 30, 2020 as an immaterial prior period adjustment. The contract was assumed as part of theWAM 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, as well as the mix of new subscriber activations in the period.
Product Sales
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Product sales $ 18,303 $ 27,365 $ (9,062 ) (33.1 )%
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Product sales $ 43,958 $ 54,393 $ (10,435 ) (19.2 )%
We derive product revenues primarily from sales of industrial IoT subscriber
communicators, including telematics devices, modems and cellular wireless SIMs,
to our resellers and direct customers, as well as through leasing arrangements
of subscriber communicators.
The decreases in product revenues for the quarter and six months ended June 30,
2020 , compared to the prior year periods, were 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
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Cost of services $ 12,559 $ 13,508 $ (949 ) (7.0 )%
Cost of product sales 13,211 19,607 (6,396 ) (32.6 )%
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Cost of services $ 25,640 $ 26,555 $ (915 ) (3.4 )%
Cost of product sales 30,492 38,635 (8,143 ) (21.1 )%
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 excludes depreciation and
amortization discussed below. The decreases in cost of services for the quarter
and six months ended June 30, 2020 , compared to the prior year period, were
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 and 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 quarter
ended June 30, 2020 , was primarily due to the decrease in product sales and the
lower costs associated with new product offerings and the mix of product
shipments, compared to the prior year period. The decrease in cost of product
sales for the six months ended June 30, 2020 , was primarily due to the decrease
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, compared to the prior year period.
Selling, General and Administrative Expenses
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Selling, general and administrative expenses $ 17,474 $ 17,452 $ 22 0.1 %
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Selling, general and administrative expenses
7.4 %
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Selling, general and administrative ("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 six
months ended June 30, 2020 , compared to the prior year period, was primarily due
to reductions in contingent liabilities in 2019 which did not recur in 2020, and
to an increase in bad debt expense in 2020.
Product Development Expenses
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Product development $ 2,784 $ 3,732 $ (948 ) (25.4 )%
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Product development $ 6,604 $ 7,699 $ (1,095 ) (14.2 )%
Product development expenses consist primarily of the expenses associated with
our engineering efforts, including the cost of third parties to support our
current applications. Product development expenses for the quarter and six
months ended June 30, 2020 decreased, compared to the prior year periods,
reflecting lower employee costs and other expenses associated with our continued
development of new solutions and services for our customers.
Depreciation and Amortization
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Depreciation and amortization $ 12,409 $ 12,526 $ (117 ) (0.9 )%
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Depreciation and amortization $ 25,773 $ 25,204 $ 569 2.3 %
The increase in depreciation and amortization for the six months ended June 30,
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
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Acquisition-related and integration costs
$ (363 ) (76.6 )% Six Months Ended June 30, Change (In thousands) 2020 2019 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 decreases in acquisition-related and integration costs for the quarters and six months endedJune 30, 2020 , compared to the prior year periods, reflect lower acquisition and integration activity for the 2020 periods. 29 --------------------------------------------------------------------------------
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 of
Quarters Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Interest income $ 265 $ 572 $ (307 ) (53.7 )%
Other income (expense) (234 ) (300 ) 66 (22.0 )%
Interest expense (5,410 ) (5,322 ) (88 ) 1.7 %
Total other expense $ (5,379 ) $ (5,050 ) $ (329 ) 6.5 %
Six Months Ended June 30, Change
(In thousands) 2020 2019 Dollars %
Interest income $ 681 $ 964 $ (283 ) (29.4 )%
Other income (expense) (500 ) (58 ) (442 ) NM
Interest expense (10,656 ) (10,563 ) (93 ) 0.9 %
Total other expense $ (10,475 ) $ (9,657 ) $ (818 ) 8.5 %
The increase in other expense for the quarter ended June 30, 2020 , compared to
the prior year period, was primarily due to lower interest income in the current
year period. The increase in other expense for the six months ended June 30,
2020 , compared to the prior year period, was primarily due to increased other
income (expense) related to the change in foreign currency translation and a
reduction in interest income during the current year period. We believe our
foreign exchange exposure is limited as a majority of our revenue is collected
in U.S. dollars.
Income Taxes
For the quarter ended June 30, 2020 , our income tax benefit was $0.6 million ,
compared to an income tax expense of $1.1 million for the prior year period. For
the six months ended June 30, 2020 , our income tax benefit was $1,000 , compared
to an income tax expense of $1.9 million for the prior year period. The
decreases in the income tax provision for the quarter and six months ended
June 30, 2020 primarily related to amended tax filings and provision to tax
return true-ups for multiple international entities. This resulted in an
international tax benefit recorded in these periods. In addition, the change in
geographical mix of income, decreased taxable non-U.S. earnings before income
taxes when compared to the prior year periods.
