Acquisition of StarTrak

9 Months Ended

Sep. 30, 2011

Acquisition of StarTrak [Abstract]

Acquisition of StarTrak

3. Acquisition of StarTrak

Effective on the close of business on May 16, 2011, the Company completed the acquisition of substantially all of the assets of StarTrak including but not limited to cash, accounts receivable, inventory, equipment, intellectual property, all of StarTrak’s rights to customer contracts, supplier lists and assumed certain liabilities pursuant to an Asset Purchase Agreement dated as of February 23, 2011. The results of operations of StarTrak have been included in the condensed consolidated results for the period subsequent to the acquisition date of May 16, 2011.

The consideration paid to acquire StarTrak was valued at $18,242 consisting of: (i) cash subject to a final working capital adjustment, (ii) forgiveness of the 6% secured promissory note advanced by the Company to Alanco on February 23, 2011, (iii) note payable issued to a lender and stockholder of Alanco, (iv) common stock, (v) Series A convertible preferred stock and (vi) delivery of the Company’s investment in preferred stock and common stock of Alanco back to Alanco.

In addition to the consideration paid, up to an additional gross amount of $1,500 (subject to certain reductions) in contingent payments is payable by the Company if certain revenue milestones of StarTrak are achieved for the 2011 calendar year. Any potential earn-out amount can be paid in common stock, cash or a combination at the Company’s option. Any shares of common stock issued will be based on the 20-day average closing price of the common stock ending March 31, 2012 subject to certain reductions set forth in the Asset Purchase Agreement. The potential earn-out amount will be paid to Alanco stockholders and to two selling stockholders of Alanco. The earn-out amount is based on StarTrak achieving certain revenue milestones for calendar year ending December 31, 2011 payable on or before April 30, 2012. If StarTrak does not achieve the revenue milestone of at least $20,000 neither Alanco stockholders nor the two selling stockholders are entitled to an earn-out amount. The Company expects the contingent earn-out amount to be nil. The potential earn-out is calculated as follows:

• $250 if StarTrak achieves at least $20,000 in total revenues;

• plus an additional $750 such additional amount to be pro-rated on a straight line basis, if StarTrak achieves between $20,000 and $22,000 in total revenues;

• plus an additional $250 if StarTrak achieves at least $23,000 in total revenues; and

• plus an additional $250 if StarTrak achieves at least $24,000 in total revenues.

The Company accounted for the acquisition pursuant to FASB Topic ASC 805, “Business Combinations”. In accordance with ASC 805, the estimated purchase price was allocated to intangible assets and identifiable assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase price over the net assets and liabilities assumed was recorded as goodwill.

The preliminary estimated fair values of the purchase price are as follows:

Cash consideration	$	1,893
Forgiveness of 6% secured promissory note advanced to Alanco on February 23, 2011 including interest of $4		304
Contingent earn-out consideration		—
The Company’s investment in preferred stock and common stock of Alanco delivered back to Alanco		2,050
$3,900 secured 6% promissory note payable issued to a lender and stockholder of Alanco		3,812
Issuance of 183,550 shares of Series A convertible preferred stock		1,834
Issuance of 2,869,172 shares of common stock (valued at $2.91 per share, which reflects the Company’s common stock closing price on May 16, 2011)		8,349
Total	$	18,242

Contingent earn-out consideration

As of the acquisition date, the fair value of the contingent earn-out amount was estimated to be nil. The estimated fair value of the earn-out was determined using weighted probabilities to achieve the revenue milestones. The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model discounted at 19.0%. The fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Any change in the fair value of the contingent earn-out subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized in earnings in the period the estimated fair value changes. For the three months ended September 30, 2011, there were no changes to the fair value of the contingent earn-out amount.

