3. Acquisitions

Euroscan Holding B.V.

On March 11, 2014, the Company 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”). The acquisition was completed pursuant to the Share Purchase Agreement dated March 11, 2014 (the “Share Purchase Agreement”), entered into by the Company and MWL Management B.V., R.Q. Management B.V., WBB GmbH, ING Corporate Investments Participaties B.V. and Euroscan Holding B.V., as sellers. As this acquisition was effective on March 11, 2014, the results of operations of Euroscan are included in the condensed consolidated financial statements beginning March 12, 2014. The acquisition of Euroscan was not considered significant under SEC Regulation S-X.

The aggregate consideration paid by the Company at the closing was valued at $29,185 (€21,000), subject to adjustments for working capital and net cash (on a debt free, cash free basis), payable in cash and common stock as follows:

(i)

Cash consideration in an amount equal to $29,163 (€20,999) payable in Euros, which includes an initial working capital estimate of $2,220 (€1,599) subject to a final working capital adjustment and net cash. €1,000 of such cash consideration was placed in escrow with a third party to be available to pay any indemnification obligations of MWL Management B.V. and R.Q. Management B.V. under the Share Purchase Agreement; and

(ii)

Issuance of 291,230 shares of the Company’s common stock to MWL Management B.V. and R.Q. Management B.V (based on €1,600 divided by the 20-day-average closing price of the Company’s common stock ending on the second business day prior to the execution of the Share Purchase Agreement). The 291,230 shares of common stock were valued at $7.70 per share, which reflected the Company’s closing price of common stock on March 11, 2014

In addition to the consideration paid at closing, the Share Purchase Agreement provides for contingent consideration of up to $6,547 (€ 4,714) (the “Earn-Out”) and is payable post-closing by the Company to MWL Management B.V. and R.Q. Management B.V. Up to $2,778 (€2,000) will be payable based on achieving an increase in number of wireless subscribers attributable to the Euroscan Group for three one-year earn-out periods April 1, 2014 through March 31, 2015, April 1, 2015 through March 31, 2016 and April 1, 2016 through March 31, 2017. Up to $2,083 (€1,500) will be payable based on achieving certain gross profits of the Euroscan Group, subject to certain adjustments for three earn-out periods March 11, 2014 through December 31, 2014, January 1, 2015 through December 31, 2015 and January 1, 2016 through December 31, 2016. Up to $1,686 (€1,214) will be payable based on achieving certain operational milestones obtained before March 31, 2017. Any shares of common stock to be issued will be based on the 20-day average closing price of the Company’s common stock prior to the last trading day of the earn-out periods.

The following table summarizes the fair value of the purchase price:


Cash	$	29,163
Issuance of 291,230 shares of common stock (valued at $7.70 per share, which reflects the Company’s common stock closing price on March 11, 2014)		2,242
Fair value of contingent earn-out amounts		4,800

Total	$	36,205

Preliminary Estimated Purchase Price Allocation

The total preliminary estimated purchase price was allocated to the net assets acquired based upon their preliminary estimated fair values as of the close of business on March 11, 2014 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. As of March 31, 2014 the purchase price allocation and estimated purchase price is preliminary due to the proximity to the acquisition date. The Company anticipates finalizing the purchase price allocation by the first quarter of 2015. The preliminary estimated purchase price allocation for the acquisition is as follows:


Cash	$	280
Accounts receivable		2,613
Inventory		1,394
Other current assets		502
Property, plant and equipment		324
Intangible assets		17,400
Other noncurrent assets		171

Total identifiable assets acquired		22,684

Accounts payable and accrued expenses		(2,503	)
Deferred revenues		(44	)
Deferred tax liabilities		(4,558	)

Total liabilities assumed		(7,105	)

Net identifiable assets acquired		15,579
Goodwill		20,626

Total preliminary purchase price	$	36,205

Intangible Assets

The fair values of the technology and trademarks were estimated using a relief from royalty method under the income approach based on discounted cash flows. The fair value of the customer lists was estimated based on an income approach using the excess earnings method. A discount rate of 17.5% 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 the intangible assets. The remaining useful lives of the technology and trademarks were based on historical product development cycles, the projected rate of technology migration and a market participant’s use of these intangible assets and the pattern of projected economic benefit of these intangible assets. The remaining useful lives of customer lists were based on the customer attrition and the projected economic benefit of these customers.


