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ORBCOMM INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. Certain statements discussed in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans, objectives and expectations for future events and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Such forward-looking statements, including those concerning the Company's expectations, are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from the results, projected, expected or implied by the forward-looking statements, some of which are beyond the Company's control, that may cause the Company's actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include but are not limited to: ongoing global economic instability and uncertainty; substantial losses we have incurred and may continue to incur; demand for and market acceptance of our products and services and the applications developed by our resellers; we may need additional capital to pursue our growth strategy; loss or decline or slowdown in the growth in business from our key customers, such as Caterpillar Inc., ("Caterpillar"), Komatsu Ltd., ("Komatsu"), Hitachi Construction Machinery Co., Ltd., ("Hitachi"), and other value-added resellers, or VARs, and international value-added resellers, or IVARs; loss or decline or slowdown in growth in business of any of the specific industry sectors the Company serves, such as transportation, heavy equipment, fixed assets and maritime; dependence on a few significant customers; the inability to effect suitable investments, alliances and acquisitions; our acquisitions may expose us to additional risks; litigation proceedings; technological changes, pricing pressures and other competitive factors; the inability of our international resellers and licensees to develop markets outside the United States; the inability to obtain or maintain the necessary regulatory approvals or licenses for particular countries to operate our satellites and provide our services; market acceptance and success of our Automatic Identification System ("AIS") business; satellite launch and construction delays and cost overruns of our next-generation satellites and launch vehicles; in-orbit satellite failures or reduced performance of our existing satellites; significant liabilities created by products we sell; the $45 million 9.5% Senior Notes that we issued on January 4, 2013 could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance; the failure of our system or reductions in levels of service due to technological malfunctions or deficiencies or other events; our inability to replenish or expand our satellite constellation; inability to operate due to changes or restrictions in the political, legal regulatory, government administrative and economic conditions and developments in the United States and other countries and territories in which we provide our services; and changes in our business strategy. In addition, specific consideration should be given to various factors described in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 ("Annual Report"). The Company undertakes 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 machine-to-machine ("M2M") solutions, including network connectivity, devices and web reporting applications. These solutions enable optimal business efficiencies, increased asset efficiency, utilization, and substantially reduce asset write-offs helping industry leaders realize benefits on a world-wide basis. Our M2M products and services are designed to track, monitor and enhance security for a variety of assets, such as trailers, trucks, rail cars, intermodal containers, generators, fluid tanks, marine vessels, oil and gas wells, pipeline monitoring equipment, irrigation control systems, and utility meters, in the transportation & distribution, heavy equipment, oil & gas, maritime and government industries. Additionally, we provide AIS data services for vessel tracking and to improve maritime safety to government and commercial customers worldwide. We provide these services using multiple network platforms, including our own constellation of 25 low-Earth orbit satellites, two AIS microsatellites, and our accompanying ground infrastructure. We expanded our network by launching 6 next-generation satellites into orbit, which are expected to be put into service in the second half of 2014. We also offer customer solutions utilizing additional satellite and terrestrial-based cellular network service options that we obtain through service agreements we have entered into with mobile satellite providers Inmarsat and Globalstar, as well as several major cellular (Tier One) wireless carriers. Our satellite-based customer solution offerings use small, low power, mobile earth stations ("Communicators") for remote asset connectivity, and our terrestrial-based solutions utilize cellular data modems with subscriber identity modules ("SIMS"). Customer solutions provide access to data gathered over these systems via connections to other public or private