Investment in Alanco

The Company accounted for the investment in Alanco at cost, or $2,356. The investment consisted of an initial purchase of 500,000 shares of Alanco’s Series E convertible preferred stock for $2,250, and 73,737 shares of common stock received as payment of dividends on the Series E convertible preferred stock totaling $106. The fair value of the Series E convertible preferred stock was estimated using a combination of an income approach for the debt component and the Black-Scholes option pricing model for the option component. The rate utilized to discount the net cash flows to the present value for the debt component was 20.0% based on a private-equity rate of return for this security. The fair value of the option component was de minimis. The fair value of the common stock dividends was based on Alanco’s closing stock price as of May 16, 2011. The Company recorded a loss of $305 on the revaluation of its investment in Alanco, triggered by the acquisition, for the difference between the fair value and the carrying value at the date of acquisition. Such loss was recorded prior to tendering the shares to Alanco. The loss is recorded in other income (expense) in the statement of operations for the nine months ended September 30, 2011.

$3,900 secured 6% promissory note payable issued to a lender and stockholder of Alanco

The fair value of the note payable was estimated using an income approach-yield analysis based on the contractual interest and principal payments. The rate utilized to discount the net cash flows to the present value was 6.85%, which was based on: (i) comparable loan indices with similar structure and credit and (ii) comparable companies. As a result, the Company recognized a fair value adjustment of $88, which reduced the carrying value of the note. This amount will be amortized to interest expense using the effective interest method which will increase the carrying value of the note through the maturity date (See Note 15).

Series A convertible preferred stock

The face value of the Series A convertible preferred stock is $1,836 and the estimated fair value is $1,834. As a result, the face value will be accreted up to the fair value using the effective interest method through the date of redemption (See Note 16).

Preliminary Estimated Purchase Price Allocation

The total preliminary estimated purchase price was allocated to the net assets based upon their preliminary estimated fair values as of the close of business on May 16, 2011 as set forth below. The excess of the preliminary purchase price over the preliminary net assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and the estimates and assumptions are subject to change, and the revisions may materially affect the presentation in the Company’s consolidated balance sheet. Any change to the initial estimates of the assets and liabilities acquired will be recorded as adjustments to goodwill throughout the measurement period. The areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain net assets and liabilities, including deferred warranty revenues and warranty liabilities, intangible assets, goodwill and the final working capital adjustment. The Company anticipates finalizing the purchase price allocation by the end of 2011. The preliminary estimated purchase price allocation is as follows:

Cash and cash equivalents	$	322
Accounts receivable		1,535
Inventory		2,085
Other current and noncurrent assets		279
Indemnification assets		379
Property, plant and equipment		303
Intangible assets		7,600
Total identifiable assets acquired		12,503
Accounts payable and accrued expenses		(1,755	)
Deferred warranty revenues		(400	)
Warranty liabilities		(1,050	)
Patent infringement claim		(155	)
Total liabilities assumed		(3,360	)
Net identifiable assets acquired		9,143
Goodwill		9,099
Total preliminary purchase price	$	18,242

Intangible Assets

The fair values of the trademarks and the technology and patents were estimated using a relief from royalty method under the income approach based on discounted cash flows. The fair value of customer relationships were estimated based on an income approach using the excess earnings method. A discount rate of 19% was selected to reflect risk characteristics of these intangible assets. The discount rate was applied to the projected cash flows associated with the assets in order to value these intangible assets. The remaining useful lives of the technology and patents and trademarks were based on historical product development cycles, the projected rate of technology migration and the pattern of projected economic benefit of these intangible assets. The remaining useful lives of customer relationships were based on customer attrition and the future economic benefit (See Note 11).

	Estimated
	useful life (in
	years)		Amount
Technology and patents		10	$	3,900
Customer relationships		10		2,900
Trademarks		10		800
			$	7,600

Goodwill

Goodwill represents the excess of the preliminary estimated purchase consideration over the preliminary estimated fair values of the underlying net tangible and intangible assets. In accordance FASB Topic 350, “ Intangibles-Goodwill and Other ”, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event the Company determines the fair value of goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal period in which the determination is made (See Note 11). The Company will perform the goodwill impairment test during the fourth quarter of 2011.