	Estimated
	Useful life
	(years)		Amount
Customer lists		12	$	14,400
Technology		10		2,400
Trademarks		10		600

			$	17,400

Goodwill

The acquisition of Euroscan allows the Company to complement its North American Operations in M2M by adding a significant distribution channel in Europe and other key geographies where Euroscan has market share. These factors contributed to a preliminary estimated purchase price resulting in the recognition of goodwill. The goodwill recorded as part of the acquisition is partially related to the establishment of a deferred tax liability for the intangible assets which have no tax basis and, therefore, will not result in a future tax deduction. As of March 31, 2014, the Company does not intend to make the Internal Revenue Code Section 338(g) election to treat the acquisition as a deemed asset sale. The goodwill attributable to the acquisition is not deductible for tax purposes. However, the period of making the election with the Internal Revenue Service remains open for 8.5 months from the acquisition date.

Contingent earn-out consideration

The estimated fair value of the contingent earn-out amounts was determined based on the Company’s preliminary estimates using weighted probabilities to achieve an increase in the number of wireless subscribers attributable to the Euroscan Group business for three one-year earn-out periods covering April 1, 2014 through March 31, 2017, and specific gross profit thresholds attributable to the Euroscan Group business for three earn-out periods covering March 11, 2014 through December 31, 2014, January 1, 2015 through December 31, 2015 and January 1, 2016 through December 31, 2016. In addition, the estimated fair value of the contingent earn-out amounts for obtaining certain operational milestones was determined based on the Company’s preliminary estimates using weighted probabilities for achieving the milestones before March 31, 2017.

At the acquisition date, the Company estimated the fair value of the contingent earn-out amounts using probability-weighted discounted cash flow models discounted at 16.5% for the wireless subscribers and gross profit earn-outs and 0.5-1.5% for the operational milestones earn-outs, and recorded a liability for the estimated fair value of the contingent earn-out consideration. The fair value measurements are 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 amounts 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. Achievement of the earn-out measures lower than the targets will result in less being paid out. Achievement below certain thresholds will reduce the liability to zero. The undiscounted range of potential payments related to the number of wireless subscribers earn-out is from $0 to $2,778, gross profit target earn-outs is from $0 to $2,083, and certain operational milestones earn-out is from $0 to $1,686. As of March 31, 2014, the Company estimated the fair value of the contingent earn-out amounts at $4,800 using probability-weighted discounted models, and recorded $1,056 in accrued liabilities and $3,744 in other liabilities in the condensed consolidated balance sheet.

Indemnification Asset

In connection with the Share Purchase Agreement, the Company entered into an escrow agreement with MWL Management B.V., R.Q. Management B.V and an escrow agent. Under the terms of this escrow agreement, €1,000 was placed in an escrow account through March 11, 2016 (subject to reduction as described below) to fund any indemnification obligations to the Company under the Share Purchase Agreement. Under the terms of the escrow agreement, the escrow amount is subject to reduction and early release to the extent no unresolved claims exist in accordance with the following provisions: (1) On September 11, 2014, the escrow amount is reduced by €250 which amount is then distributed to MWL Management B.V. and R.Q. Management B.V., (2) On March 11, 2015, the escrow amount is further reduced by €250 which amount is then distributed to MWL Management B.V. and R.Q. Management B.V and (3) On September 11, 2015, the escrow amount is further reduced by €250 which amount is then distributed to MWL Management B.V. and R.Q. Management B.V. On March 11, 2016, the remaining balance of the escrow account will be distributed to MWL Management B.V. and R.Q. Management B.V to the extent no resolved claims exist.

Pre-Acquisition Contingencies

The Company has evaluated and continues to evaluate pre-acquisition contingencies related to Euroscan that existed as of the acquisition date. If any pre-acquisition contingencies that were acquired as part of the acquisition become probable and estimable, the Company will record such amounts to goodwill in the one-year measurement period, or the Company’s results of operations, if outside the one-year measurement period as applicable.

Sensor Enabled Notification System

Effective on the close of business on October 1, 2013, the Company completed the acquisition of certain assets and liabilities of Comtech Mobile Datacom Corporation (“Comtech”) Sensor Enabled Notification System (“SENS”) operations pursuant to an Asset Purchase Agreement (“Comtech Asset Purchase Agreement”) dated as of October 1, 2013. The consideration paid to acquire SENS was $1,978 in cash. The operations of SENS are included in the Company’s condensed consolidated financial statements subsequent to the acquisition date of October 1, 2013.