As of June 30, 2020 and December 31, 2019 , we maintained a valuation allowance
against our net deferred tax assets primarily attributable to operations in the
United States , as the realization of such assets was not considered more likely
than not.
Net Loss
For the quarter ended
For the six months endedJune 30, 2020 , we had a net loss of$13.5 million compared to a net loss of$11.8 million in the prior year period, primarily due to decreased revenue, offset, in part, by decreased costs associated with our products and services, as described above.
Noncontrolling Interests
Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders.
Net Loss Attributable to
For the quarter endedJune 30, 2020 , we had a net loss attributable to our company of$6.7 million compared to a net loss of$6.4 million in the prior year period. For the six months endedJune 30, 2020 , we had a net loss attributable to our company of$13.6 million , compared to a net loss of$11.9 million in the prior year period. 30
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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, sales of our common stock through public offerings and private placements of debt. AtJune 30, 2020 , we have an accumulated deficit of$224.6 million . Our primary source of liquidity consists of cash and cash equivalents totaling$62.4 million atJune 30, 2020 and an unused$25.0 million 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 fund capital expenditures to support operations and facilitate growth and expansion for the next twelve months. As previously reported, during the quarter endedJune 30, 2020 , we received proceeds from a loan in the amount of$7.6 million (the "PPP Loan") fromJPMorgan Chase Bank, N.A . ("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 theSmall 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 Resources" to provide us with access to additional liquidity, our improved outlook on our ability to generate cash from operations in the quarter endedJune 30, 2020 , the evolving requirements and the 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 onJune 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 for the six months endedJune 30, 2020 was$20.8 million , resulting from a net loss of$13.5 million , offset by non-cash items including$25.8 million for depreciation and amortization and$3.2 million for stock-based compensation. Working capital activities for the six months endedJune 30, 2020 provided cash of$0.9 million , primarily due to a decrease of$9.3 million in accounts receivable relating to decreased revenues and timing of receivables, a decrease of$1.8 million in prepaid expenses and other assets and a decrease of$1.6 million in inventories, offset by a decrease of$9.4 million in accounts payable and accrued liabilities primarily related to timing of payments, a decrease of$1.3 million in deferred revenue and a decrease of$1.1 million in other liabilities. Cash provided by our operating activities for the six months endedJune 30, 2019 was$10.9 million , resulting from a net loss of$11.8 million and cash used by working capital of$5.6 million , offset by non-cash items including$25.2 million for depreciation and amortization and$3.7 million for stock-based compensation. Working capital activities primarily consisted of an increase of$2.6 million in accounts receivable relating to timing of receivables, an increase of$2.6 million in prepaid expenses and other assets and a decrease of$2.4 million in accounts payable and accrued liabilities primarily related to timing of payments, offset, in part, by an increase of$1.6 million in other liabilities. Investing Activities
Cash used in our investing activities for the six months ended
Cash used in our investing activities for the six months ended
Financing Activities
Cash used in our financing activities for the six months endedJune 30, 2020 was$2.1 million , due to payments of$2.5 million for purchases of common stock under our share repurchase program, offset, in part, by$0.4 million from the sale of common stock under the employee stock purchase plan. Cash provided by financing activities for the six months endedJune 30, 2019 was$0.6 million , due to 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 Credit
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.
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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, certain of our
domestic subsidiaries party thereto (the "Guarantors") and U.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. Interest
payments are due on the Senior Secured Notes semi-annually in arrears on April 1
and October 1 , beginning October 1, 2017 .
We have 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 could have redeemed 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 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 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
million .
On December 18, 2017 , we and certain of our subsidiaries entered into a senior
secured revolving credit agreement (the "Revolving Credit Agreement") with
JPMorgan Chase, as administrative agent and collateral agent. The Revolving
Credit Agreement provides for a revolving credit facility (the "Revolving Credit
Facility") in an aggregate principal amount of up to $25.0 million for working
capital and general corporate purposes and matures on December 18, 2022 (the
"Maturity Date"). On June 25, 2020 , we and certain of our subsidiaries, as
guarantors, entered into a first amendment to the Revolving Credit Agreement
(the "Amendment") with JPMorgan Chase, as administrative agent. The primary
purpose of the Amendment was to modify the maximum net leverage ratio (total
funded debt less cash and cash equivalents (up to $50 million ) divided by
trailing 12-months adjusted EBITDA) and minimum interest coverage ratio
(trailing 12-months adjusted EBITDA divided by trailing 12-months cash interest
expense) to provide us with access to additional liquidity during the COVID-19
pandemic and to increase the applicable interest margins. Effective June, 25,
2020, at our election, extensions of loans under the Revolving Credit Facility
will bear 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 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.