The acquisition of StarTrak enables the Company to create a global technology platform to transfer capabilities across new and existing vertical markets and deliver complementary products to the Company’s channel partners and resellers worldwide. In addition, the acquisition provides an opportunity to drive new subscribers to the Company’s global communications network while accelerating the growth of StarTrak’s suite of products by adding scale and providing subscriber management tools. These factors contributed to a preliminary purchase price resulting in the recognition of goodwill. The acquired goodwill is deductible for income tax purposes over fifteen years.

Deferred warranty revenues

In connection with the preliminary estimated purchase price allocation, the Company estimated the fair value of the service obligations assumed from StarTrak. The estimated fair value of the service obligations was determined using a version of the income approach, known as the build-up method to estimate the cost necessary to fulfill the obligations plus a normal profit margin on the fulfillment effort. The estimated costs to fulfill the service obligations were based on StarTrak’s historical direct costs and indirect costs related to StarTrak’s service agreements with its customers. Direct costs include personnel directly engaged in providing service and support activities, while indirect costs consist of estimated general and administrative expenses based on an overall margin of StarTrak’s business (See Note 13).

Warranty liabilities and Escrow Agreement

As a result of the acquisition of StarTrak on May 16, 2011, the Company acquired warranty obligations on StarTrak’s product sales, which provide for costs to replace or fix the product. One-year warranty coverage is accrued on product sales which provide for costs to replace or fix the product. The Company’s analysis of the warranty liabilities associated with the one-year warranty coverage are estimated based on the historical costs of StarTrak to replace or fix products for customers, and additional liability for warranty coverage for other specific claims that are expected to be incurred within the next twelve months, for which it is estimated that customers may have a warranty claim. As the Company continues to gather additional information, these accrual estimates may differ from actual results and adjustments to the estimated warranty liability would be required. The Company will continue to evaluate warranty liabilities relating to the acquisition of StarTrak throughout the measurement period. If the Company determines that adjustments to these amounts are required during the remainder of the measurement period such amounts will be recorded as an adjustment to goodwill.

The Company is estimating additional warranty obligations of $1,050 related to warranty claims the Company is investigating. These claims vary in nature, and the range of additional warranty obligations is estimated between $1,050 and $1,700. This amount has not yet been fair valued. The Company is currently in the process of determining the extent of the additional warranty obligations and any changes during the remainder of the measurement period to the estimate will be an adjustment to goodwill. For the three months ended September 30, 2011, there were no changes to the amount of the initial warranty obligations recorded at the date of acquisition.

In connection with the acquisition, the Company entered into an escrow agreement with Alanco. Under the terms of the escrow agreement, 166,611 shares of common stock were issued to Alanco and placed in an escrow account to cover 50% of certain costs relating to fuel sensor warranty obligations incurred by the Company. In the event that the sum of (i) aggregate warranty expenses (other than for fuel sensors) and (ii) any fuel sensor damages directly expended or accrued on the StarTrak balance sheet from March 1, 2011 through March 1, 2012 exceeds $600, the Company shall have the right to provide written notice to the escrow agent and Alanco setting forth a description of the fuel sensor distribution event and the number of shares of the Company’s common stock to be distributed to the Company from the escrow account. The number of shares of common stock that the Company will direct the escrow agent to release to the Company from the escrow account will equal 50% of the fuel sensor damages (excluding the amount of damages that when added to the non-fuel sensor damages equals $600) incurred or suffered from June 1, 2011 through March 1, 2012, valued at $3.001 per share. As a result, the Company has recorded $304 relating to the escrow agreement as an indemnification asset, which is included in other assets. As of September 30, 2011, there were no changes to the contractual amount of the indemnification asset. For the three months ended September 30, 2011, the Company recorded a loss of $38 on the fair value of the common stock held in escrow. The loss is recorded in selling, general and administrative expenses in the condensed consolidated statements of operations.