networks, including the Internet. We are dedicated to providing the most versatile, leading-edge M2M solutions that enable our customers to maximize operational efficiency, increase asset utilization and achieve significant return on investment. Customers benefiting from our network, products and solutions include original equipment manufacturers, or OEMs, such as Caterpillar, Komatsu, Doosan Infracore America, Hitachi, Hyundai Heavy Industries, The Manitowoc Company and Volvo Construction Equipment; vertical market technology integrators known as VARs and IVARs, such as I.D. Systems, Inc., inthinc Technology Solutions Inc., and American Innovations, Ltd.; and leading refrigeration unit manufacturers, such as Carrier and Thermo King, and well-known brands such as Tropicana, Maersk Line, Prime Inc., C.R. England, FFE Transport, Inc., Target, Chiquita, Ryder, J.B. Hunt, Hapag-Lloyd, Golden State Foods, Martin-Brower and Canadian National Railways. 24 -------------------------------------------------------------------------------- Table of Contents Next-generation Satellite Launch On July 14, 2014, we successfully launched six of our next generation OG2 satellites aboard a Space Exploration Technologies Corp. ("SpaceX") Falcon 9 launch vehicle. The OG2 satellites were successfully separated from the Falcon 9 vehicle into the proper insertion orbit. After an initial health check, the satellites will undergo extensive in-orbit testing for approximately 60 days to verify that all subsystems are properly functioning. The satellites are expected to be providing full commercial M2M messaging and AIS services when in-orbit testing is complete. Acquisition Euroscan Holding B.V. On March 11, 2014, pursuant to the Share Purchase Agreement entered into with MWL Management B.V., R.Q. Management B.V., WBB GmbH, ING Corporate Investments Participaties B.V. and Euroscan Holding B.V., as sellers (the "Share Purchase Agreement"), we completed the acquisition of 100% of the outstanding equity of Euroscan Holding B.V., including, indirectly, its wholly-owned subsidiaries Euroscan B.V., Euroscan GmbH Vertrieb Technischer Geräte, Euroscan Technology Ltd. and Ameriscan, Inc. (collectively, the "Euroscan Group" or "Euroscan") for an aggregate consideration of (i) $29.2 million (€21.0 million), subject to net working capital adjustments and net cash (on a debt free, cash free basis); (ii) issuance of 291,230 shares of the Company's common stock, valued at $7.70 per share, which reflected the Company's closing price on the acquisition date; and (iii) additional contingent considerations of up to $6.5 million, €4.7 million (the "Euroscan Acquisition"). As this acquisition was effective on March 11, 2014, the results of operations of Euroscan were included in the condensed consolidated financial statements beginning March 12, 2014. Refer to "Note 3 - Acquisitions" in the notes to the condensed consolidated financial statements for further discussion on the Euroscan Acquisition. Public Offering On January 17, 2014, we completed a public offering of 6,325,000 shares of common stock including 825,000 shares sold upon full exercise of the underwriters' over-allotment option at a price of $6.15 per share (the "2014 Public Offering"). We received net proceeds of approximately $36.6 million after deducting underwriters' discounts and commissions and offering costs. Shelf Registration On April 4, 2014 we filed a Form S-3 shelf registration prospectus statement for a proposed maximum aggregate offering price of $100 million. We may use this prospectus at any time or from time to time to offer, in one or more offerings, our debt securities, shares of our common stock, shares of our preferred stock, warrants to purchase our debt securities, common stock or preferred stock or units consisting of any combination of the foregoing securities. The shelf registration statement was declared effective on April 9, 2014. 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 accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these 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, 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 2014. 25-------------------------------------------------------------------------------- Table of Contents EBITDA EBITDA is defined as earnings attributable to ORBCOMM Inc., before interest income (expense), provision for income taxes and depreciation and amortization. We believe EBITDA is useful to our management and investors in evaluating our operating performance because it is one of the primary measures 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. EBITDA is not a performance measure calculated in accordance GAAP. While we consider EBITDA to be an important measure of operating performance, it should be considered in addition to, and not as a substitute for, or superior to, net income or other measures of financial performance prepared in accordance with GAAP and may be different than EBITDA measures presented by other companies. The following