Preliminary Estimated Purchase Price Allocation

The total preliminary estimated purchase price was allocated to the net assets acquired based upon their preliminary estimated fair values as of the close of business on October 1, 2013 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. The areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of intangible assets and goodwill. The Company anticipates finalizing the purchase price allocation by the end of the third quarter of 2014. The preliminary estimated purchase price allocation for the acquisition is as follows:


Inventory		485
Intangible assets		1,270

Total identifiable assets acquired		1,755
Accounts payable and accrued expenses		(8	)

Net identifiable assets acquired		1,747

Goodwill		231

Total preliminary purchase price	$	1,978

Intangible Assets

The fair values of the technology and trademarks were estimated using a relief from royalty method under the income approach based on discounted cash flows. The fair value of the customer lists was estimated based on an income approach using the excess earnings method. A discount rate of 43% 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 the intangible assets. The remaining useful lives of the technology and trademarks were based on historical product development cycles, the projected rate of technology migration and a market participant’s use of these intangible assets and the pattern of projected economic benefit of these intangible assets. The remaining useful lives of customer lists were based on the customer attrition and the projected economic benefit of these customers.


	Estimated
	Useful life
	(years)		Amount
Customer lists		7	$	980
Technology		10		260
Trademarks		3		30

			$	1,270

Goodwill

The acquisition of SENS gives the Company access to a customer base that includes military, international, government and commercial customers as well as expanded reach in growing regions, such as the Middle East, Asia and South America. These factors contributed to a preliminary estimated purchase price resulting in the recognition of goodwill. The acquired goodwill is deductible for income tax purposes.

GlobalTrak

Effective on the close of business on April 3, 2013, the Company completed the acquisition of certain assets and liabilities of GlobalTrak, a division of System Planning Corporation (“SPC”), pursuant to an Asset Purchase Agreement (“GlobalTrak Asset Purchase Agreement”) dated as of March 13, 2013. The consideration paid to acquire GlobalTrak was $2,990 in cash, which included $500 that was deposited in escrow with a third party escrow agent and a final working capital adjustment of $86 which was paid to the Company. The $500 is available to pay indemnification obligations of SPC to the Company primarily relating for breaches of representations and warranties made by SPC. During the three months ended March 31, 2014, the Company reduced warranty liabilities assumed in connection with the acquisition. As a result, goodwill decreased by $250 and warranty liabilities decreased by the same amount since it was within the one-year measurement period.

Indemnification Asset

In connection with the GlobalTrak Asset Purchase Agreement, the Company entered into an escrow agreement with SPC and an escrow agent. Under the terms of this escrow agreement, $500 was placed in an escrow account for up to fifteen months to fund any indemnification obligations to the Company primarily relating for breaches of representations and warranties made by SPC. Under the terms of the escrow agreement, SPC will be entitled to receive one-half of the $500, less the aggregate amount of claims made by the Company against SPC six months from April 3, 2013. In the event that the Company believes that an indemnity obligation of SPC has arisen under the GlobalTrak Asset Purchase Agreement, the Company shall have the right to provide written notice to the escrow agent and SPC setting forth a description of the claim and the amount of cash to be distributed to the Company from the escrow account. In October 2013, the Company notified the escrow agent to release $250 from escrow and distribute the amount to SPC.

MobileNet, Inc.

Effective on the close of business on April 1, 2013, the Company completed the acquisition of substantially all of the assets of MobileNet, Inc. (“MobileNet”), pursuant to an Asset Purchase Agreement (the “MobileNet Asset Purchase Agreement”) dated as of March 13, 2013.

The consideration paid by the Company consisted of $3,231 in cash, and the issuance of 329,344 shares of the Company’s common stock (valued at $4.96 per share, which reflects the Company’s common stock closing price on April 1, 2013), of which 164,672 shares of common stock were placed into an escrow account for up to fifteen months from closing to fund any indemnification obligations to the Company primarily relating for breaches of representations and warranties made by MobileNet.

In addition to the consideration paid at closing, the MobileNet Asset Purchase Agreement provides for contingent consideration payable by the Company to MobileNet if service revenues attributable to the MobileNet business for either of the two one year earn-out periods May 1, 2013 through April 30, 2014 and May 1, 2014 through April 30, 2015 are in excess of the specified baseline amount. In that event, the Company has agreed to pay to MobileNet an amount equal to (i) 50% of the first $2,000 of such excess amount for the applicable earn-out period and (ii) 35% of any amount of such excess amount for the applicable earn-out period which is greater than $2,000. Up to 50% of any potential earn-out amounts can be paid in common stock at the Company’s option. Any shares of common stock to be issued will be based on the 20-day average closing price of the common stock prior to the last trading day of the earn-out period.