Patent infringement liability and Escrow Agreement

StarTrak was a named defendant in a patent infringement action filed by Innovative Global Systems LLC (“Innovative Global Systems”) in the United States District Court for the Eastern District of Texas. In July 2011, a settlement agreement was reached under which Innovative Global Systems dismissed the patent infringement action and grant StarTrak and StarTrak Information Technologies, LLC, a wholly owned subsidiary of ORBCOMM holding the acquired StarTrak assets, a license in the patents-in-suit and certain other patents. Under the settlement agreement Innovative Global Systems received the amount of $155, which amount was agreed in principle in May 2011. Accordingly, the Company recognized a liability relating to the patent infringement action for $155 on the date of acquisition. As of September 30, 2011, there were no changes to the patent infringement liability.

In connection with the acquisition, the Company entered into an escrow agreement with Alanco. Under the terms of the escrow agreement, 249,917 shares of common stock were issued to Alanco and placed in an escrow account to cover 50% of any damages relating to the Innovative Global Systems patent infringement action incurred or suffered by the Company. The Company and Alanco are in discussions regarding the extent to which legal fees incurred by the Company relating to this patent infringement action will, in addition to the settlement payment, be covered by the escrow agreement. Upon final agreement between the Company and Alanco regarding these additional costs, the Company will direct the escrow agent to release to the Company from the escrow account shares of common stock valued at $3.001 per share equal to 50% of the damages incurred or suffered by the Company. As a result of the settlement agreement, the Company has recorded $75 relating to this escrow agreement as an indemnification asset, which is included in prepaid expenses and other current assets. As of September 30, 2011, there were no changes to the contractual amount of the indemnification asset. For the three months ended September 30, 2011, the Company recorded a loss of $9 on the fair value of the common stock held in escrow. The loss is recorded in selling, general and administrative expenses in the condensed consolidated statements of operations.

Pre-Acquisition Contingencies

The Company has evaluated and continues to evaluate pre-acquisition contingencies related to StarTrak that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable of occurring and can be estimated during the remainder of the measurement period, amounts recorded for such matters will be made to goodwill in the measurement period and, subsequent to the measurement period, in the Company’s results of operations.

Pro Forma Results for StarTrak Acquisition

The following table presents the unaudited pro forma results (including StarTrak) for the three and nine months ended September 30, 2011 and 2010 as though the companies had been combined as of the beginning of each of the periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented.

The supplemental pro forma revenues, net income (loss) attributable to ORBCOMM Inc. and the net income (loss) attributable to common stockholders for the periods presented in the table below were adjusted to include the amortization of the intangible assets, interest expense on the 6% secured promissory note, income tax expense and record dividends on the Series A convertible preferred stock calculated from January 1, 2010 to the acquisition date. Also the supplemental pro forma information was adjusted to exclude acquisition costs and elimination of intercompany transactions.

The amount of StarTrak’s revenues and net loss included in the Company’s condensed consolidated statements of operations from the acquisition date to September 30, 2011 and the revenues, net income (loss) attributable to ORBCOMM Inc. and the net income (loss)  attributable to common stockholders of the combined entity had the acquisition date been January 1, 2010, are as follows:

			Net Income (loss) Attributable			Net Income (loss) Attributable
	Revenues		ORBCOMM Inc.			to Common Stockholders
Actual from May 17, 2011 to September 30, 2011	$	6,894	$	(352	)	$	(352	)
Supplemental pro forma for the three months ended September 30, 2011	$	13,940	$	946		$	928
Supplemental pro forma for the three months ended September 30, 2010	$	16,586	$	(849	)	$	(867	)
Supplemental pro forma for the nine months ended September 30, 2011	$	38,140	$	316		$	262
Supplemental pro forma for the nine months ended September 30, 2010	$	39,426	$	(5,488	)	$	(5,542	)