table reconciles our net income to EBITDA for the periods shown: Three months ended Six months ended June 30, June 30, (In thousands) 2014 2013 2014 2013 Net income attributable to ORBCOMM Inc. $ 1,403 $ 1,686 $ 972 $ 2,794 Income tax expense 427 204 600 349 Interest income (16 ) (12 ) (18 ) (29 ) Interest expense - 5 2 51 Depreciation and amortization 2,190 1,370 3,989 2,628 EBITDA $ 4,004 $ 3,253 $ 5,545 $ 5,793 For the second quarter of 2014 compared to the second quarter of 2013, EBITDA increased 23.1% while net income decreased (16.8)%. The rate of increase for EBITDA compared to the rate of decrease for net income primarily reflects higher amortization of finite-lived intangible assets as a result of the Euroscan Acquisition, as well as current higher income tax expenses relating to Euroscan and deferred income tax expenses related to adjustments to tax basis goodwill. For the six months of 2014 compared to the six months of 2013, EBITDA decreased (4.2)% compared to a decrease in net income of (65.2)%. The lower rate of decrease for EBITDA compared to net income primarily reflects higher amortization of finite-lived intangible assets as a result of our acquisitions in 2014 and 2013, as well as current higher income tax expenses relating to Euroscan and deferred income tax expenses related to adjustments to tax basis goodwill. Revenues We derive service revenues from the utilization of Communicators and the utilization of SIMS on the cellular providers' wireless networks by its customers (i.e., its VARs, IVARs, international licensees and country representatives and direct customers). These service revenues generally consist of subscriber-based and recurring monthly usage fees and a one-time activation fee for each Communicator or SIM activated for use. Usage fees are generally based upon the number, size and frequency of data transmitted by a customer and the overall number of Communicators and SIMS activated by each customer. Revenues for usage fees from currently billing Communicators and SIMS 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. Usage fees charged to our resellers and direct customers are charged primarily on the overall number of Communicators activated by them and the total amount of data transmitted. We also earn service revenues from extended warranty service agreements extending beyond the initial warranty period of one year, royalty fees from third parties for the use of our proprietary communications protocol charged on a one-time basis for each Communicator connected to our M2M data communications system and fees from providing engineering, technical and management support services to customers. We derive product revenues primarily from sales of subscriber communicators to our resellers (i.e., our VARs, IVARs, international licensees and country representatives) and direct customers. We also sell cellular wireless SIMS (for our terrestrial-communication services) to our resellers and direct customers. Revenues generated from product revenues are either recognized when the products are shipped or when customers accept the product depending on the specific contractual terms. 26 -------------------------------------------------------------------------------- Table of Contents Shipping costs billed to customers are included in product sales revenues and the related costs are included as costs of product sales. 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 June 30, 2014 and 2013, together with the percentage of total revenue represented by each revenue category in (in thousands): Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Service revenues $ 14,902 61.3 % $ 13,517 72.8 % $ 29,328 67.2 % $ 27,407 77.7 % Product sales 9,396 38.7 % 5,042 27.2 % 14,320 32.8 % 7,872 22.3 % $ 24,298 100.0 % $ 18,559 100.0 % $ 43,648 100.0 % $ 35,279 100.0 % Total revenues for the quarters ended June 30, 2014 and 2013 were $24.3 million and $18.6 million, respectively, an increase of 30.6%. Total revenues for the six months ended June 30, 2014 and 2013 were $43.6 million and $35.3 million, respectively, an increase of 23.5%. Service Revenues Three months ended Six months ended June 30, Change June 30, Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars % Service revenues $ 14,902 $ 13,517 $ 1,385 10 % $ 29,328 $ 27,407 $ 1,921 7 % The increase in service revenues for the quarter and six months ended June 30, 2014 was primarily due to revenue generated from our acquisitions and increases in core service revenues. As of June 30, 2014, we had approximately 915,000 billable subscriber communicators compared to approximately 800,000 billable subscriber communicators as of June 30, 2013, an increase of 14%. Service revenue growth can be impacted by the customary lag between subscriber communicator activations and recognition of service revenue from these units. Product Sales Three months ended Change Six months ended June Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars % Product sales $ 9,396 $ 5,042 $ 4,354 86 % $ 14,320 $ 7,872 $ 6,448 82 % The increase in product revenues for the quarter and six months ended June 30, 2014, compared to the prior year periods, was primarily attributable to the products sold by the companies we acquired and increases from products sold in our core business. Costs of revenues, exclusive of depreciation and amortization Three months ended Change Six months ended June Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars % Cost of service $ 4,630 $ 4,426 $ 204 5 % $ 9,700 $ 9,163 $ 537 6 % Cost of product sales 6,547 4,094 2,453 60 % 10,574 6,197 4,377 71 % 27 -------------------------------------------------------------------------------- Table of Contents Costs of services is comprised of expenses to operate our network, such as payroll and related costs, including stock-based compensation, and usage fees to third-party networks. The increase in cost of service for the quarter and six months ended June 30, 2014, compared to the prior year periods, was primarily due to costs associated with our acquired companies, offset, in part, by a one-time reduction due to the impact of a favorable contract settlement. Costs of products 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 increase in cost of product for the quarter and six months ended June 30, 2014 was primarily due to increased product sales as a result of our acquisitions, costs associated with our increased sales in our core business and inventory charges. Gross Profit Gross profit increased by $3.1 million or 31% to $13.1 million for the quarter ended June 30, 2014 compared to $10.0 million for the quarter ended June 30, 2013. The increase was due to increases in gross profit of $1.2 million from service revenues and $1.9 million from product sales, primarily due to a mix of higher margin product sales as a result of our Euroscan Acquisition. Gross profit increased by $3.5 million or 17.6% to $23.4 million for the six months ended June 30, 2014 compared to $19.9 million for the six months ended June 30, 2013. The increase was due to increases in gross profit of $1.4 million from service revenues and $2.1 million from product sales, primarily due to a mix of higher margin product sales as a result of our acquisitions in 2014 and 2013. Additionally, the increase in service revenue gross profit is due to increases in service revenues notwithstanding the effect on growth in service revenues of a billing adjustment in the first six months of 2013 that had the effect of increasing service margins in the prior year period. Selling, general and administrative expenses Three months ended Change Six months ended June Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars % Selling, general and administrative expenses $ 8,314 $ 6,372 $ 1,942 30 % $ 15,120 $ 12,449 $ 2,671 21 % Selling, general and administrative ("SG&A") expenses relate primarily to expenses for general management, sales and marketing, finance, professional fees and general operating expenses. The increase in SG&A expenses for the quarter and six months ended June 30, 2014, compared to the prior year periods, was primarily due to additional headcount, most of which was from the companies acquired. Product development expenses Three months ended Change Six months ended June Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars % Product development $ 641 $ 478 $ 163 34 % $ 1,320 $ 1,264 $ 56 4 % Product development expenses consist primarily of the expenses associated with our engineering efforts including the cost of third parties to support our current applications. Depreciation and amortization Three months ended Change Six months ended June Change (In thousands) 2014 2013 Dollars % 2014 2013 Dollars %Depreciation and amortization $ 2,190 $ 1,370 $ 820 60 % $ 3,989 $ 2,628 $ 1,361 52 % The increase in depreciation and amortization for the quarter and six months ended June 30, 2014 is primarily due to the amortization of intangible assets acquired in our acquisitions. 28 -------------------------------------------------------------------------------- Table of Contents Acquisition-related costs Acquisition-related costs include professional services expenses and identifiable integration costs. For the quarters ended June 30, 2014 and 2013, we incurred acquisition-related costs of $0.2 million in each quarter, respectively. For the six months ended June 30, 2014 and 2013, we incurred acquisition-related costs of $1.4 million and $0.6 million, respectively. The increase in the six months ended June 30, 2014 of 120% compared to the prior year period, mainly related to costs incurred in connection with our Euroscan Acquisition. Income from operations For the quarter ended June 30, 2014, we have income from operations of $1.8 million, compared to income from operations of $1.6 million for the quarter ended June 30, 2013. For the six months ended June 30, 2014, we have income from operations of $1.6 million, compared to income from operations of $3.0 million for the six months ended June 30, 2013. Other income (expense) Other