Contingent earn-out consideration

The estimated fair value of the contingent earn-out amounts was determined based on the Company’s estimates using weighted probabilities to achieve the service revenues attributable to the MobileNet business for either of the two one year earn-out periods May 1, 2013 through April 30, 2014 and May 1, 2014 through April 30, 2015. At the acquisition date, the Company estimated the fair value of the contingent earn-out amounts using a probability-weighted discounted cash flow models discounted at 19% and recorded a liability for the estimated fair value of the contingent earn-out consideration. The fair value measurements are 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 amounts 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. Achievement of the service revenues lower than the targets will result in less being paid out. Achievement below certain thresholds will reduce the liability to zero. As of March 31, 2014, the Company estimated the fair value of the contingent earn-out amounts using a probability-weighted discounted models discounted at 18%. For the three months ended March 31, 2014, the fair value of the earn-out amounts decreased by $571 which is recorded in selling, general and administrative expenses in the condensed consolidated statements of operations. As of March 31, 2014, $347 is included in other liabilities in the condensed consolidated balance sheet.

Indemnification Asset

In connection with the MobileNet Asset Purchase Agreement, the Company entered into an escrow agreement with MobileNet and an escrow agent. Under the terms of this escrow agreement, 164,672 shares of common stock were issued to MobileNet and placed in an escrow account for up to fifteen months to fund any indemnification obligations to the Company primarily relating for breaches of representations and warranties made by MobileNet. Under the terms of the escrow agreement, MobileNet will retain all rights and privileges of ownership of the common stock placed in the escrow account. Further subject to certain resale restrictions, MobileNet has the right to sell any of the common stock that was placed in escrow provided that all proceeds of any such sale are deposited directly with the escrow agent. In the event that the Company believes that an indemnity obligation of MobileNet has arisen under the MobileNet Asset Purchase Agreement, the Company shall have the right to provide written notice to the escrow agent and MobileNet setting forth a description of the distribution event and the number of shares of the Company’s common stock and or amount of cash to be distributed to the Company from the escrow account. The Company will direct the escrow agent to release to the Company from the escrow account a number of shares of common stock equal to the distribution amount valued at the 20-day average closing price from April 1, 2013. The Company did not record an indemnification asset for any indemnity obligations of MobileNet arising under the MobileNet Asset Purchase Agreement.

LMS

Contingent earn-out consideration

The estimated fair value of the remaining contingent earn-out amount of $950 was determined based on the Company’s estimates using weighted probabilities to achieve the sales targets through 2014. The Company estimated the fair value of the sales targets contingent earn-out amounts using a probability-weighted discounted cash flow model. The fair value measurements are 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 amounts 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. Achievement of the sales target lower than the target will result in less than the $950 being paid out. Achievement below certain thresholds will reduce the liability to zero. For the three months ended March 31, 2014, the fair value of the earn-out amount was increased by $8 which is recorded to selling, general and administrative expenses in the condensed consolidated statements of operations. As of March 31, 2014, $25 is included in accrued liabilities and $191 is included in other liabilities in the condensed consolidated balance sheet.

StarTrak

Warranty Liabilities and Escrow Agreement

As a result of the acquisition of StarTrak on May 16, 2011, the Company recorded 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.

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 in relation to the escrow agreement an indemnification asset measured at fair value, which was included in other assets. On February 24, 2014 the Company and Alanco entered into a settlement agreement to distribute the 166,611 shares of common stock from the escrow account to Alanco. In consideration for agreeing to distribute these shares of common stock, the Company received $691 from Alanco. The Company recorded a loss of $97 for the difference between the value of indemnification asset and the $691, which is recorded to selling, general and administrative expenses in the condensed consolidated statements of operations. From January 1, 2014 through February 23, 2014 the Company recorded a gain of $126 on the fair value of the common stock held in escrow, which is recorded as a reduction to selling, general and administrative expenses. For the three months ended March 31, 2013, the Company recorded a gain of $135 on the fair value of the common stock held in escrow, which is recorded as a reduction to selling, general and administrative expenses in the condensed consolidated statements of operations.

Pro Forma Results for the Acquisition of GlobalTrak

The following table presents the unaudited pro forma results of the Company and GlobalTrak for the three months ended March 31, 2013 as though the companies had been combined as of the beginning of the period 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 on January 1, 2013.

The supplemental pro forma revenues, net income (loss) attributable to ORBCOMM Inc. and the net income (loss) attributable to common stockholders for the period from January 1, 2013 through March 31, 2013 presented in the table below were adjusted to include the amortization of the intangible assets and income tax expense calculated from January 1, 2013 to the acquisition date. Also the supplemental pro forma information was adjusted to exclude acquisition costs directly related to GlobalTrak.


						Net Income (loss)
			Net Income (loss)			Attributable to
			Attributable			ORBCOMM Inc.
	Revenues		ORBCOMM Inc.			Common Stockholders
Actual for the three months ended March 31, 2014	$	771	$	(586	)	$	(586	)

Supplemental pro forma for the three months ended March 31, 2013	$	17,384	$	437		$	421