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. We must
also comply with covenants of not exceeding a specific leverage ratio and
maintaining a minimum interest coverage ratio. Failure to comply with the
covenants could result in an event of default, which, if not cured or waived,
could allow the lenders to require repayment in full of all principal
outstanding and interest accrued under the Revolving Credit Facility or could
create a cross default under the Senior Secured Notes. If we fail to repay such
amounts, the noteholders or lenders, as applicable, 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,
which may not be available on acceptable terms, or at all.
At
32
--------------------------------------------------------------------------------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 condensed 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.
The following table reconciles our net loss attributable to
Quarters Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Net loss attributable to ORBCOMM Inc. $ (6,670 ) $ (6,419 ) $ (13,645 ) $ (11,909 )
Income tax expense (554 ) 1,140 (1 ) 1,850
Interest income (265 ) (572 ) (681 ) (964 )
Interest expense 5,410 5,322 10,656 10,563
Depreciation and amortization 12,409 12,526 25,773 25,204
EBITDA 10,330 11,997 22,102 24,744
Stock-based compensation 1,471 1,661 3,150 3,743
Net income attributable to
noncontrolling interests 29 33 167 127
Acquisition-related and integration
costs 111 474 202 689
Adjusted EBITDA $ 11,941 $ 14,165 $ 25,621 $ 29,303 For the quarter ended
For the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , EBITDA decreased$2.6 million , while net loss attributable toORBCOMM Inc. increased$1.7 million and Adjusted EBITDA increased$3.7 million .
Non-GAAP Gross Margin
Non-GAAP Service Gross Margin is defined as Non-GAAP Service gross profit divided by service revenues. Non-GAAP Service gross profit is defined as service revenues, minus cost of services (including depreciation and amortization expense) plus depreciation and amortization expense. Non-GAAP Product Gross Margin is defined as Non-GAAP Product gross profit divided by product sales. Non-GAAP Product gross profit is defined as product sales, minus cost of product sales (including depreciation and amortization expense) plus depreciation and amortization expense. We believe that Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are useful to evaluate and compare the results of our operations from period to period on a consistent basis by removing the depreciation and amortization impact of capital investments from our operating results. Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are not performance measures calculated in accordance withU.S. GAAP. While we consider Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin to be important measures of operating performance, they should be considered in addition to, and not as substitutes for, or superior to, measures of financial performance prepared in accordance withU.S. GAAP and may be different than Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin measures presented by other companies. 33 -------------------------------------------------------------------------------- The following tables reconcile GAAP Service Gross Margin to Non-GAAP Service Gross Margin and GAAP Product Gross Margin to Non-GAAP Product Gross Margin for the periods shown: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In thousands, except margin data) Service revenues$ 38,429 $ 39,738 $ 78,953 $ 78,745 Minus - Cost of services, including depreciation and amortization expense 16,747 17,758 34,107 35,054 GAAP Service gross profit$ 21,682 $ 21,980 $ 44,846 $ 43,691 Plus - Depreciation and amortization expense 4,188 4,250 8,467 8,499 Non-GAAP Service gross profit$ 25,870 $ 26,230 $ 53,313 $ 52,190 GAAP Service gross margin 56.4 % 55.3 % 56.8 % 55.5 % Non-GAAP Service gross margin 67.3 % 66.0 % 67.5 % 66.3 % Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In thousands, except margin data) Product sales$ 18,303 $ 27,365 $ 43,958 $ 54,393 Minus - Cost of product sales, including depreciation and amortization expense 13,732 20,312 31,522 40,033 GAAP Product gross profit$ 4,571 $ 7,053 $ 12,436 $ 14,360 Plus - Depreciation and amortization expense 521 705 1,030 1,398 Non-GAAP Product gross profit$ 5,092 $ 7,758 $ 13,466 $ 15,758 GAAP Product gross margin 25.0 % 25.8 % 28.3 % 26.4 % Non-GAAP Product gross margin 27.8 % 28.4 % 30.6 % 29.0 % GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 56.4% in the second quarter of 2020, compared to 55.3% in the prior year period. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.3% in the second quarter of 2020, compared to 66.0% in the prior year period. GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 56.8% in the six months endedJune 30, 2020 , compared to 55.5% in the prior year period. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.5% in the six months endedJune 30, 2020 , compared to 66.3% in the prior year period. The aforementioned improvements were primarily due to lower costs achieved through the Company's 2020 cost reduction plan. GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 25.0% in the second quarter of 2020, compared to 25.8% in the prior year period. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 27.8% in the second quarter of 2020, compared to 28.4% in the prior year period. GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 28.3% in the six months endedJune 30, 2020 , compared to 26.4% in the prior year period. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 30.6% in the six months endedJune 30, 2020 , compared to 29.0% in the prior year period. The aforementioned improvements were primarily due to a better mix of higher-margin products shipped in greater volumes in the quarter and six months endedJune 30, 2020 , compared to the prior year periods.
Contractual Obligations
As of
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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