income (expense) is comprised primarily of interest income from our cash and cash equivalents, which consists of U.S. Treasuries, interest bearing instruments, and our previously held investments in marketable securities consisting of U.S. government and agency obligations, corporate obligations and FDIC-insured certificates of deposit classified as held to maturity, foreign exchange gains and losses and interest expense. For the quarter and six months ended June 30, 2014 other income (expense) was $0.1 million and $0.1 million, respectively. For the quarter and six months ended June 30, 2013 other income (expense) was $0.4 million and $0.3 million, respectively. Income before income taxes For the quarter ended June 30, 2014, we have income before income taxes of $1.9 million, compared to income before income taxes of $2.0 million for the quarter ended June 30, 2013. For the six months ended June 30, 2014, we have income before income taxes of $1.6 million, compared to income before income taxes of $3.3 million for the six months ended June 30, 2013. Income taxes For the quarter ended June 30, 2014, we recorded income taxes of $0.4 million, which included foreign income taxes of $0.2 million from income generated by our international operations and $0.2 million from the amortization of tax goodwill generated from our acquisitions offset, in part, by deferred tax credits related to amortization of intangible assets with no tax basis. For the quarter ended June 30, 2013, we recorded income taxes of $0.2 million, which included foreign income tax of $0.1 million from income generated by our subsidiary ORBCOMM Japan, operating in Japan, and $0.1 million from the amortization of tax goodwill generated from our acquisitions. For the six months ended June 30, 2014, we recorded income taxes of $0.6 million, which included foreign income taxes of $0.3 million from income generated by our international operations and $0.3 million from amortization of tax goodwill generated form our acquisitions offset, in part, by deferred tax credits related to amortization of intangible assets with no tax basis. For the six months ended June 30, 2013, we recorded income taxes of $0.3 million, which included foreign income taxes of $0.2 million form income generated by our subsidiary ORBCOMM Japan and $0.1 million from the amortization of tax goodwill generated from our acquisitions. As of June 30, 2014 and 2013, we maintained a valuation allowance against all of our net deferred tax assets, excluding goodwill, attributable to operations in the United States and all foreign jurisdictions, except for Japan, as the realization of such assets was not considered more likely than not. Net income For the quarter ended June 30, 2014, we have net income of $1.4 million compared to net income of $1.8 million in the prior year period. For the six months ended June 30, 2014, we have net income of $1.0 million compared to net income of $2.9 million in the prior year period. 29-------------------------------------------------------------------------------- Table of Contents Noncontrolling interests Noncontrolling interests relate to earnings and losses attributable to noncontrolling shareholders. Net income attributable to ORBCOMM Inc. For the quarter ended June 30, 2014, we have net income attributable to our company of $1.4 million compared to net income of $1.7 million in the prior year period. For the six months ended June 30, 2014, we have income attributable to our company of $1.0 million compared to net income of $2.8 million in the prior year period. For the quarter and six months ended June 30, 2014 and 2013, the net income attributable to our common stockholders considers dividends of less than $0.1 million paid in shares of the Series A convertible preferred stock. Liquidity and Capital Resources Overview Our liquidity requirements arise from our working capital needs and to fund capital expenditures to support our current operations, and 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. At June 30, 2014, we have an accumulated deficit of $62.5 million. Our primary source of liquidity consisted of cash and cash equivalents and restricted cash totaling $50.9 million, and cash flows from operating activities, which we believe will be sufficient to provide working capital and capital expenditures for the next twelve months. Operating activities Cash provided by our operating activities for the six months ended June 30, 2014 was $1.4 million resulting from net income of $1.0 million, supplemented by non-cash items including $4.0 million for depreciation and amortization and $1.8 million for stock-based compensation, offset, in part, by a net decrease of $0.6 million in the fair values of acquisitions related contingent consideration. Working capital activities primarily consisted of a net increase in accounts receivable due to timing of collections, as well as increases in inventories, as a result of our Euroscan Acquisition, and decreases in accounts payable and accrued liabilities primarily related to timing of payments. Cash used in our operating activities for the six months ended June 30, 2013 was $2.2 million resulting from net income of $2.9 million, supplemented by non-cash items including $2.6 million for depreciation and amortization and $1.2 million for stock-based compensation. Working capital activities primarily consisted of a net uses of cash of $2.8 million for an increase in accounts receivable, primarily due to the increase in revenues, and $2.0 million from a decrease in accounts payable and accrued expenses primarily related to timing for payments for professional fees. Investing activities Cash used in our investing activities for the six months ended June 30, 2014 was $57.6 million, resulting primarily from capital expenditures of $29.5 million and $28.9 million in cash consideration paid in connection with our Euroscan Acquisition. Cash used in our investing activities for the six months ended June 30, 2013 was $30.9 million, resulting primarily from capital expenditures of $21.6 million, purchases of marketable securities of $51.4 million and $3.2 million and $2.0 million in consideration paid to acquired MobileNet, Inc. and GlobalTrak, respectively, offset, in part, by proceeds received from the maturities of marketable securities totaling $47.3 million. Financing activities Cash provided by our financing activities for the six months ended June 30, 2014 was $36.6 million, primarily due to net proceeds received from our 2014 Public Offering. Cash provided by our financing activities for the six months ended June 30, 2013 was $40.3 million, resulting primarily from proceeds received from the issuance of $45 million Senior Notes, offset, in part, by payments for debt issuance costs of $1.3 million in connection with the Senior Notes and a $3.4 million principal repayment of the 6% secured promissory note issued in connection with the acquisition of StarTrak in 2011. 30-------------------------------------------------------------------------------- Table of Contents Future Liquidity and Capital Resource Requirements We expect that our existing cash and cash equivalents and restricted cash along with cash flows from operating activities will be sufficient over the next 12 months to provide working capital, cover interest payments on the $45 million Senior Notes, and capital expenditures that primarily includes the deployment of the next-generation satellites. We believe our positive net working capital assets can provide additional liquidity If necessary to cover any temporary cash flow needs, and we further believe we have access to capital markets should that be required. On January 17, 2014, we completed our 2014 Public Offering. We received net proceeds of approximately $36.6 million after deducting underwriters' discounts and commissions and offering costs. On January 4, 2013, we issued $45 million aggregate principal amount of Senior Notes ("Senior Notes") due on January 4, 2018. Interest is payable quarterly at a rate of 9.5% per annum. The Senior Notes are secured by a first priority security interest in substantially all of our and our subsidiaries' assets. The Senior Notes allow us to put in place a revolving credit facility of up to $15 million, secured by a first priority security interest in receivables and inventory. The covenants in the Senior Notes limits our ability to, among other things, (i) incur additional indebtedness and liens; (ii) sell, transfer, lease or otherwise dispose of the Company's or subsidiaries assets; or (iii) merge or consolidate with other companies. We are also required to obtain launch and one year in-orbit insurance for our next-generation satellites under the terms of the Senior Notes. We must also comply with a maintenance covenant of either having available liquidity of $10 million (the sum of (a) cash and cash equivalents plus (b) the total amount available to be borrowed under a working capital facility) or a leverage ratio (consolidated total debt to consolidated adjusted EBITDA, adjusted for stock-based compensation and certain other non-cash items and other agreed upon other charges) of not more than 4.5 to 1.0. On April 4, 2014 we filed a Form S-3 shelf registration prospectus statement for a proposed maximum aggregate offering price of $100 million. We may use this prospectus at any time or from time to time to offer, in one or more offerings, our debt securities, shares of our common stock, shares of our preferred stock, warrants to purchase our debt securities, common stock or preferred stock or units consisting of any combination of the foregoing securities. The shelf registration statement was declared effective on April 9, 2014. Debt Covenants As of June 30, 2014, we were in compliance with our covenants of the Senior Notes. Contractual Obligations There have been no material changes in our contractual obligations as of June 30, 2014, as previously disclosed in our Annual Report. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. |